Public sector

New laws to prevent fraud may affect the public sector

Barry Dean Barry Dean

New legislation planned to criminalise boards who fail to control internal fraud may affect public sector and not for profit organisations.

This article, the first of our series on internal fraud risks, covers plans proposed by the UK Government to expand the responsibilities of board members to address fraud risks.

The UK Government is planning a big change in corporate law, making boards criminally liable for certain offences perpetrated by their employees that will include fraud. [1] On the face of it, this is targeted at commercial organisations and will not affect public sector or not for profit organisations. However, we would advise caution. 

It was originally the Bribery Act 2010 would have no relevance for the public sector insofar as organisations would not be subject to Section 7 of the Act - the corporate failure to prevent bribery provisions. This was because the provisions related to ‘relevant commercial organisations’.

It has proved not to be that clear cut. Guidance published by the Government on 30 March 2011 stated:

“So long as the organisation in question is incorporated (by whatever means), or is a partnership, it does not matter if it pursues primarily charitable or educational aims or purely public functions. It will be caught if it engages in commercial activities, irrespective of the purpose for which the profits are made.”[2]

For instance, local governments with joint ventures or profit making arms, charities, educational bodies and even healthcare and certain central government departments potentially fall under the Act.

So far no cases have been brought against public sector or not for profit organisations, so this guidance has yet to be challenged in Court. However, it is clear that the legislators did not intend these provisions to apply only to the private sector.

Most large public sector and not for profit organisations have considered the need to have ‘adequate procedures’ to prevent bribery: the safe harbour defence to a charge of corporate failure.

Due to the lack of commercial incentives, the risk of employees in the public sector employees paying bribes is seen as much lower than their counterparts in the private sector. This is often reflected in procedures at public sector organisations.

If and when the new legislation is introduced, boards of public sector organisations may be equally at risk as those in the private sector.

Similar to the Bribery Act, it is almost certain there will be protections for boards who have implemented ‘adequate procedures’ to prevent fraud. A total rethink may be needed by public sector organisations as to what ‘adequate procedures’ might mean.

In a series of articles over the coming weeks and months, we will look at the risks of internal fraud in certain types of public sector and not for profit organisations and specific areas such as payroll and procurement.

[1] The Times – 12 September 2016: Crackdown on white-collar crime
[2] Ministry of Justice, The Bribery Act 2010 – Guidance, Paragraph 35