Supply chain fraud affects retail and consumer product companies of all sizes and can include bribery, money laundering, tax evasion, intellectual property (IP) theft and more.
Supply chain fraud poses a larger threat to organisations than ever before, with supply chains encompassing an expansive network of third parties across the globe (often in regions with differing ethical codes and business practices) being particularly at risk of fraud. in regions with differing ethical codes and business practices.
Moreover, the impending recession is changing the nature and scale of supply chain fraud risks that organisations face. When economic survival is threatened, the line separating acceptable and unacceptable behaviour can become blurred and criminal organisations that profit from fraud will view the current economic conditions as an opportunity rather than a threat.
The frequency and consequences of supply chain fraud are increasing and organisations must take the appropriate steps to mitigate the risks involved before they become a material business threat.
In the UK, organisations are, by now, familiar with the corporate offence of failure to prevent bribery, introduced by section 7 of the Bribery Act 2010 - , which imposes strict liability on companies that fail to prevent an act of bribery by associated persons, unless the company can demonstrate that it had in place adequate procedures to prevent such an offense from occurring.
Anti-bribery and anti-corruption has been a focus in the US for almost 40 years since the enactment of the Foreign Corrupt Practice Act in 1977, which requires organisations to have internal controls in place to prevent and detect bribery. However, the introduction of the Bribery Act in 2010, thought to be the strictest anti-bribery legislation in the world, has led many countries in Europe and beyond to overhaul their existing anti-bribery regimes, and in some cases, to implement anti-bribery laws for the first time.
Less well known, however, are the UK corporate criminal offences of failing to prevent the facilitation of tax evasion, established under part 3 of the Criminal Finances Act 2017. Under these offences businesses can be held criminally liable if their associated persons facilitate tax evasion by a taxpayer, either in the UK or overseas. However, a defence is available if the company had Reasonable Prevention Procedures in place to prevent its associated persons from facilitating tax evasion.
The definition of ‘associated person’ is notably broad and gives rise to a risk that the fraudulent actions of third party suppliers could put a business at risk of prosecution. Potential liability under these offences can also extend through the supply chain, meaning that a supplier (some way removed) can still pose a risk to that business.
Labour supply chains can also pose a significant risk to companies either using off-payroll labour or outsourcing contracts for major projects. The IR35 rules place the onus on the end user of contractor labour to decide whether Pay As You Earn and National Insurance Contributions should be deducted from payments to contractors – even where an agency is involved.
Where an organisation outsources a project to a supplier who does not apply the IR35 rules correctly and fraud occurs, this would create a potential risk to the organisation of being held criminally liable for failing to prevent the facilitation of tax evasion, subject to the statutory defence of demonstrating that Reasonable Preventive Procedures were in place.
Regardless of whether jurisdictions beyond the UK have enacted similar anti-bribery and anti-tax evasion legislation, both the Bribery Act and Criminal Finances Act have wide territorial reach, whereby corporates can be held criminally liable if their associated persons commit bribery or facilitate tax evasion either in the UK or overseas.
Supply chain fraud poses a larger threat to organisations than ever before, with supply chains encompassing an expansive network of third parties across the globe (often in regions with differing ethical codes and business practices) being particularly at risk of fraud. in regions with differing ethical codes and business practices.
Moreover, the impending recession is changing the nature and scale of supply chain fraud risks that organisations face. When economic survival is threatened, the line separating acceptable and unacceptable behaviour can become blurred and criminal organisations that profit from fraud will view the current economic conditions as an opportunity rather than a threat.
The frequency and consequences of supply chain fraud are increasing and organisations must take the appropriate steps to mitigate the risks involved before they become a material business threat.
Corporate criminal liability
Organisations are increasingly being held accountable for the actions of the parties they contract with. Aside from the direct losses suffered by organisations through supply chain fraud, there is an increasing threat of corporate criminal liability being imposed upon organisations that fail to prevent fraud and associated offences within their supply chain. Subsequently, this can lead to far greater costs and reputational harm.In the UK, organisations are, by now, familiar with the corporate offence of failure to prevent bribery, introduced by section 7 of the Bribery Act 2010 - , which imposes strict liability on companies that fail to prevent an act of bribery by associated persons, unless the company can demonstrate that it had in place adequate procedures to prevent such an offense from occurring.
Anti-bribery and anti-corruption has been a focus in the US for almost 40 years since the enactment of the Foreign Corrupt Practice Act in 1977, which requires organisations to have internal controls in place to prevent and detect bribery. However, the introduction of the Bribery Act in 2010, thought to be the strictest anti-bribery legislation in the world, has led many countries in Europe and beyond to overhaul their existing anti-bribery regimes, and in some cases, to implement anti-bribery laws for the first time.
Less well known, however, are the UK corporate criminal offences of failing to prevent the facilitation of tax evasion, established under part 3 of the Criminal Finances Act 2017. Under these offences businesses can be held criminally liable if their associated persons facilitate tax evasion by a taxpayer, either in the UK or overseas. However, a defence is available if the company had Reasonable Prevention Procedures in place to prevent its associated persons from facilitating tax evasion.
The definition of ‘associated person’ is notably broad and gives rise to a risk that the fraudulent actions of third party suppliers could put a business at risk of prosecution. Potential liability under these offences can also extend through the supply chain, meaning that a supplier (some way removed) can still pose a risk to that business.
Labour supply chains can also pose a significant risk to companies either using off-payroll labour or outsourcing contracts for major projects. The IR35 rules place the onus on the end user of contractor labour to decide whether Pay As You Earn and National Insurance Contributions should be deducted from payments to contractors – even where an agency is involved.
Where an organisation outsources a project to a supplier who does not apply the IR35 rules correctly and fraud occurs, this would create a potential risk to the organisation of being held criminally liable for failing to prevent the facilitation of tax evasion, subject to the statutory defence of demonstrating that Reasonable Preventive Procedures were in place.
What does this mean outside of the UK?
Although the UK is the first country to enact specific legislation imposing corporate liability for a failure to prevent tax evasion, there are similar powers available to prosecutors in other jurisdictions, for example Sweden, where a corporate can be held liable for failing to do what was reasonably required to prevent an offence, including tax evasion.Regardless of whether jurisdictions beyond the UK have enacted similar anti-bribery and anti-tax evasion legislation, both the Bribery Act and Criminal Finances Act have wide territorial reach, whereby corporates can be held criminally liable if their associated persons commit bribery or facilitate tax evasion either in the UK or overseas.
Conclusion
The opportunity for significant supply chain fraud losses and potential criminal liability will continue for as long as organisations underestimate the risk and fail to develop adequate controls.
Active monitoring and strong internal controls will allow companies to mitigate the likelihood of fraud by identifying red flags early on, so that they can be stopped before they occur. Third-party risk can also be reduced by conducting due diligence on partners and supplies prior to onboarding and during the business relationship.
Effective fraud risk management is, however, cost effective and as the economy heads into recession and companies seek new ways to reduce costs, attacking supply chain fraud offers the opportunity for potentially significant cost savings with a relatively low investment.
If you have any questions or would like to discuss any of these topics and what they mean for you and your business, please get in touch with our consumer sector and Fraud experts.
