Thursday 28 October 2004

Professional Fraud - Managing the Nightmare

It is the nightmare scenario that every professional dreads - the discovery that a trusted colleague, partner or employee has fraudulently taken money from the business' client account.

There are usually two reasons for this deceitful behaviour. The first is that the professional has made a mistake causing a client loss and, afraid to discuss this with a colleague or supervisor for fear of reproach, he decides to cover up the shortfall on the client's account by transferring money from another client's account. This is known as "teeming and lading", essentially robbing Peter to pay Paul.

The other, which is often even more devastating to the trust built up over time in a business, is where the fraudulent professional is effectively stealing from client accounts for his or her own personal gain. It could be that the thief has mounting debts or it is simply a case of greed getting the better of them.

What are the warning signs ?

Often fraud is discovered simply by chance but there are certain recurring themes that can suggest everything is not entirely as it may seem.

  1. An unusually large number of write offs of fees or disbursements may suggest that some financial juggling has taken place.
  2. A colleague may appear to be living a lifestyle well beyond his means, which suggests either additional income from somewhere or the possibility of debt which needs to be serviced.
  3. An inappropriate refusal to discuss client matters or to "gloss" over a client's reported dissatisfaction may also suggest problems behind the scenes.
  4. Colleagues who appear reluctant to go on holiday (thereby leaving their files unattended and open to scrutiny) may also be viewed with some suspicion.

Preventative measures

It is almost impossible to entirely eradicate the possibility of fraud within the professional practice but there are steps that can be taken to minimise the risk.

Action

If the nightmare becomes real, despite you implementing the above measures, what steps should you take upon the discovery of a fraud ? Action is required to ensure that six principal objectives are met:-

Face up to the problem - ensure that the problem is dealt with swiftly and decisively - once sufficient evidence has been collated, the person under suspicion must be challenged and suspended, pending further enquiries and investigation. Any suspension should be in accordance with your organisation's disciplinary policies and procedures and any applicable professional regulations. Note the fraudster must not be allowed any further access to files, accounts etc and key evidence should be secured to enable a forensic exercise to be carried out.

Recovery - all protective measures should be taken to ensure that as far as possible, recovery from the fraudster's assets can be made. Any delays in seeking an order freezing such assets will threaten the likelihood of the court granting an order, so move quickly.

Alert all relevant bodies. Your professional indemnity policy is likely to cover you against claims made by clients who have suffered loss as a result of the fraud(s), unless you have condoned or assisted the fraudster. Notify your insurers immediately to ensure maximum protection under the policy. Also advise the police - notwithstanding the desire or otherwise of a practice to contact the police, one has an obligation, in any event, to make a formal report to NCIS under the anti money laundering regulation. Do, however, ask the police to liaise with you with regard to recovery. Specialist legal advisers dealing with fraud matters will often have a good working relationship with the police because of the latter's sometimes limited resources, they may be happy to allow the lawyers to pursue civil recovery before impounding documents and other crucial evidence.

Understand your obligations - client accounts affected by the fraud will need to be rectified and interest paid - liaise with your professional/regulatory body to ensure that you comply with their requirements.

Deal with the problem in a professional and positive way. The press are likely to become aware of and report on the matter and clients will become concerned. A brief but reassuring press release should be arranged and clients should be advised individually that following a full investigation, rectification of any shortfalls will be made in full as per your professional obligations.

Specialists - seek advice from specialists who are used to dealing with such matters and who have sufficient resources to deal with the investigation and recovery aspects in a short period of time. Specialist lawyers will also have a network of experienced forensic accountants and counsel who can assist.

Richard Palmer,
Partner
Watson Burton has a specialist commercial and professional fraud team. If you have any concerns or queries in this area of law, please contact Richard Palmer on 0191 244 4302.
Email richard.palmer


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