Keep Your Pockets Full: Steer Clear of Fraud Fines with These Strategies
By David Pasewaldt and Margarete Weiß *
Increased penalties for corporate fraud in the United Kingdom announced
Prepare for a major shift in corporate liability for fraud in the United Kingdom starting September 2025, courtesy of the Economic Crime and Corporate Transparency Act. This new legislation pins the blame on companies if their employees commit fraud that benefits the company.
Brace for Impact
Under this new rule, companies face hefty fines if they haven’t established solid prevention measures to deter fraud. The penalty? Unlimited fines, considering the specific circumstances of each case.
German Companies Feel the Heat
The reach of this new regulation extends beyond British borders, encompassing German companies with at least 250 employees and an annual turnover of over approximately €43 million (£36 million). If their employees or agents conduct fraud under UK law, particularly targeting British citizens or British companies, these German companies face the Law's wrath.
Six Principles to Escape the Claws
Luckily, there’s a way for companies to dodge the blame if they can demonstrate that they’ve taken reasonable steps to forestall fraud. On 6 November 2024, the UK government laid out six specific requirements companies must meet to avoid liability.
- Top Gun Approach: Senior management plays a crucial role in fostering a culture of fraud prevention, leading by example and allocating necessary resources.
- Risky Business: Companies should conduct regular, documented assessments of their fraud risks, taking into account their industry and specific operations.
- Precise Procedures: Implement controls commensurate with identified risks, such as approvals and audits.
- Due Diligence: Thoroughly vet partners, suppliers, and agents to reduce third-party risks.
- Education: Routinely instruct employees on fraud risks and reporting mechanisms.
- Progress Reports: Continuously review and improve the appropriateness and effectiveness of prevention measures.
Meeting these criteria before September 2025 is essential. Document these measures to fend off allegations of failing to prevent fraud should fraud occur.
No Catchy Rulebook for Germany
As of now, Germany doesn’t have detailed standards for corporate liability in fraud cases or requirements for compliance or fraud prevention measures. However, German authorities might consider existing measures for fraud prevention when determining sanctions. Without a clear roadmap, German companies can learn from the UK’s guidelines, even if they don’t conduct business in the UK.
*) Dr. David Pasewaldt is a partner, and Margarete Weiß is an associate in the "White Collar, Regulatory & Compliance" practice group of Clifford Chance in Frankfurt.
The UK's Economic Crime and Corporate Transparency Act introduces six principles for companies to avoid liability for "failure to prevent fraud." These principles, designed as a flexible framework, are:
- Top-level commitment: Senior management must actively promote a culture of fraud prevention through visible leadership and resource allocation[5][2].
- Risk assessment: Companies must conduct dynamic, documented evaluations of fraud risks tailored to their operations, including third-party relationships[2][5].
- Proportionate prevention procedures: Implement controls (e.g., approvals, audits) scaled to identified risks[5][4].
- Due diligence: Vet partners, suppliers, and agents to mitigate third-party risks[2][5].
- Communication and training: Regularly educate employees on fraud risks and reporting mechanisms[5][2].
- Monitoring and review: Continuously assess the effectiveness of prevention measures and adapt as needed[2][5]. The principles emphasize proportionality, allowing adaptation to jurisdictional requirements while maintaining a fraud-resistant corporate culture[4][2]. While the ECCTA applies only to UK-linked organizations, German companies can adopt these principles proactively to align with similar EU regulations like the Corporate Sustainability Due Diligence Directive. To implement:
- Customize risk assessments to reflect Germany’s regulatory environment (e.g., Supply Chain Due Diligence Act).
- Leverage existing compliance frameworks (e.g., anti-bribery measures under the German Criminal Code) to address fraud risks.
- Enhance cross-border due diligence for UK-facing operations to preempt ECCTA exposure via subsidiaries or partnerships.
- Integrate training with Germany’s emphasis on employee co-determination (Mitbestimmung) to foster collective accountability.
- In light of the Economic Crime and Corporate Transparency Act, companies face unlimited fines if they haven't established solid prevention measures to deter fraud by 2025, as per the new UK legislation.
- German companies with at least 250 employees and an annual turnover of over approximately €43 million (£36 million) will also be subject to these fines if their employees or agents commit fraud under UK law.
- To avoid liability for 'failure to prevent fraud', companies must follow the UK government's six principles which includes allocating necessary resources to fraud prevention by senior management (Top Gun Approach).
- In the absence of detailed standards for corporate liability in fraud cases in Germany, German companies can learn from the UK’s guidelines and incorporate them into their own fraud prevention measures, aligning with similar EU regulations like the Corporate Sustainability Due Diligence Directive.
