31 October 2011
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24 January 2014
Sophia Purkis explains why speedy action and taking independent advice can help mitigate cases of theft or expenses fraud
Recent expenses scandals in the legal profession have brought the question of how to handle cases where partners or employees have misappropriated funds from firms or companies into the public eye.
In such situations, the partnership or employer faces a series of decisions. These include: how to deal with the matter; whether the regulator, the police or the Serious Fraud Office (SFO) should be informed; whether clients should be told; whether, notwithstanding that the organisation is the victim, it might have liability to clients under the stringent regulatory regimes that now exist; and how best to secure some form of financial redress. All these issues must be handled while reassuring clients, employees and the media, and setting up a review of existing preventative measures.
The regulatory factor
Traditionally, the legal and regulatory choice was considered quite straightforward. Reporting the matter to the police might set an example to others in the company, but was not obligatory and could mean adverse publicity. Also, it would probably not result in repayment of monies taken.
Things are not so simple now. An FSA-regulated company is obliged to disclose to the FSA “anything relating to the firm of which the FSA would reasonably expect notice” - a deliberately wide-ranging obligation - and a theft might result in an accounting issue, the resolution of which is required to avoid breach of financial reporting obligations.
Furthermore, the corporate offence of failing to prevent bribery on behalf of a commercial organisation came into force in July this year. Much has already been written on this topic and how a company might find itself having committed a criminal offence. The only defence would be to have “adequate procedures” in place to prevent bribery. Guidance on this is available from the Ministry of Justice.
Should there be evidence of knowledge of bribes, the partners of a firm or officers and senior managers of a company might find themselves personally facing criminal proceedings. Given such potential liability for the partnership or company and its officers executives should act quickly, establish the facts and, crucially, take independent and objective external advice.
If the matter is reported to the police, the Crown Prosecution Service might choose to bring restraint and confiscation proceedings against the defendant from which the company might be able to seek redress.
The downside of this approach is that such proceedings are outside the control of the organisation and rarely result in repayment of monies. However, the SFO has recently placed strong emphasis on self-reporting, deferred prosecution and civil recovery in lieu of prosecution.
Claims and aims
Civil proceedings are therefore a feasible option and the organisation must balance the expense of such claims against the likely return from the defendant. Fortunately, the organisation can conduct investigations before commencing a civil claim to ascertain whether the defendant and their associates have sufficient assets to make proceedings cost-effective.
There could also be other considerations that mitigate towards or against bringing civil proceedings, such as a potential insurance claim from clients who have had money stolen from their client account. In such situations, a client and insurers might look more favourably on a company that is willing to bring a swift action against the perpetrator.
Often the defendant will no longer retain the proceeds in cash. Therefore, the company’s enquiries should be extended to investigate where the monies have been spent or sent.
Property acquired with monies received by the defendant can be restrained or frozen to prevent dissipation pending the court’s decision by means of a freezing order. The terms of such orders can be extended to include requiring the defendant to disclose how they have spent the monies and their current location.
If the organisation believes the defendant has documents that are evidence of their conduct and that of others, and that they will destroy these documents, it could seek an order to search the defendant’s premises and remove them, including data stored electronically on computers and mobile telephones.
Search and freezing orders can reveal information necessary both for enforcement and to help identify other potential defendants. A defendant cannot seek to withhold the information on grounds of self-incrimination.
The organisation could also investigate the possibility of seeking redress not only against the defendant, but also those who have knowingly received the proceeds of the theft or bribes, have dishonestly assisted or conspired with the defendant in their acts or have been unjustly enriched by those monies.
The relevant tests for liability for these causes of action must be applied carefully, but can be particularly effective if the defendant no longer has the monies taken or received.
These basic steps can apply as much to incidents of rogue trading as to solicitors’ expenses frauds. In all cases it is essential to act quickly, especially if it is desirable to freeze funds. However, although an independent investigation will take time the evidence gathered often proves invaluable upon application for injunctive relief and when pursuing the substantive claims to trial or settlement.
When suddenly facing these types of decisions companies or partnerships should seek independent advice. Identifying whether to report the matter to the police, the SFO or the regulator and, even if there is no such obligation, whether it would be in the organisation’s best interests to do so invariably results in a crisis better handled, and recognised as so by the audiences that matter.
Sophia Purkis is a partner at Kingsley Napley