Fraud prevention and investigation - Alex Jay - ThinkHouse September 2015

Michael Luckman: I am joined by Alex Jay, a commercial litigator, specialising in fraud and insolvency. He is also a member of the advisory board of the Association of Certified Fraud Examiners. We will be talking about fraud prevention, the investigation process and how to minimise risk.

What can a typical organisation expect to lose to fraud each year, and to put that into perspective, how does that equate financially?

Alex Jay: Typically, and this is a statistic which is borne out year on year from the fraud statistics that are compiled, organisations lose around 5%25 of their turnover to fraud, so you can extrapolate that to turnovers of organisations and you do get to a very large number but the message is losses for fraud cases are very substantial.

Michael: We all think of Banks and the financial sectors being the most heavily affected by fraud, but is that true and what other sectors are heavily affected?

Alex: Banking and financial services are typically the most targeted, around one in five of the frauds that are identified typically involve one of those institutions and it is perhaps quite obvious because a bank's job is to hand out money and that's what fraudsters largely want to achieve but, of course, you have government being targeted very frequently, you have healthcare targeted frequently, manufacturing gets targeted an awful lot as well, particularly in the counterfeit space. It is important to remember though that fraud is sector agnostic. Fraudsters don't care what sector you are in. If they can target you and they can extract money from you then they will try to do so.

Michael: What are the typical signs that someone is committing fraud?

Alex: There can be a number of red flags, I mean the important thing to bear in mind is that fraudsters will try to cover their tracks and you get many who are very, very credible, look at your Bernie Madoff, look at your Alan Stanford, dealing with very sophisticated organisations who they duped out of very, very large sums of money. There are some common red flags you can pick up, things like people who are very possessive about the issues they're dealing with, they don't want to give up control, people who have unnaturally aggressive tendencies in the workplace and also structures of deals if they come with an unduly complex business structure or the assets you're dealing with are very opaque, these can all be signs of fraud. It is not to say that if any one of them is present there is a fraud being committed but it is an indication that you might want to do some further investigation.

Michael: We know that prevention is better than detection, so are there some simple steps we can do to avoid being caught by fraud?

Alex: Yes there are a few things you can try to do and that's right, prevention certainly is better than cure. One of the things that companies can try to do to stop fraud happening in the first place is to increase what's known as the perception that if a fraud is carried out the company will investigate it and will detect it. There's been a lot of research done in this area and that is the single thing if you can increase the idea in the would be fraudster's mind that if they carry out what they're planning to do, it will be detected, you're more likely to stop them doing it in the first place. You see this happening in the real world as well, on the tubes and the buses, you see advertising space saying "spotting a ticket inspector is easy, they look just like you". That is just increasing the idea in the minds of the public that if you don't have a ticket, you'll get caught.

Michael: What key steps do you have to take when conducting a fraud investigation?

Alex: The early stages of a fraud investigation are critical. You're dealing with people who are looking generally to cover their tracks to disappear into the night with assets and if they are aware you're investigating them, they're more likely to cover their tracks or hide assets so you need to be very careful in the early stages of an investigation not to tip people off, that's key.

Another key thing to bear in mind is trying to structure your communications that you generate while you're building up an investigation. There'll be email traffic between you and your fellow investigators. You don't know when you start an investigation how far the rabbit hole will go as it were. It might be that you will produce communication you want to keep from being disclosed to other people later on if you can structure your investigation in a way to benefit for privilege, that's going to make it much harder for people to get access to communications you don't want them to see and the final thing I would say is bear in mind do you have to report anything? I mean particularly the Proceeds of Crime Act has very strict penalties for failing to report instances where you or your organisation has become involved in the proceeds of crime. That's something that you should be thinking of if your general counsel or senior position in a business. Think about it immediately. Do you have to report? The risk of it coming back and there being a criminal investigation may be in your view quite low, but the penalties if you get it wrong, are very severe - 14 years in jail for example being the most severe.

Michael: What legal remedies are available if fraud is discovered in your organisation?

Alex: There's a number of remedies available to you. You could report it to the police - that is the police are there to serve a function. They can investigate crime and then might take steps to see whether they can make recoveries on your behalf but they have a limited budget, they will not investigate every instance reported to them. You can of course take actions in the civil sphere, you can bring claims against people who have been party to the fraud in question, you can try to recover assets from them and there's a number of courses of action you can pursue. Do bear in mind, you know particularly in a fraud investigation, you might want to put in place a measure to stop assets being dissipated while you complete your investigation. You can get freezing injunctions, they can be a very powerful remedy and they mean that when your investigation is complete there will be something there at the end of the day for you to enforce against. They can be very useful. I always remind people to bear in mind the insolvency remedies that you can utilise as well. You can wind companies up, you can bankrupt individuals not only if you invoke an insolvency process, do you allow yourself to utilise the extensive powers that the insolvency legislation gives to investigate fraud, to gather evidence. It can also actually be, in some cases, a cheaper option because you can appoint an insolvency practitioner to do the investigation for you.

Michael: How do you see fraud changing in the future?

Alex: Fraud is here to stay and it's only going to increase. I, for my sins, attend a lot of fraud conferences, getting up to date on current thinking and I was at a conference recently and the clear messages, the world we operate in, is more complicated, the structures we use are complex, our IT systems are complex and it's those areas that fraudsters target to try to extract money. You know the classic example that is given is you don't see people at the High Street bank with a shotgun trying to ask for money out of the cash register because frankly you won't get very much money and you will probably get caught. Your organised criminal is targeting corporate, commercial enterprises to try to extract money.

Michael: As general counsel, what key points should I be taking to the Board to minimise their exposure to fraud?

Alex: There's two things really. In the first instance you should be ensuring that your organisation has an appropriate anti-fraud policy, it has appropriate anti-fraud measures in place and internal controls. It is always worth reviewing those, at least once yearly because by definition no set of internal controls is perfect and as soon as you implement the system you can bet your bottom dollar that fraudsters will try to find a way around it. The other thing to bear in mind of course is your reporting obligations. You know if a fraud is discovered, what are you going to do about it and the first thing you should be thinking about is, does it trigger an obligation to report? Do you have to report to the police or do you have to report to your regulatory body or possibly even your listing authority?

Michael: Thank you Alex, that was great.

Alex: Thank you very much for that, much appreciated.