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Commercial Angles' Newsletter - November 2001

Fraud recovery

Fraud is big business, the latest estimate is £16 billion per year in UK alone. Previous editions of this newsletter have discussed the types of fraud, their methods of discovery and fraud deterrence. This month's article considers what to do when fraud is discovered.

Statistics show that a person is 100 times more likely to be the victim of fraud than to be mugged in the street. Statistics also show that 60% of fraud is committed by a company's own employees and the biggest frauds are committed by the company's directors and managers. Therefore you are very likely to be confronting a trusted colleague or friend if you discover fraud. Emotions are likely to be highly charged but it is important to consider all the options coolly before taking action.

Set your objectives

What are your objectives? To recover the losses for your company? To exact retribution? To deter others? Or a combination of all three. You may well be faced with choosing only one or two of these objectives. Frequently the courses of action are mutually exclusive e.g. securing retribution may jeopardise fraud recovery and vice versa. Revenge may be sweet on a personal level but may not be in the company's best interests.

Alternative courses of action

An instinctive reaction, once fraud is uncovered, may be to call in the police. If you were to do that, the conduct of the case would be in their hands. They might not prosecute if they thought the evidence was insufficient, or if the amount involved was too small or if they had more pressing issues in their case load. If they did prosecute, the burden of proof in criminal cases is more rigorous than in civil proceedings. And civil proceedings would be delayed until the criminal case had been dealt with. And if the criminal case failed to obtain a conviction, where would that leave any civil proceedings? On the other hand, the police are experts in these types of cases and taking police action would certainly deter others in the organisation from contemplating other frauds.

Another instinctive reaction might be to sack the suspected fraudster. However this is probably a bad move in the early stages of the case. Firstly, could you prove he, (and the majority of fraudsters are white males), was the culprit? And what would be the damages to the company if he proved his dismissal was unfair at an employment tribunal? Secondly do you really know how much is involved in the fraud or how many others are connected with it? Thirdly do you know exactly how the fraud was committed? Fourthly, do you know what he did with the proceeds and whether there is any chance of recovering it? To answer these questions will probably require the cooperation of the suspect. A better course of action may be to suspend the employee suspected of the fraud, remove him from the premises as quickly and quietly as possible and to prevent his readmission to the premises until your investigations are more complete. A suspended employee may be more helpful to the investigation than a sacked ex-employee.

Securing the evidence

With the suspect off the premises you are now able to thoroughly search his office. Fraudsters frequently leave clues in their offices. All papers should be examined and any discriminating personal documents should be copied before being returned to the employee. Forensic accountants should be considered for this task if the fraud is large. They are accustomed to the type of fraud and know what is or is not suspicious. They also know what type of evidence is required by the courts.

If the suspect has a personal computer, this should be examined for incrimating evidence. But reviewing the files may also destroy the value of the files as evidence. If the fraud is large and likely to go to court, an IT expert should be used to extract the information. An expert is necesary to ensure that files can be reviewed without interfering with user logs and file access data proving that only the suspect had access to them.

Interviewing the suspect

Having obtained what evidence you can, perhaps by using the services of a forensic accountant, the next step is to interview the suspect. A witness should be present at the interview. If a forensic accountant was used, he or a solicitor may be the witness of choice. The object of the interview is to gain as much information about the fraud as possible whilst not letting the suspect find out how much or how little you actually do know. A prime piece of information is what has happened to the proceeds of the crime.

When you have as much information as practical, you are then able to consider the courses of action again. If the evidence is overwhelming but the prospects of recovering the losses are small, the costs of undertaking a civil prosecution may rule out this alternative as a course of action. The matter may then be best dealt with by the police, any recovery being regarded as a bonus. Alternatively, the suspect may have indicated at the interview that he might be willing to return a substantial amount of his proceeds in return for the company dropping all legal action, both civil and criminal. Whilst the thought that the criminal would escape with some of the company's property may rankle, this may be a suitable course of action in some cases.

Publicity

If the fraud is large, consideration must be given to what effect any publicity would have on suppliers and customers. Will suppliers rein in on credit? Will customers look elsewhere for their supplies? Whilst publicity will certainly deter other frauds within the company, its effects on outsiders must be managed. You can't prevent the facts getting out if the case goes to court. So the important thing is to make sure it is the company's message which is propagated rather than rumours or garbled stories.

Articles from previous newsletters