When the National Fraud Authority published its Annual Fraud Indicator in June 2013 it estimated that the annual cost of fraud to the UK economy is £52bn. Whilst this might be a huge amount, more recent reports estimate the actual cost is over £85bn (nearly 5.5% of the GDP) of which between 21% and 25% are insider-enabled frauds, i.e. those in which an organisation’s officers, agents or employees are involved. A fifth to a quarter of all businesses has been subject to such issues.
The most likely types of insider-enabled fraud perpetrated upon businesses are reportedly procurement fraud (false invoicing, overcharging or goods/services paid for but not rendered) and payroll fraud (including exaggerated expenses claims). In such instances it is important that businesses act swiftly to find out what has happened and work closely with fraud specialists to enable the business to best manage its commercial and legal risks.
So what should you do if you think your business has been defrauded by someone who works for you?
- It is important to acknowledge the potential issue. Whistleblowers should be taken seriously not least as adverse publicity can ensue if a business fails to listen to and act upon a report of misconduct, regardless of its truth.
- Marshal your forces. Who in your organisation needs to know? Suspected fraud can be a sensitive matter, with reputational as well as commercial risks. In the early stages of investigating the matter, often the fewer people who know about it the better and if you suspect the perpetrator is someone working for you, you do not want to tip them off until you are ready.
- Instruct specialist independent advisers. The decisions your business might have to make may concern various regulatory and legal issues. You will need clear, dispassionate advice both as to the nature of the suspected fraud and what to do about it.
- Quickly investigate the fraud. The evidence you obtain might need to be examined by regulators, the police and the courts, so it is important that it is gathered properly. Such evidence is often stored electronically; your advisers should be able to help you gather it without affecting the underlying data.
- Review the evidence objectively. One recent study indicated that at least half of all insider-enabled frauds were conducted at senior manager level and above by people who had been employed by the organisation for over ten years. We trust each other at work. When there is a perceived breach of that trust it can be hard to view things impartially. What you might be required to do next will depend on the evidence, so you should take independent advice on it to help you make the right decision.
- Co-ordinate your response. You should plan strategically to co-ordinate your response to (1) protect the organisation’s commercial position; (2) comply with your regulatory and/or statutory duties; (3) manage the risk of damage to the organisation’s reputation; (4) minimise any possible ongoing damage; and (5) seek to recover your financial loss, taking pre-emptive measures to protect your business’ position, if necessary.
- Consider regulatory/criminal action. In today’s regulated regimes you must consider your reporting obligations. An FCA-regulated company is obliged to disclose to the FCA “anything relating to the firm of which the FCA would reasonably expect notice” and where bribery is suspected the business’s senior managers might find themselves facing criminal sanctions unless they can show that they have put in place adequate procedures to prevent bribery within their business. If you are advised or choose to report the matter, the external authority might conduct its own investigations, which you will need to factor into the other actions you take.
- Explore potential civil claims. Regulatory and criminal actions rarely result in financial redress. You should seek advice on whether litigation would be cost effective and if there are third parties against whom you could also claim. If you suspect the fraudster might react to being discovered by dissipating the proceeds of the fraud or by destroying evidence, an application for a freezing and/or search order may be made and you should time your internal disciplinary action accordingly. You should also review you insurance policies to see if (1) you should report the matter to your insurers; and (2) you can make a claim under your insurance.
- Take disciplinary action. Once you have assembled the evidence and decided on a strategy you should commence your disciplinary action. There might be a temptation to dispense with it either as unnecessary or because you do not believe the fraudster will engage with it. However, following the procedure might produce further evidence, protect you against future claims and even assist you to resolve your dispute with the fraudster at as little cost to you as possible.
- Finally, you should review your internal policies to minimise the risk of a recurrence of such incidents. Specialist advisers can assist you to introduce and tighten up on your policies and procedures.
The vagaries of human character can catch anyone unawares. If you should suspect that a fraud has been perpetrated on your business the situation should be addressed quickly and calmly with the assistance of independent advisers, so that the issue can be dealt with as smoothly and with as little interruption to your business as possible.
Sophia Purkis, Partner, Fladgate LLP (firstname.lastname@example.org)