With instances of theft on the rise and ever-more sophisticated
methods of fraud being used, companies need to know how to
protect themselves and what to do when the worst happens.
The risk posed by theft and employee fraud is a very
real one; fraudsters seized more than £1 billion from the
UK economy in 2016 and theft from companies has
grown sevenfold over the year, according to KPMG’s
latest Fraud Barometer. An atmosphere of trust and
weak internal controls often allow employees at all
levels to access most, if not all, of a company’s systems
(often allowing them to be exploited for nefarious
means). Unfettered access to vital company systems is
increasingly problematic in an environment where data is
so abundant.
Perhaps surprisingly, it is most often employees and
management who steal from companies rather than
any outside agency. And for reasons that are unknown,
the risk appears to be disproportionately acute in the
manufacturing sector. Kroll’s Global Fraud & Risk Report
noted that theft and fraud within the sector are 7%
higher than the global average across all industries and
that junior employees are the most common perpetrators
of fraud, involved in 39% of thefts.
Away from the internal threat, fraudsters are also
becoming increasingly sophisticated; KPMG have
identified a 1200% increase in instances of cyber fraud
since 2015, of which 70% involved viruses, malware or
spyware. According to research by the Government, this
comes at an estimated cost to the economy of £34bn
each year and is the subject of our Rise of the Machines
article.
Manufacturers appear particularly exposed to the risk
of invoice fraud, where invoices are sent with incorrect
or diversionary payment details and procurement fraud,
where items are paid for but never delivered. It is most
often individuals with legitimate access to payment
systems who exploit them for criminal means. In a recent
case involving a Cardiff-based construction company,
an account manager who had worked at the company
for 16 years was found to have paid herself up to five
times a month from the company’s account and, over
five years, stolen almost £350,000. Such examples are,
unfortunately, commonplace; one report suggests that
theft by employees, be it by procurement fraud, bribery
or enticing suppliers to overcharge and pocketing the
difference, accounts for 88% of all losses to UK companies
which are attributable to theft and fraud.
The effect of theft on businesses can be huge. Aside from
the direct impact of losses, which often amount to six or
seven figure sums, trust within an organisation is likely
to be undermined and repercussions felt at board level.
Last year, Austrian aerospace parts maker FACC fired its
president and chief financial officer after the company
lost £36 million to an email fraud.
Theft and fraud can be addressed two ways: civil
proceedings seek damages arising from the theft and
criminal proceedings provide justice. We can assist on
both fronts.
Manufacturers need to act quickly to avoid stolen assets
being dissipated or exhausted. In civil claims, freezing
injunctions can be used to good effect to ‘lock in’ a
fraudster’s assets, assisting in the recovery of ill-gotten
gains, but time is of the essence. Criminal prosecution
may often prove to be a catharsis rather than a cure
and often comes too late to stop the fraud in its tracks;
bear in mind however that our Regulatory & Criminal
Investigations can assist in bringing private prosecutions
and seeking confiscation orders. Either way, legal advice
should be sought promptly and steps taken as soon as
possible to prevent money being transferred, spent or
hidden by the fraudster.
Foremost in a litigator’s arsenal when it comes to theft
by employees are freezing injunctions, which have
been described by courts as the “nuclear weapon” of
the law and are not granted lightly. We, however, have
an excellent track record of success when it comes to
obtaining freezing injunctions and recovering assets
procured through fraud. To improve your prospects of
success, early intervention is essential; a lawyer should be
engaged as soon as theft has been uncovered or fraud
is suspected. It is also worth bearing in mind that the
fallout from employee theft often requires consideration
of Employment, Litigation and Regulatory aspects of the
law; as a full-service law firm we are well placed to be able
to offer you all the advice you will need.
Prevention is always cheaper than the cure; businesses
are encouraged to review their procedures and policies
now rather than waiting for a theft or fraud to occur
before taking action. We can assist in putting in place
measures to minimise a company’s exposure to fraud,
be it by robust internal policies which restrict access to
sensitive business systems such as payroll and finance
or by drafting employment contracts which protect the
company in the event that a fraud is discovered.
Innovation mustn’t stop at the production line;
companies must develop and refine internal systems
and protocols to minimise the risk of falling victim to
employee fraud. Whilst effective internal controls, good
recruitment and robust management are all highly
effective preventative measures, knowing where to turn
when it happens is essential. Our Commercial Litigation
team is the perfect starting point.
Published: 16 May 2017
Focus on Manufacturing - Edition 5
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