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You Have To Act Like Sherlock Holmes

John McDonald on dealing with corporate fraud and bribery

WHAT do you do if you think you or your company has become a victim of fraud?
Recent reports have highlighted the risk to the construction industry of fraud and corruption. These are many-faceted areas of law which encompass criminal, civil and regulatory offences. Businesses must be vigilant and know what to do if they believe they might have been the subject of fraud.
The construction industry is arguably particularly susceptible because of its extended supply chains and use of multiple subcontractors and suppliers. So-called ‘supply chain fraud’ takes many forms, including over-invoicing, theft/substitution of materials, bid/contractor fixing and bribery/corruption.
Fraud/corruption is often discovered accidentally following a customer’s complaint or when trying to tidy up paperwork. Investigate suspicions covertly and quickly. It is usually advisable to employ external specialists to help you collate and assess evidence, and decide what to do next.
Once you have confirmed your suspicions you need to consider: Should the matter be reported to the police or Serious Fraud Office? Are there any regulatory issues arising, for example, potential health & safety concerns? Will your insurance cover things? Practically, how do you get your money back?
Your response needs to be co-ordinated and planned to protect the organisation’s commercial position and reputation, comply with any regulatory/statutory requirements and seek to recover your financial loss.
You might wish to report the incident to the police, but you will more than likely not get any money back by doing so. Civil claims offer greater control and a wider range of options. There are many different ways such claims can be brought and consider carefully the most effective means of seeking redress.
Fraud can also give rise to claims under the construction contract, which could allow you to go to adjudication. There might also be practical actions you could take such as rectifying past overpayment on an interim certificate by offsetting it against a future one, or refusing to pay for goods which are not delivered and rejecting those provided in breach of specification.
On the other hand, damages available for fraud claims can be greater than those for contractual claims, and litigation offers remedies not available in adjudication. For example, you could obtain orders to freeze the fraudster’s assets pending judgment and to permit you to search their home or premises for evidence or to recover stolen goods.
Bribery and corruption are particularly complicated areas of law. The Bribery Act 2010 introduced offences of corporate liability. So where bribery is suspected the organisation’s senior managers might face criminal sanctions for failing to prevent it or conniving or consenting to it.
There is a defence to the former offence if the organisation can demonstrate that it had in place ‘adequate procedures designed to prevent a person associated with it from undertaking such conduct’.
If someone in your organisation has received bribes (for example, to secure a contract), you should be able to argue that the person concerned breached their duties and they’ll need to account to you for the money they received.
Things get more difficult if the person cannot afford to repay it. There are circumstances in which you might be able to trace the bribe into another’s hands and claim it back from them. However, the case law on this topic is not definitive and the Court of Appeal recently called for clarity on the issue from the Supreme Court.
Often the fraudster has passed the proceeds of his fraud to someone else, leaving himself ostensibly penniless. Claims may be brought against third parties who have knowingly received stolen money or goods or who knowingly assisted the fraud. Such third parties might, unlike the fraudster, have assets against which you could enforce a judgment. In the case of tracing claims, it might be possible to follow assets through the hands of different people to reclaim them.
A case of suspected fraud well-handled minimises the impact on a business and deters future occurrences. CFJ John McDonald is from Tara Management Services

This article has been reproduced from the Contract Flooring Journal. You can find them at www.contractflooringjournal.co.uk.