Partner London
"What these offences all have in common is that they hold the company liable where an associated person engages in a particular offence for the benefit of said company."
Below we briefly explain the nature of ‘failure to prevent’ offences, the failure to prevent fraud offence more specifically and then we will set out how this offence may apply to sustainability-related claims and what new or heightened risks companies should be considering as a result.
‘Failure to Prevent’ offences (FTP Offences)
The Failure to Prevent Fraud (“FTPF”) offence is the third offence of this kind introduced in the UK, following the offences of failure to prevent bribery and tax evasion. What these offences all have in common is that they hold the company liable where an associated person engages in a particular offence for the benefit of said company. They do not require the senior management to have ordered the offence or even have known of the offence. They also do not require the associated person to have been prosecuted for the underlying offence to establish that it occurred.
Where an associated person commits an offence, the FTP Offences all provide a defence for the company where, at the time the offence was committed, the company had in place reasonable procedures to prevent the offence taking place.
What constitutes a failure to prevent fraud?
Under the FTPF offence, a large organisation can be held liable where an associated person (employee or agent of the organisation) commits a fraud with the intention of benefitting the organisation, its subsidiaries, or its clients. The intended benefit does not have to be realised. Whether the fraud was known to the directors or management of the organisation is irrelevant.
Unlike, for example, the failure to prevent bribery, an FTPF offence must have a nexus to the UK; namely, the fraud must have been committed in the UK or the benefit must have been reaped in the UK.
To refute liability, the organisation is required to prove that it had in place reasonable measures to prevent the commission of such frauds in the first place. The burden is on the organisation to prove this. The government’s new guidance aims to help companies determine what constitutes ‘reasonable procedures’.
Application to and considerations for sustainability claims
"The FTPF requires that an associated person knew that the fraudulent representation was false and acted dishonestly in making the representation."
One thing that stands out in the UK government’s guidance on FTPF is the clear intention for this offence to apply to fraudulent sustainability claims. One example scenario of fraud by false representation provided by the Home Office is:
“An investment fund provider promotes investment in a ‘sustainable’ timber company, knowing that, in fact, this company’s environmental credentials are fabricated, and that the timber is harvested from protected forest. Investors are deceived into placing funds with the investment fund provider…”
The fact that the link between the FTPF and sustainability claims is specifically drawn out is indicative of the increased attention being paid towards claims being made in relation to sustainability credentials and the government’s acknowledgement of the rising importance of ESG in business operations.
This increased acknowledgement of the importance of ESG was further evident in the Law Commission’s Report that led to the introduction of the FTPF offence. In its 2022 Report, not only did it make recommendations for increased legislative requirements for prevention of fraud, but the Law Commission also recommended the introduction of a ‘failure to prevent human rights abuses’ offence. Whilst this recommendation was not adopted by the government, its inclusion in the 2022 Report reflects a change in public perception of ESG due diligence and sustainability-related claims which may be a pre-cursor to further legislative change in the future.
Despite this shift in the tides being evident, it would be remiss to overstate the scope and application of these laws. The FTPF requires that an associated person knew that the fraudulent representation was false and acted dishonestly in making the representation. This sets quite a high bar that is unlikely to be met in most standard cases where there is no underlying dishonest intention e.g., where an ESG report uses language that may unintentionally overstate or oversell the company’s ESG achievements. Despite not being captured by the FTPF offence, these more common, unintentionally misleading statements in ESG reports may still come under criticism in other forums. For example, in respect of greenwashing claims; under scrutiny from stakeholders; or because of the downwards pressure on UK companies expected to come from business partners in scope of the CSRD and CSDDD.
Whilst we are not of the view that FTPF will lead to an abundance of claims relating to fraudulent sustainability claims and ESG reporting, it does signal to companies that there is an increasing need and pressure to improve reporting practises, including verification methods, appropriate use of language, and traceable year on year reporting. It may also provide some comfort to corporates looking to invest in funds and other vehicles which have as their purpose to provide a social or environmental benefit, for example, when entering into offtake agreements for carbon credits – a part of the sustainability ecosystem which has already come under increased scrutiny in several high-profile legal proceedings across several jurisdictions.
The FTPF offence will come into effect on 1 September 2025, so companies within scope should be keeping this in mind over the next 10 months as they prepare themselves to comply, including when ensuring that relevant policies are in place and training has been provided.
London Trainee Aditya Ashok also contributed to this article.
Key contacts
Partner London
Associate London
