Pandemic Brings New Fraud Risks For UK Cos.

By Azizur Rahman
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Law360 (April 28, 2020, 5:01 PM EDT) --
Azizur Rahman
Azizur Rahman
Currently, everyone is observing restrictions on their movements and many millions are either working from home or have stopped work altogether in an effort to stop the spread of COVID-19.

As a response to such a seismic blow to the economy, Chancellor of the Exchequer Rishi Sunak announced huge packages of financial assistance in the shape of grants for the self-employed and payment of the wages of employed workers. Yet in announcing his help for the self-employed, the chancellor acknowledged that such a scheme may be attractive to those looking to perpetrate fraud.

His statement was a recognition that whatever the health of an economy — or the financial standing of an individual or a company within it — there will always be those looking to make fraudulent gains. The situation that has been created by coronavirus will have produced new opportunities for those who commit fraud. And fraud is like a virus: it will spread and cause the maximum amount of harm unless the right precautions are taken.

To paraphrase the criminologist Donald Cressey, perceived financial need, opportunity and rationalization all help promote fraud. With the current economic uncertainty, the chance for state financial handouts and the possibility that many may feel they should be getting something, all of Cressey's conditions appear to be present.

That is the case when it comes to both the chancellor's attempts to help employees and the business world in general: new developments produce new fraud possibilities.

This is arguably why the Financial Conduct Authority has gone to great lengths to warn that the present situation may be exploited by those looking to defraud, using anything from investment fraud and advance fee fraud through to clone firms. The FCA is urging those in business to use its financial services register and its warning list to check on the authenticity of any financial proposition made.

Similarly, the National Crime Agency is highlighting risks posed by the likes of bogus online medical equipment suppliers, fake HM Revenue and Customs, bank and loan company officials and computer hackers passing themselves off as software engineers. Companies could even find themselves being impersonated by those looking to make illegal gains.

It is now, therefore, arguably more important than ever to be alert to the risks. This means both having well thought out and properly executed measures in place to prevent and/or identify fraud and responding promptly and appropriately if fraud is suspected.

If fraud is identified — or even if it is merely suspected — it needs to be investigated at the earliest possible opportunity. A well-planned and properly conducted internal investigation will establish whether fraud has been committed and the best course of action to take to prevent it happening again.

It is also ensures the board of a company or other senior figures are fully informed of what has happened. This means they are able to respond to any concerns voiced by shareholders, potential investors, trading partners or other third parties — and they are able to decide precisely how to engage with regulators or investigating agencies.

Conducting such an investigation may, at first glance, appear difficult given current working restrictions and the likelihood that many of the parties involved are now working remotely. But, just as a large amount of work is currently being carried out away from the office or other workplace, a similar approach can be used for investigations: they can be conducted with some out-of-the-box thinking.

Interviews, for example, could be conducted via telephone or video link; although consideration must be given to legal issues such as confidentiality and privilege in the jurisdictions where they are carried out. Document collection can be done remotely or by using an appropriate third party, providing all relevant data protection requirements are met.

Once such an investigation has been completed, decisions then need to be made regarding whether its findings are shared internally and/or disclosed to the relevant regulatory agency.

It should at this point be emphasized that despite the unusual circumstances the law and the agencies that enforce it are still functioning, even if changes are being made. To give one significant example, while Secretary of State for Business Alok Sharma has announced a temporary suspension of the wrongful trading provisions, the law in relation to fraudulent trading — and the potential for director disqualification — remains in place.

Wrongful trading was introduced into U.K. law by the Insolvency Act 1986 and makes it an offense for a company director to continue to trade if they know their business is trading insolvent, that is, unable to pay their debts as they fall due. It is usually the case whereby companies hope that things will improve even though things continue to spiral downward. When it comes to wrongful trading there is no intent to defraud the company's creditors — it is a case of poor judgement or the failure of the directors to carry out their responsibilities.

Fraudulent training, on the other hand, takes place when directors knowingly carry on business affairs with no intention to pay their debts. This offence is usually more difficult to prove given the burden of proof. Evidence must be weighed heavily before a court is prepared to convict an individual of such offence.

The difference between the two is important. Alok Sharma's suspension of the wrongful trading provisions is an example of changes being made in strange times. But the law remaining in place relating to fraudulent trading is a stern reminder that those in business should not see the current situation as an opportunity to be lax in their approach to fraud identification and prevention.

While businesses' current problems are being acknowledged by the government, companies cannot expect to be immune from either the dangers of fraud or the consequences of becoming involved in it.

Recent weeks have seen significant upheaval in the business world — and a clear possibility for those looking to commit fraud. But companies must ensure they do what they can to minimize the potential turmoil.



Azizur Rahman is a senior partner at Rahman Ravelli.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


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