Overview of fraud in businesses

Definition of fraud 

In England, Wales and Northern Ireland, the fraud laws were overhauled by the Fraud Act 2006 which came into force in 2007. It introduced a statutory definition of fraud, separating it into three classes. These are: 

• Fraud by false representation – where a person makes "any representation as to fact or law...express or implied" which they know to be untrue or misleading.
• Fraud by failing to disclose information – where someone fails to disclose any information to a third party when they are under a legal duty to do so.
• Fraud by abuse of position – where a person who should have been safeguarding the financial interests of another, abuses that position.

For each offence to be proven, the fraudster must have been acting dishonestly with the intent of making a gain for themselves or anyone else, or inflicting a loss (or a risk of loss) on another. 

The Act also made it an offence to be in possession of articles for use in fraud and to make or supply articles for use in fraud. It also created the offence of obtaining services dishonestly. 

Corporate bodies

The Act provides that if a corporate body is guilty of an offence under the Act and this was carried out with the "consent or connivance" a director, manager, secretary or officer of the body, then they may face prosecution too. A new offence of participating in fraudulent business carried on by a sole trader was also introduced and the maximum penalty for participating in fraudulent business carried on by a company was increased from seven years prison to 10 years. 

Penalties for fraud

A person found guilty of fraud faces a fine or up to 12 months jail on summary conviction (six months in Northern Ireland), or a fine or imprisonment for up to 10 years on conviction on indictment.  

Scotland

Apart from some minor exceptions, the Fraud Act 2006 does not apply to Scotland which has common law crime of fraud, committed when someone achieves a practical result by a false pretence. Scotland also has the offence of 'uttering,' which is where something such as a document, is passed off as real which has an adverse affect on another person. 

Dealing with fraud in business

Businesses are open to fraud in a number of ways, be it from external sources, internally by management and/or employees or a combination of the two. It could amount to an employee fiddling their expenses, managers skimming cash off the bottom line or cyber criminals breaking into your IT systems to steal confidential information. The types of fraud to which businesses can fall prey internally (with or without external collusion) can be divided into three categories:

• Fraudulent financial reporting – “cooking the books” for personal gain, e.g. improper revenue recognition, intentional overstatement of assets or understatement of liabilities.
• Misappropriation of assets – e.g., theft, payroll fraud, ghost employees, forgery, billing schemes, teeming and lading (lapping) and cross-firing.
• Expenditures incurred for illicit purposes – e.g., money laundering, bribery, conflicts of interest and kickbacks.

Businesses need to be aware of the risks and introduce systems at every level to prevent, detect, and combat fraud. You should have an insurance policy to indemnify you against financial loss resulting from acts of dishonesty by employees and others and you should implement a culture to prevent you becoming a victim. You should have systems and procedures in place to prevent fraud or, if it does happen, detect its presence as early as possible. Such measures could include:

• Designating one person or department with responsibility for managing fraud prevention and detection. They should be on the look out for some of the tell-tale signs of fraud such as accounting anomalies, changes in someone’s behaviour or inexplicable improvements in their lifestyle.
• Your recruitment process should be designed to detect and deter fraudsters – this includes a close vetting of all CVs and a thorough checking of references.
• Staff training and awareness programmes.
• All employment contracts should contain guidelines on the use of confidential and personal information; allow for the monitoring of email and calls; and for the retention and recovery of pensions or bonuses where fraud is uncovered. There should also be post-contract obligations restricting the use of company information and providing for the return of all company property.
• Hotlines for whistle-blowers, allowing employees to report an illegal activity they are aware of through their work.
• Systems to protect your IT infrastructure and track who is accessing what and when.
• Restrictions of the type of information – paper or electronic based – that employees can access from home or take out of the workplace.
• Data mining (the process of extracting hidden patterns from large amounts of data).
• Spot audits and random checking of expense receipts.

Dealing with suspected fraudsters

If the fraud was committed by an outsider, calling in the police is probably your best option. If you think an employee was involved you can still call in the police but you may decide it’s easier, quicker and less disruptive to investigate yourself and sack the culprit if required. Whatever you decide, don’t act rashly in your dealing with the suspect otherwise you may end up before an employment tribunal.

Investigate thoroughly and amass any evidence, by all legal means possible – including bringing in private investigators if need be – before you confront anyone.

If witnesses are available, check that there is no grudge between them and the accused person and make sure you keep a written dated record of what they say and where they say it. Their statement should include details of their opportunity and ability to observe the misdeed clearly and any circumstantial evidence.

It might not be practical for you to investigate properly while the suspected fraudster is still in situ (and they might try and cover their tracks) so you could consider suspending them while you look into the allegations.

Remember: you can’t usually dismiss anyone unless you have been through the proper procedures, have investigated thoroughly and have a genuine belief of wrongdoing on the part of the employee and reasonable grounds for holding that belief.