Speed is key to mitigate for fraud in a business

Andrew Foyle

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Andrew Foyle is Joint Head of Litigation at Shoosmiths in Scotland and a solicitor advocate.

AT times of economic downturn it is a sad fact that incidents of fraud and embezzlement tend to rise.  The sentencing remarks of the sheriff in Glasgow earlier this week (27 April), when jailing an accounts manager for the embezzlement of over £239,000 from her employer, is a graphic reminder of the effect fraud can have on a business.  The sheriff specifically referenced the difficulties the business experienced, including threats to their power supply, the inability to replace departing staff or consider wage increases and the effects on the mental health of the business owner.

However, once a fraud is discovered, what can a business do to mitigate the losses they have suffered?

Within the business, embezzlement of this type is often carried out by employees in positions of trust.  On uncovering the crime, the overwhelming reaction of employers tends to be shock or disbelief.  In our experience, fraudsters rarely have much to show for their crime.  More often than not the money is spent on intangibles, such as holidays or, more sadly, on some form of addiction. As the crime doesn’t often result in any tangible assets and the discovery of their wrongdoing will render the fraudster unemployed, recovery from the former employee can be problematic.

Where the police are involved and there is a public interest in doing so, the Crown will often lead attempts to trace the proceeds of crime.  They have extensive powers to do so, and are effective in using them.

However, in cases where the Crown has not undertaken such an exercise, it will be up to the employer to pursue matters.  A relatively recent high-profile example of this is the author, JK Rowling’s successful action against her former personal assistant in March 2019. The circumstances of that case are well reported.

However, successfully obtaining a judgment against a wrongdoer is no guarantee of recovery.  In order to maximise the chances of recovering some or all of the money taken, the best advice is to act as quickly as possible. 

Whilst the fraudster may have little to show for their crime, it is possible that they own a house or have money in a bank account, that can be attached in order to reduce exposure.  Delays in taking action run the risk that those assets will be transferred elsewhere.  By contrast, taking early action gives the opportunity to obtain interim orders preventing those assets from being transferred whilst court action is ongoing.

It is also worth considering family members or others who may have been complicit in the crime.  In some cases, bankruptcy proceedings should be considered in order to allow a trustee to investigate whether any other party might have benefited (leaving them open to pursuit) and to consider whether to challenge any transfers of assets in the lead up to the discovery of the crime.  It is very common, as the net closes in, for a fraudster to divest him or herself of the proceeds of their crime.

Quick action can often yield results. In one case in which we were involved, substantial sums were recovered from a bank account. In another, a holiday home was discovered the sale of which led to a full recovery. That said, cases of achieving a full recovery are rare. More often than not, the outcome is a partial recovery that at least helps to mitigate the harsh effects such a fraud can have on a business. 

Significantly, in the case of a small or medium enterprise, during an economic crisis the ability to achieve even a partial recovery might just prove to be the difference between business survival and insolvency.

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