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In case of fraud, stay away from the merry-go round

You receive a telephone call. It’s anonymous, ‘Your Buying Director’s got his hands in the till. He’s doing deals with your supplier, bumping the prices and splitting the uplift.’ Is this real or does the caller just have a grievance? He says it’s been going on for years. How much would that be worth?

You have spent £1.5 million acquiring an established business as part of a modest expansion strategy. Six weeks later the turnover is lower than expected. Debtors are disputing sales invoices. Creditors are demanding settlement of six-month-old invoices despite the completion accounts showing nothing older than three months. Despite all that due diligence, did you misunderstand something?

The first reaction to such events can be an instant light-bulb moment. More often it is a slowly rotated dimmer switch. It starts with confusion, then a search for alternative explanations followed by a dawning realisation. Your emotions turn from bewilderment to horror then to fear and anger.

You do not know what to do. You are embarrassed. You do not want to tell anyone. You are afraid of the consequences if employees, suppliers and customers find out. You spend valuable time trying to understand it, doubting yourself and silencing your inner voice. You feel it is your fault and you have let others down. You may be thinking, ‘What will happen to us?’.

A fraud often means someone you trusted has let you down. It might be a supplier you know very little about, nevertheless you trusted them. Worse, it might be an employee or business associate you have worked with for years. Even senior management in large multinational companies experience a range of emotional responses when discovering fraud.

Fraud is, by its nature, a secret crime committed by stealth and guile: no smoking gun, broken windows or empty driveway. This means it is often not detected at all and when it is detected the victim company discovers that it has unknowingly been a victim for some time, perhaps even years. For the same reasons, it can be difficult to investigate.

Frauds tend to involve repeated events. Once an offender has learnt how to commit a fraud and got away with it, they do it again, often accelerating their offending. Without intervention, the opportunistic offender turns into a habitual fraudster. Unfortunately this means a detected fraud is often just the tip of the iceberg.

What should you do? Should you immediately call your local police station, should you file a report with Action Fraud? Should you turn to lawyers to help you? Which ones?

It is an unfortunate fact that very many, if not the majority of victims of fraud, end up on a sort of merry-go-round in their search for advice and help in how to respond to a case of fraud. The first problem which presents itself to a victim of fraud is who to turn to for advice and help.

Even experienced company directors and business partners may have limited experience of significant fraud and will usually have little or no experience of fraud cases in the civil and criminal courts. They will know of lawyers and accountants who help them in their business and personal affairs but those advisers may not have the expertise to help in the case of a fraud.

The situation for businesses is particularly confusing because of the split legal regimes which they have to consider: a civil-court system of law and a criminal-court system of law, each with its own structures, complexities and legal language. The parallel systems of justice developed on their separate tracks long before the fiendishly complex frauds of today emerged. Whilst both the criminal and civil justice systems have evolved and continue to adapt to the innovations of fraudsters, serious legacy problems remain.

Distressed businesses, some with with scant knowledge of the law must first find a way to access the legal systems in England and Wales. They must then make profound choices with serious implications: to sue, to punish, seek both or do nothing. Finally, they have to navigate their way around complex bureaucracies with the help of strangers.

This is a challenging task. The criminal system can be very slow and does not prioritise compensation for victims, let alone businesses that are victims. The civil system is faster and focused on asset recovery for businesses but it is very expensive to access. The challenges facing businesses that have been defrauded are real. But letting fraudsters get away with it is unpalatable and unwise for many businesses, particularly if the fraudsters are insiders who were employed by or contracted to the business.

It is critical that you are aware of and that you evaluate all your choices as early as possible. A failure in this regard is often not the fault of the victim but it is frequently the biggest cause of problems and regret later. If you are going to pursue fraudsters through the criminal law system, it is crucial to know how to engage the police and prosecutors who have many other investigations and cases which will compete with your case. It is also very important to know about the risks that the public authorities may be slow to respond, may not bring proceedings and also the risk that they may even compete for the assets that you want to recover.

One of the first things an experienced fraud lawyer will do for his or her client is form an asset recovery strategy. Thinking about and planning asset recovery at the outset is crucial in fraud cases because fraudsters will often work very hard to make sure that their victims (and prosecutors) cannot find or enforce judgments against assets they hold or control. In cyber fraud cases, time frames can be even faster. Businesses and their lawyers have to work hard to find and freeze assets which can then be recovered from the fraudsters through court proceedings.

Unfortunately, a great many victims do not end up getting specialist expert advice from the outset and this can restrict their options and cause them serious difficulties with any case that they pursue.

The real keys to responding to fraud and successfully making recoveries are twofold. Firstly, businesses need to have good insights into how both the civil and criminal justice systems work. Secondly, they need to know how to engage specialist lawyers to maximum effect.

Commercial_and_Cyber_Fraud_3D_CoverIan Smith and Dr David Shepherd are the authors of Commercial and Cyber Fraud: a Legal Guide to Justice for Businesses (Bloomsbury Professional, May 2019). Ian is a Barrister at 33 Chancery Lane, specialising in representing businesses that are victims of fraud. David is a Senior Lecturer at the University of Portsmouth, specialising in fraud and corruption.

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