Guarding against fraud

24 April 2008

Fraud has a civil as well as criminal context in many countries, which may lead to liability in one or both fields. Typical examples of criminal fraud include theft, obtaining property by deception, false accounting, forgery and so on. On the civil side, such behaviour is likely to give rise to a cause of action and claim for damages.

Construction-specific examples of fraud include the exaggeration of time sheets by agency workers, falsification of invoices, or the supply of inferior materials. These are not very sophisticated forms of fraud and their impact can be reduced by ensuring checks and controls are in place to monitor documentation.

Of greater concern is where the integrity of a member of staff has been compromised, perhaps in entering into a secret arrangement with a client, supplier or contractor - the classic “backhander”. This is a criminal activity and could result in a criminal prosecution and a period of imprisonment for the individual concerned. It could also leave the business employing the offender having to deal with issues regarding civil action and possible investigation for competition offences such as cartel activity.

This type of offence by an employee is hard to guard against, even where pre-employment enquiries have been made. As a consequence it is important to recognise that the risk exists, to understand where the business may be vulnerable and to ensure that there is effective management and monitoring of staff, especially those in key procurement or contracts positions.

Legal Reform

It is against this back drop that the UK government has attempted to consolidate the offence of fraud and widen the net to bring the perpetrators to justice. The dual nature of fraud can cause complications.

On the criminal side of the fraud spectrum, if an individual domiciled in the UK, EU or any other part of the world commits a fraud in the UK, then they may be prosecuted for it in the English criminal courts. However, the same is not necessarily true for civil claims. European law states unless a contract provides otherwise, the relevant jurisdiction for contractual claims between Member State entities will be where contractual performance took place or was intended to take place.

To simplify the position, the UK government introduced a new Fraud Bill in 2006 to reform the law and to meet the challenges created by increasingly sophisticated criminals. The Bill also attempts to simplify the law by creating a single offence of fraud that can be committed in any of three ways.

These are:

• False representation - this could include electronic communications that involve “phishing” or an employee who has “improved” their CV to obtain employment

• Failing to disclose information - this would mean that an employee who failed to mention previous criminal convictions would commit an offence of fraud. It could also cover circumstances where a contractor obtained work where they failed to disclose information such as impending insolvency.

• Abuse of position - this would be relevant in circumstances involving “backhanders” or shadow working, where a member of staff sets up a business in direct competition unknown to the employer and diverts potential customers to the parallel business.

Perception of fraud in the construction industry

The Fraud Bill does not remove other legislation to prevent bribery or operating in a cartel. Taking part in anti-competitive arrangements or making an illegal payment to an official to secure new work creates potentially serious problems for those involved - but might be regarded by some as being just “good business”.

However, the consequence for a business that is guilty of such conduct is very substantial. In the UK a business found guilty of operating a cartel can be fined up to 10% of its worldwide annual turnover. Individuals convicted of being engaged in this type of offence can expect to receive a prison sentence.

The scope of UK legislation has been extended to include corruption that takes place overseas and the bribing of a foreign official to obtain a contract could now be tried to a UK court. The Fraud Bill will confirm that other fraud activity that takes place overseas can also be dealt with within the UK.

The risk to a business from that type of behaviour by its employees, especially those in senior positions, is considerable, especially where the developing landscape means UK legislation has a global reach.

Going Forward

Organisational policies should make it clear that illegal conduct that could create liability for the employer is unacceptable and staff should be properly trained as to what limitations the law creates in the modern business environment. The relevant employment contracts and disciplinary procedures should reflect the policy position of the company.

From a cultural position it must be clear to everyone within an organisation that practices or attitudes that were once common-place are no longer acceptable in modern business where industry is expected to behave in a socially responsible manner. In a post-Enron world, failing to recognise the new reality is not an option.       ce

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