Author: Sophia Purkis
This article first appeared on www.bmmagazine.co.uk.
What should firms think about if they are unfortunate enough to fall victim to fraud? This article focuses on some key issues, including evidence gathering, civil recovery, reporting obligations and reputation management.
First, an example of fraud from the legal industry. Although lawyers may well stand somewhere between estate agents and MPs in terms of the esteem in which they are held by the general public, most lawyers do in fact take pride in their honesty and integrity.
It therefore caused something of a stir in legal circles when Hogan Lovells, the 10th largest law firm in the world, announced in May 2011 that its star litigation partner, Christopher Grierson, had systematically defrauded the firm of £1.3m over a four year period. Mr Grierson would book a flight, then at the last moment cancel and obtain a refund.
He would then still claim the cost of the flight as an expense from his firm. Mr Grierson is now contemplating the error of his ways while enjoying the hospitality of Her Majesty’s Prison Service. Hogan Lovells’ experience is a vivid illustration that there is no such thing as a typical fraudster and no business is immune to fraud risk.
An effective response to fraud must start with evidence gathering, ideally before the fraudster becomes aware that the game is up. The success or failure of any criminal prosecution or civil recovery action may turn on the speed and accuracy of evidence collection and the analysis and presentation of the evidence to relevant authorities.
Evidence gathering will often have an IT aspect, for example in creating forensic images of computers and other electronic devices used by the fraudster. It may require an accounting analysis of how the fraud has been perpetrated, the extent of losses and the location of stolen assets.
The legal avenues to obtain redress should also be considered as soon as practicable. Firms will naturally consider seeking to recover losses by a civil action against the fraudster. But the range of available civil actions goes much further than that.
There may be claims against third parties who have dishonestly assisted the fraudster, whether or not they have actually received stolen assets. A third party (even if not involved in the fraud) who receives assets knowing that they are the proceeds of fraud can be pursued. Recovery may also be possible from innocent third parties who have been unjustly enriched by gifts from the fraudster.
Important weapons in the litigation armoury include freezing injunctions and search orders. A freezing injunction can block the operation of bank accounts and prevent the transfer of property such as real estate or company shares. This prevents dissipation of assets pending determination of the claim by the court. A freezing injunction is usually supported by an order that the defendant make full disclosure of his financial circumstances and the location of missing assets. If he fails to make full disclosure he may face committal for contempt of court. A search order permits entry to specific premises, and seizure of documents and computers necessary to support the claim.
Time will be of the essence. A fraudster may fritter away his ill-gotten gains or may seek to hide (or “launder”) the proceeds by moving them through different accounts, in the names of different account holders, located in different jurisdictions. In either case timely action through the courts can interrupt the disposal process and improve the prospect of making recovery.
Firms must also consider possible reporting obligations. There may be regulatory reporting requirements, for example for firms regulated by the Financial Conduct Authority or Prudential Regulation Authority. If so, firms will be particularly keen to show the regulator that lessons have been learnt and that appropriate safeguards are being implemented for the future.
Organisations should check the terms of their insurance policies for reporting obligations, whether or not a claim is considered. It may not be an easy decision whether to report the matter to the police. Adverse publicity may ensue but, equally, not reporting may send the wrong message. There may be reputational damage either way.
Thought should be given to a communications strategy with the press, who may be interested in the story, and clients or customers, who may need reassurance that their interests are protected.
From simple theft of money by dishonest expense claims, to sophisticated schemes to disguise the diversion away of revenue streams or business opportunities, to the taking of bribes or secret commissions, the term “fraud” covers a huge range of dishonest behaviour. In all cases, a swift, co ordinated response will be crucial in mitigating the financial and reputational damage fraud may cause.