Considerations for the Recovery of Fraud Losses
Article, Financier Worldwide – December 2012
Insurance / Legal / Forensic Investigation
Historians have shown that the first recorded evidence of fraud dates back to 300 BC. Ben Hobby, Director and Catherine Rawlin, Partner at RGL Forensics London consider how fraud has therefore been a constant risk in our business lives since the advent of commercial trade.
Historians have shown that the first recorded evidence of fraud dates back to 300 BC. Fraud has therefore been a constant risk in our business lives since the advent of commercial trade.
On discovering a fraud, a business will turn to its fraud action plan, if it has one in place, and there will be many issues to consider at the beginning of any investigation. One of the most important will be the recovery of losses borne by the business. In determining an appropriate response, it will be important to understand the nature and extent of the problem. The response can range from no action, or an internal disciplinary hearing, through to criminal prosecution.
In most jurisdictions, legislation exists that allows for a confiscation order to be made following a conviction. However, obtaining the correct evidence is critical to the success of any application under this type of legislation. By obtaining the right guidance from the police and external legal counsel at the start of the investigation, businesses can ensure that they co-operate with the police and that their investigation processes comply with the legislative requirements, thereby not prejudicing the chances of a recovery.
Alternatively, it may be possible for the business to recover its losses via a commercial crime insurance policy. However, these policies generally only respond where the fraud stems from the actions of an employee with the intention to defraud. It is important to understand the requirements of the policy so the correct evidence can be obtained to prove the loss to insurers.
For example, a business may have suffered a fraud in respect of several supplier accounts that were created by a single employee in the course of their normal duties. The investigation establishes that each account was created by a third party with the intention of defrauding the business. However, documents provided to support the creation of each account appear to be genuine. In the absence of other evidence, it would appear that the fraud has been committed without employee involvement.
In this case, the investigation would need to establish a link between the employee and the relevant third parties before the policy will respond. This may be by, for example, tracing funds paid to each supplier or establishing whether there was any communication with the employee above and beyond that required for the commercial relationship.
A good place to start tracing assets is in the employee’s ‘own back yard’ as this may provide indications that the employees is ‘living beyond their means’. Recent planning permission, a new car and extra time off work for a long-haul holiday are common indicators.
The fraud and the laundering of its proceeds can be extremely convoluted. There are over 60 tax havens around the world and the majority of complex fraud becomes masked, fronted or diluted through third parties and laundered through many complicated schemes. It can also pass from one entity to another until it becomes hidden behind an offshore trust.
Obtaining evidence from the relevant international banks through which these transfers are made and able to demonstrate that the monies represent the proceeds of fraud can be done in a number of ways with the appropriate legal support. These include the use of such instruments as Mutual Legal Assistance (MLA), a letter of Request or by using legislation and powers contained within the crime (International Co-operation) Act 2003, UK Data Protection Act 1998, and the European Convention 1990. Notwithstanding the availability of these instruments, in recent years there has been an increase in the level of assistance and co-operation provided by international banks in following this type of trail such that it is now easier for an investigating team to obtain this evidence.
The evidence obtained from this part of the investigation can be used to support a legal application. This may be to freeze certain assets, pending further investigation which may include applications for disclosure of specific information, or to recover assets if they represent the proceeds of the fraud.
However, given the differences in law that exist across jurisdictions, it is important to have awareness of the relevant local legal framework, data protection laws and disclosure obligations, as well as the requirements for supporting evidence needed for any legal application.
By considering the possible methods of recovering losses at the beginning of an investigation with the investigating team and appointed lawyers, the business can identify and preserve all relevant evidence. This decreases the level of reliance on the business’ document retention procedures, as well as reducing the risk of evidence being destroyed by the fraudsters. Taking these steps will not necessarily guarantee the recovery of any losses, but it will certainly increase the possibility of locating the proceeds of fraud.
As appeared in Financier Worldwide, December 2012.