Partner Peter Binning participated as a panellist in Financier Worldwide’s Roundtable: Corporate Fraud.
James D. Ratley, President and CEO at Association of Certified Fraud Examiners, was the Roundtable’s moderator.
Ratley: Could you provide an insight into the types of corporate fraud that are typically being seen across the current financial and economic landscape?
Binning: Corporate financial crime is extremely diverse, ranging from unscrupulous individuals taking advantage of weakness in a company’s procedures to line their own pockets, to board level grand corruption. Wherever there is insufficient division of responsibilities or oversight, dishonesty sometimes for huge personal gain, becomes possible. One key recent trend has been the upsurge in digital fraud, with malware and ransomware being extremely damaging to businesses of all sizes. The most recent figures from the UK’s Office of National Statistics show 1.8 million computer related crimes in a 12-month period. In many cases, the massive increase in portable digital technology has probably made it easier for relatively low-level employees or employees of contractors to target businesses through their banking arrangements. At the other end of the scale, competition in overseas markets, particularly in the developing economies, has proved fertile ground for high-stakes deals on questionable terms brokered by top executives.
Ratley: Could you highlight any recent, noteworthy cases of corporate fraud which caught your eye? What would you say are the most important lessons that the corporate world can learn from the outcome of such cases?
Binning: There have been several major cases on both sides of the Atlantic, such as the Petrobras scandal in Brazil, the Wells Fargo fraud in the US, the Malaysian 1MDB case and, in the UK, the DPA’s entered into by Rolls-Royce and the prosecution of Barclays Bank senior executives by the SFO. The lessons to be learned are that corporate accountability, at least in the West, is on an upwards only trajectory. Companies doing business where the corruption risk is high or with high ranking state actors need to take special care and the threat of individual prosecution at the highest levels of large companies is now a very real risk.
Ratley: What impact have legal and regulatory developments had on the landscape of corporate fraud and misconduct in your region over the past 12-18 months?
Binning: As has been the case for several years, UK legislation has continued to increase the powers of prosecutors and regulators to pursue both companies and individuals associated with them. Most recently, the Criminal Finances Act has created a corporate offence of failing to prevent the facilitation of tax evasion by a person associated with it – including, but not limited to, employees. The same piece of legislation creates unexplained wealth orders which require the owner of property to explain how it was acquired and make it possible for property to be seized if such an explanation is unsatisfactory or not forthcoming. In the regulatory sphere, the FCA has made it mandatory for most regulated firms to implement formal whistleblowing procedures as part of its drive toward enhanced personal accountability through the senior managers and certification regime.
Ratley: If a company finds itself under investigation by the authorities and subject to potential litigation, what general steps should it take in response?
Binning: While all investigations are different and no standard ‘tick box’ response is available, there are certain steps which should be taken when faced with potential litigation. Legal advice should be sought by the corporate entity at the earliest possible opportunity. Decisions made at the investigation stage of a case can have a profound impact on the outcome of a case and it is important to ensure that directors are fully informed when taking decisions. Equally, it will be important to make sure that early consideration is given to individual employees or directors of the company being offered separate legal representation where they may be suspected of wrongdoing. It will often be in the best interests of both the individual and the company for each to be legally represented.
Ratley: In your opinion, are boards and senior executives doing enough to reduce potential corporate fraud and avoid costly investigations and litigation?
Binning: Many companies now take the threat of corporate fraud extremely seriously. Of course no matter how assiduous directors are in maintaining their anti-fraud defences, investigations cannot always be avoided. Human factors are a constant threat when compliance systems are under stress. The watchword now in corporate management goes beyond mere ‘tone from the top’ and extends to all employees, helping to cultivate and actually live a set of shared values. The key elements of any fraud-prevention strategy are clear policies on relevant issues and high-quality training to accompany them. The relevant law differs significantly across jurisdictions and entities operating in more than one country must ensure that staff are appropriately prepared.
Ratley: What advice can you offer to companies in terms of implementing and maintaining a robust fraud risk assessment process, with appropriate controls to detect potential misconduct? For example, what measures should they take to strengthen their internal procurement or supply chain processes?
Binning: All risk assessment processes should aim for the right division of responsibilities between employees and ensure that all vital functions are monitored by at least two individuals. Procurement and supply processes are particularly vulnerable to abuse by individuals within an organisation – as is so often seen in the field of bribery and corruption. Maintaining high-level communication with contractors and clearly setting out intercompany procedures can go a long way to ameliorating risks in this area. With regular suppliers it may be advisable for companies to formulate joint policies dealing with their relationship. The time and resources such procedures require is more than justified by the protection they offer.
Ratley: When suspicions of fraud arise within a firm, what steps should be taken to evaluate and resolve the potential problem?
Binning: Whenever a firm learns it is under investigation, it will usually be necessary to convene a fully independent committee of the board as swiftly as possible to manage the situation. Failure to do so may result in decisions being made by senior executives who may fall under suspicion and could result in serious prejudice to any investigation and lasting harm to the company and its shareholders. One vital issue for the company will be how to approach communication with the prosecutors or regulators. While full cooperation is often the best approach, it may not always be required or in the best interests of shareholders. Moreover, the precise scope of the investigation will need to be considered. Defining the precise ambit of the investigation is necessary to determine which classes of document should be disclosed and which can be legitimately withheld.
Ratley: In terms of third-party relationships, what are some of the main fraud-related risks that can emerge? What can companies do to manage such risk in connection with suppliers, agents, intermediaries and consultants?
Binning: The risks to companies from third parties are manifold. Individual fraudsters may exist within suppliers, contractors and clients. Clearly, the most prevalent risks will lie in the area of payments to contractors where the diversion of monies is a perennial issue. More sophisticated frauds may involve the movement of money or property through an unsuspecting company. A comprehensive programme of supplier or third-party vetting and assessment is needed in many businesses to ensure that the other party will observe the same high standards of business integrity. Where suspicion arises, it will be necessary to investigate and sometimes require significant cooperation from the other party. Sometimes contractual terms will assist here; for example, clear commitment to common compliance standards and mutual transparency and audit requirements.
Ratley: How important is it to train staff to identify and report potentially fraudulent activity? In your experience, do companies pay enough attention to employee education?
Binning: Training of staff is absolutely vital to any fraud-prevention strategy for the simple reason that procedures can only be as good as those operating them. With the legal and regulatory landscapes in a semi-fluid state, it is important not only to train staff but to do so regularly, as new legislation and rules come into force frequently. Clearly, companies will have to conduct a cost benefit analysis in relation to training, and any resources devoted to it must be both targeted and proportionate. It is also vital that employees of sufficient seniority are trained – this, incidentally, is a requirement of the new whistleblowing rules set out by the FCA. However, the benefits of training can be huge. Fraud often goes undetected for some time within a company and ending it at an early stage can mean significant resources are saved.
Ratley: In what ways have companies changed the way they manage and respond to fraud in light of the renewed focus on encouraging and protecting whistleblowers? What more do you think needs to be done in this area?
Binning: In the UK, the FCA’s reforms have made whistleblowing policies compulsory in most companies within the regulated sector. The regulations are necessarily general and individual companies have significant scope to develop their own regime. Many companies will have opted to implement the bare minimum procedures – though these may sometimes be onerous. The FCA whistleblowing regime provides a strong framework to protect whistleblowers, although it does not afford them protection from prosecution. However, some work does need to be done on the harmonisation of data protection legislation on the one hand and whistleblowing regimes on the other. This issue arises particularly in the context of anonymous whistleblowing which may violate data protection laws in some jurisdictions.
Ratley: How do you envisage the regulatory and legislative landscape unfolding in the coming months and years? Against this backdrop, do you expect companies to enhance their measures to mitigate potential fraud in future?
Binning: The trend toward increasing enforcement against both companies and their senior employees shows little sign of abating. While it is not certain exactly how recently implemented powers will be used, it seems likely that prosecuting agencies in more countries will continue to pursue fraudsters with all the tools at their disposal. They will expect to share the fines levied between them. A key aspect of such enforcement is therefore likely to be enhanced international cooperation between major jurisdictions and a growing number of very large corporate non-conviction financial settlements through DPA’s of similar disposals. There will be more prosecutions of senior executives on the back of these corporate settlements. In light of these factors, it is crucial that companies devote sufficient resources not only to fighting fraud but to ensuring that they remain attuned to a continually changing legal landscape.
Find the full Roundtable: Corporate Fraud in Financier Worldwide here.
Andrew Smith and Tasha Benkhadra write for Law Society Gazette on Russian sanctions
August 15 2022
Jessica Parker writes for Law360 on HMRC’s fraud charge against Bernie Ecclestone
August 3 2022
Corker Binning moves to 1 Ely Place
July 19 2022