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An interesting editorial blog from a UK legal firm on whether use of AI in internal company processes can increase risk of prosecution under the Failure to Prevent Fraud Act.

This UK Act enshrines a legal principle that is common to other anti-fraud law around the world.  Unlike traditional corporate criminal attribution, the prosecution does not need to establish that any senior individuals within the company knew about or were party to the fraud. Liability arises solely from the fact that a fraud offence was committed (by any “associated party”) that would benefit the company.

The defence is that a company took reasonable steps to mitigate fraud risks, including by its own employees and suppliers.  This is analogous to the “due diligence” defence in food safety law.

The argument here is that you cannot “outsource” this due diligence to AI.  This is because it is foreseeable that AI results will sometimes be incorrect.  In fact, if you use AI without human verification, you are weakening the due diligence defence and foreseeably increasing the likelihood of giving misleading statements.  This applies to relying on AI for everything from supply-chain risk assessments to drafting of company financial reports.

Photo by Tingey Injury Law Firm on Unsplash

The EU has updated its list (Delegated Regulation 2025/1184) of countries in which it considers controls against money laundering or terrorist financing are poor.  Any European business dealing with businesses in these countries is expected to enhance their financial due diligence checks and internal governance for contract review and sign-off.

Due diligence checking of new (and existing) suppliers is an essential fraud mitigation tool for any business, including food businesses.  The overall level of regulatory control in a given country, along with generic cultural attitudes to bribery and corruption, will inform this risk scoring.  A data source used by many businesses is the Corruption Perceptions Index league table published annually by Transparency International.

This blog, from consultancy group Forensic Risk Alliance, outlines the principles that a company must follow to demonstrate due diligence under the UK Failure to Prevent Fraud Act.  It is not specific to the food industry but the principles are generic,.  These same principles are good practice even for companies in countries that do not have similar legislation (i.e. a legal onus to take due diligence to prevent fraud) and for smaller UK companies not within the legal scope of the act.  The blog discusses how the principles can be implemented in practice:

• Implement a risk-based approach
• Incorporate fraud into other risk assessments
• Use existing data and technology
• Employee involvement and training
• Cross-industry collaboration

The blog contains links to other open-access blogs and articles on the same topic.

This report draws from a depth of data and in person interviews that will allow readers to more fully understand how the pandemic impacted global supply chains, how different companies reacted and the lasting changes that will be with us for years to come. It also analyzes other ways in which supply chains were disrupted and how the impact of these events was compounded by the pandemic

Key Points:

1. More organizations than ever are now using technology to assist with supply chain management and mapping: More than half (55.6%) of organizations are now using technology to help analyse and report on supply chain disruptions.
2. The number of supply chain disruptions organizations encountered in 2020 was higher than
   any other year in the report’s history.
3. COVID-related disruptions were more likely to occur beyond tier 1.
4. Solving the logistics puzzle has been a key challenge to organizations during 2020 – and is set
   to continue into 2021.                                                                                                                 
5. Senior management are now more engaged with supply chain issues.
6. Organizations are now more likely to interrogate the BC arrangements of critical suppliers.
7. More due diligence should be carried out pre-contract.

Read full report.