Last month, Roger Potgieter suggested measures for asset finance businesses to protect themselves against the ever-present threat of fraud. This month, he focuses on the remedies available when a fraud is uncovered.

No matter how strong your front-end procedures might be, it is equally important that you know what your options are in the unfortunate event that you do become a victim of fraud.

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If you find you have been a victim of fraud, consider the following checklist:

  • Do you know where the assets are?
  • What are the assets worth if recovered?
  • Gather as much information as possible regarding the financial position of the individual or company who carried out the fraud.
  • Find out if a Liquidator or Administrator has been appointed, and get as close to them as possible, as they will have access to information which may assist you. Likewise be willing to provide them with any evidence of the fraud.
  • Consider whether to pursue civil or criminal remedies.

Recovery of the asset should always be at the forefront of your mind, including the possibility of urgent injunctive relief where appropriate. However, if you do not know where the asset is, or if it holds little value, then you should consider whether or not to report the matter to the Police, and/or whether or not to pursue other remedies via the civil courts. There are certain advantages and disadvantages to each of these options, which I will summarise below.

When deciding whether to take civil or criminal action, you will need to bear in mind your business’s primary responsibility to its shareholders to:

  • Maximise recoveries
  • Minimise reputational damage
  • Deter similar actions by others

Court Proceedings

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There are several advantages of a civil remedy through court proceedings:

  • The proceedings are started by you, as the victim. You are not reliant on anyone else to get the ball rolling.
  • The courts have wide-ranging powers to grant invasive injunctive relief, including worldwide freezing orders and urgent delivery-up orders.
  • Civil fraud trials tend to be quicker, and the burden of proof – the ‘balance of probabilities’ – is lower than in criminal proceedings.
  • The primary thrust of the proceedings is the recovery of losses.
  • English judgments can be enforced in foreign jurisdictions.
  • In certain circumstances you may be able to pursue civil remedies against the directors personally where the fraud has been committed in the name of a company – the so-called ‘piercing the corporate veil’.

However, there are disadvantages:

  1. Costs can be a big issue in civil proceedings as you will be paying court fees, solicitors’ fees and barristers’ fees. Furthermore, if you cannot prove your case you may be ordered to pay the other side’s legal fees as well.
  2. Civil proceedings are unlikely to result in imprisonment for the offender – unless they find themselves in contempt of court; the most severe sanction you can achieve is bankruptcy, and there is no guarantee that this outcome will lead to a recovery of your losses.

Reporting to the Police

The advantages of a criminal remedy, by involving the Police, are:

  1. It costs significantly less than pursuing civil remedies, as the Police will not send you an invoice for doing their job.
  2. It offers retributive justice, which may include a prison sentence. This may give you some satisfaction, particularly in circumstances where the assets have disappeared altogether.
  3. It may also result in financial compensation as a result of restraint of assets or a confiscation order.
  4. The Police have wide powers to obtain information and documents.

The disadvantages are:

  1. It might be difficult to persuade the Police to adopt a case for investigation.
  2. There can be delays of weeks and months, even if they do agree to investigate.
  3. Once the matter is in Police hands, you have little or no control over the course of the investigation and any subsequent prosecution.
  4. This loss of control extends to publicity, and increases the risk of the fraud coming to the public attention, which may be something you are keen to avoid.
  5. You need a conviction before any recovery, which is by no means guaranteed bearing in mind the criminal standard of proof – ‘beyond all reasonable doubt’.

There is not necessarily a right or wrong answer when deciding whether to pursue civil or criminal remedies in cases where a fraud is uncovered. You will need to make a decision based on the information that is available to you at the time, and on your priorities, which will depend on the specific circumstances of the case.

Of course, I hope it is not something you ever have to consider, but if it is, then I would encourage you to have the confidence to take strong action – criminal or civil – to send a warning that you are not a soft touch for fraudsters, and to prevent your company from being targeted again.