Out-Law Legal Update
High Court guidance will reassure banks acting to freeze accounts suspected of holding proceeds of crime
Out-Law Guide | 07 Sep 2013 | 4:59 pm | 10 min. read
This guide was last updated in March 2019
The number of incidents of fraud and the impact on businesses is alarmingly high. The Annual Fraud Indicator 2017 estimated that fraud costs the UK economy £190 billion per year. This is up from £54 billion in 2013. With such staggering numbers, it is vital that businesses protect themselves and are aware of the available remedies.
Civil fraud claims involve complex issues of law and evidence. If you are the victim of a fraud, you should seek specialist legal advice as quickly as possible. Civil fraud solicitors in the UK have a number of tools at their disposal which they can use to immediately secure stolen assets on behalf of the victims of fraud. Each case must be dealt with on its own merits. There are some common methods of asset recovery that can be obtained through the civil courts and some of the important steps in that process.
Depending on the nature of the fraud, it may be appropriate to report it to the police or a public body such as the Serious Fraud Office (SFO), National Crime Agency (NCA) or Economic Crime Unit for further investigation and potential criminal prosecution. However, according to Freedom of Information Act data obtained on behalf of Pinsent Masons, the law firm behind Out-Law.com, the annual number of restraint orders obtained by the CPS has remained largely static despite the costs of fraud in the UK almost quadrupling over the last five years, while the SFO did not obtain a single compensation order in the period 2017-2018. Therefore, if a victim of fraud wants to maximise their chances of recovering the stolen assets then these routes should only be pursued after civil proceedings, which will solely focus on recovering the stolen assets, have concluded.
It may also be necessary to report the fraud to the relevant regulatory body such as the FCA or SRA, depending on the nature of the victim's business. Civil fraud solicitors can also assist with navigating any reporting process to minimise the impact on the company.
Once the fraud has been discovered companies must act quickly to investigate the issue and to protect the company's position but without alerting the suspected wrongdoers.
Most frauds are likely to leave both a paper trail and an electronic footprint. An initial review of information relating to the alleged fraud, which might include invoices, financial and procurement systems documentation, is essential in order to establish the underlying facts and amount at stake in any potential claim. Financial information should be first reviewed by a solicitor who is an expert in civil fraud to determine if a forensic accountant is needed. This will ensure available resources are used appropriately in the initial 24 hours upon discovery of a fraud. A civil fraud solicitor will ensure any work such as e-mails and reports produced by the forensic accountant is protected by legal professional privilege (LPP) to the greatest extent possible. Documents covered by LPP remain confidential and do not have to be produced in subsequent litigation.
The input of a civil fraud solicitor experienced in this field will also assist with setting the aims and objectives of the investigation. It should always be remembered that, at this very early stage, the aim is to fact-find and determine what happened rather than reaching a conclusion on liability. Specialist input from employment lawyers will usually be required at the outset to ensure a proper and defensible procedure is followed with respect to any employees suspected of wrongdoing.
A detailed witness statement or affidavit will need to be produced by the civil fraud solicitor to set out the background as to what has happened. This will include the history of the parties involved, the discovery of the fraud and what has happened. This is usually a very detailed statement. It is useful to involve external solicitors in any interviewing process as they will have the necessary experience of gathering evidence in this manner during pre-action investigations.
The method and process of undertaking interviews will need to be carefully considered as maximising the protection of LPP will be important in the event of subsequent legal proceedings. An experienced civil fraud solicitor will also be best placed to focus on a line of questioning which is targeted at both understanding the underlying issues and potential causes of action, and obtaining the necessary information to potentially issue proceedings.
A thorough review of the suspected fraudster's electronic data, including laptop or desktop computer, work mobile and any other work-related device, is usually essential to collate relevant evidence. Whilst being aware of the risk of 'tipping-off', steps should usually be taken at the outset to secure the available documents and information by seizing laptops and phones, denying access to computer systems and locking offices. The use of external IT consultants is essential in this phase, particularly to ensure electronic evidence is admissible in subsequent legal proceedings. They should be instructed by solicitors to help maintain LPP. These external consultants will work closely alongside the victim's internal IT team.
Ideally this process should be conducted without alerting the suspected fraudster and should be completed as soon as possible: usually within a day or two, depending on the amount of data to be reviewed.
Once the investigation is complete a specialist civil fraud solicitor will be able to advise the victim on the most appropriate course of action and provide an estimate of costs, taking into account the strength of the claim. There are a wide range of claims that a victim can make against an alleged fraudster in the civil courts depending on the facts of the case, and so it is important to seek specialist advice from the outset.
They can then advise on and guide the victim through the process of preserving and recovering any stolen assets and losses. Various types of court orders can be obtained from the civil courts to protect and trace stolen assets.
If there are real suspicions that the alleged fraudsters will quickly dissipate stolen assets the victim may apply for a freezing order. A freezing order prevents the fraudster and associated individuals and entities from disposing or dealing with their assets worldwide or removing their assets from the UK. Freezing orders are usually obtained urgently and without notice: that is, the fraudster will not be aware of the freezing order until it has been granted by the court and served on them and the relevant financial institutions. It is an essential tool for those looking to preserve assets, to ensure those assets are available to satisfy a final court order. Freezing orders are now increasingly being used to assist with novel situations such as where the identity of the fraudster cannot be identified, for example in cases of sophisticated cyber fraud and email hacking.
Where the freezing order is made at a without notice hearing there will be a full hearing at a later date, about which the respondent will be notified - usually about seven days after the initial without notice hearing. This second hearing allows the alleged fraudsters to make representations to the court as to why the freezing order should not have been granted or to otherwise vary its terms. This is why it is important to make sure the evidence filed in support of the freezing order is as accurate as possible. An applicant for a without notice freezing injunction has a duty of "full and frank" disclosure, so must put forward any evidence they have of the fraudster's possible defences.
Where further information is needed in order to trace the flow of funds from the company to other entities and individuals and identify unknown wrongdoers, the victim may apply for orders known as 'Norwich Pharmacal' orders either before or during a damages claim. These are disclosure orders requiring an innocent third party mixed up in the fraud, such as a bank holding the alleged fraudster's bank accounts, to disclose certain documents or information. These orders can again be obtained without notice to the alleged fraudster and are powerful investigatory tools.
In extreme cases, it may be necessary to seek a search and seize order. This type of order is usually only sought if it can be demonstrated that, without it, there is a real risk any evidence in the hands of the fraudsters will be destroyed. Such an order will allow the civil fraud solicitor and his or her team, normally including IT experts, to enter the fraudsters' properties and search for, copy and remove all items covered by the order. This will take place in the presence of a court appointed independent 'supervising solicitor'. The supervising solicitor is a neutral party who ensures the order is executed correctly and does not prejudice the fraudsters' rights. As with a freezing order, a return date will then be listed to allow the fraudster to make any representations.
An application for a freezing order or search and seize order will also require the filing and serving of the Claim Form and Particulars of Claim. At this point, civil proceedings against the fraudster begin, which can be a lengthy process. It is important, therefore, following the investigation and before obtaining any interim orders, to consider the value of the fraud, whether the wrongdoers are good for the money, where the wrongdoers assets are located, how difficult it will be to enforce a judgment and how the proceedings will be funded.
The primary purpose of the civil fraud claim is to recover the stolen assets and losses as quickly as possible with the best possible net recovery. Therefore, it is important for the victim to recognise that a commercial 'out of court' settlement may occur at any time before the litigation is determined and for it to be open to this opportunity. Settlement discussions usually take place after proceedings are issued especially if a freezing order has been granted, or following disclosure or after exchange of witness statements. Although settlement is always an option, its appropriateness will depend on the particular circumstances of the case at each stage in the litigation.
It is possible for a civil fraud claim to settle very quickly, but usually the alleged fraudster will wish to file and serve a defence after proceedings are served. The court will then set out the timetable for the parties to prepare for and attend a trial at a case management conference hearing. This timetable will include directions for, amongst other things, the service by the parties of their documentary, witness and expert evidence
The court will make an order for the parties to give disclosure of documents relevant to the matter and the scope of this order will depend on which division of the High Court the claim has been issued in. In summary, such an order will require parties to search for and disclose documents in a party's possession or control. The extent of the order for disclosure made by the court will depend on the facts and the pleaded legal issues in dispute. It may, for example, require each party to carry out a search for documents which support or adversely affect their own case or another party's case. In exceptional cases, which will include some fraud cases, the court may go further and require a party to search for documents which also lead to a "train of inquiry" which may result in the identification of further documents. The process will include both disclosing documents to the other side and considering the documents that they have disclosed to you.
Witness statements will need to be drafted in readiness for trial. These will be used to provide evidence of the wrongdoing to the court by those individuals who are best placed to do so. It may also be necessary to call on expert opinion evidence in order to prove or disprove a case. The expert's duty is to assist the court, not to act as an advocate for either party. In fraud cases, an expert witness will often be required in order to quantify the losses suffered as a result of the alleged fraudster's wrongdoing.
A significant amount of work will need to be completed in the run-up to trial to prepare the presentation of the case against the fraudster. The length of the trial will of course depend on the facts of each case, in particular the complexity of the fraud and the amount of documentation involved. At trial, the judge will hear evidence relating to the matter and decide whether the claims are successful. If successful, the judge will also decide the measure of damages and costs to be awarded.
Most corporate fraud victims will pursue employees who have stolen from the company. Not only does this allow the victim to recover its assets but it also sends out a strong message to all the employees of the company that fraud will not be tolerated. This also avoids directors having to account to shareholders as to why they did not act in accordance with their statutory duties to act in the best interests of the company, and recover the stolen assets. It sets the tone of how the company wants to operate and be seen to operate in its markets.
Out-Law Legal Update
High Court guidance will reassure banks acting to freeze accounts suspected of holding proceeds of crime