Worldwide: The Professional Touch

Last Updated: 26 July 2005
Article by Mark Surguy

Originally published 13 February 2005

"The cost to the UK economy of fraud has been put at £14 billion a year, which is the equivalent of £230 for each member of the population. It is not victimless but is indiscriminate, hitting both rich and poor. Fraud may involve no violence…but it can be devastating in its effects" The Attorney General, the Rt Hon the Lord Goldsmith QC, 2003.

In the case of internal fraud by an employee on his employer, fraud is complex and costs money. So do fraud investigations. Complex work requires a complex response. This means putting together a cross disciplinary team of both professionals and non-professionals. The principal professionals to involve are lawyers and forensic accountants. The non-professionals are likely to be IT specialists. The choice of the professional team needs to be thought through carefully. For example, is it intended that the forensic accountant investigating the fraud should be the expert witness in court? If so, the way he is instructed and the way he reports will have to follow the requirements of the civil procedure rules.

Involving the right people at the right time will avoid costly errors. For example, on the advice of the company's auditors an investigations team is commonly assigned to establish the modus operandi of the fraud and how much money has been taken. Ultimately lawyers may be instructed by the company to recover the embezzled funds.

But lawyers should be brought in at the same time to take advantage of the special confidentiality inherent in the lawyer-client relationship, namely legal professional privilege. In Price Waterhouse (a firm) v BCCI Holdings (Luxembourg) SA and others an investigatory committee (led by Price Waterhouse into the extent of BCCI's problem loans) created documents and sent them to the company's lawyers for advice on recovery proceedings. Although the documents were confidential, they were not privileged and were liable to disclosure to the regulatory authorities. Had the lawyers led the investigation, the position would have been different.

Apart from the issue of privilege is the increasingly prevalent problem of conflicts of interest. Take the case of Prince Jefri Bolkiah v KPMG where forensic accountants undertook a fraud investigation. The suspect was a former client of KPMG. KPMG still held confidential information about the suspect which was relevant to the investigation. Could the forensic accountants be thrown off the case because of a possible conflict of interest?

Interestingly, there was no previous authority on the position of an accountant in this situation. Were the duties owed to clients and former clients by solicitors and accountants in relation to forensic work the same duties?

In the Court of Appeal in this case it was argued that the conflict of interest rules were less strict for accountants than solicitors. Lord Woolf MR stated, "Accountants regularly act as expert witnesses in the courts. Under the new rules of procedure expert witnesses primary duty will be owed to the court and not to their clients when giving evidence. Litigation, but not professional, privilege can protect information which accountants receive for the purpose of litigation. Nonetheless the role of accountants is not normally as central to the process of justice as is the role of solicitors. To regard accountants as playing a central role in the administration would be wrong."

In the House of Lords Lord Hope said that, "the nature of the work which a firm of accountants undertakes in the provision of litigation support services requires the court to exercise the same jurisdiction to intervene on behalf of a former client of the firm as it exercises in the case of a solicitor. The basis of that jurisdiction is to be found in the principles which apply to all forms of employment where the relationship between the client and the person with whom he does business is a confidential one."

The House of Lords held that sophisticated "Chinese Walls" within a firm of accountants did not remove the risk of unauthorised disclosure of confidential information and an injunction was granted preventing KPMG from continuing to act.

Clearly, it is important for any accountant called in to undertake a fraud investigation to carry out a proper conflict search to ensure there is no risk of such unauthorised disclosure. This case also points towards the need for co-operation between lawyers and accountants in relation to a fraud investigation. What is required is an integrated approach. The company should make sure that both are involved simultaneously and roles are defined. The terms of engagement of the professionals must be carefully documented at the outset. This alone can avoid confusion, duplication and unnecessary expense.

The prospects of getting money back may be also damaged if the lawyers are not brought in to work alongside the forensic accountants. All too often, the lawyer is telephoned only after the police (who do not have powers to obtain freezing injunctions) have advised that freezing orders ought to be obtained because arrests are imminent. But few businesses (and few police forces) appreciate that freezing orders are not available on demand. The chances of achieving a successful outcome in court are greatly enhanced by the early involvement of lawyers who are experts in collecting and presenting evidence.

Should the police be involved at all? The law recognises a duty to report certain types of fraud such as in the case of RGB Resources Plc (in liquidation) v Rastogi. It is unclear whether the duty extends to reporting to the police. Certain practical difficulties can arise where both the police and the company's professional advisers are involved. As a result companies may hesitate before involving the police. Not all "fraud" is of course crime (though it usually will be when money rather than for example confidential information is being diverted) but it should be borne in mind that the professional advisors are arguably under a duty imposed by the Proceeds of Crime Act 1992 to report any criminal activity which amounts to money laundering to the National Criminal Intelligence Service.

The suspect has rights. He is entitled to a fair disciplinary process. If the appropriate steps are not followed, then a dismissal can be unfair. For example, if the police are called in and decide there is enough evidence to make an arrest, it is not sufficient for the employer to rely on the police's view and to make a dismissal without giving the employee an opportunity to explain his conduct: Clarke v Trimoco Motors Limited [1993] ICR 237. In addition, the company's disciplinary procedure should be followed. Usually a suspension on full pay pending a full investigation is the only proper course to take.

If criminal offences are committed and civil remedies are pursued, the question of the interrelationship of the criminal trial and the civil proceedings arises. For example, can the police sit in on the civil trial and collect evidence and information from the witnesses and then use it to press charges? The answer seems to be that they can.

Might the civil trial prejudice the criminal trial? In the case of Re Priority Stainless (UK) Ltd directors of a company suspected of fraud feared a police prosecution over their activities and applied to stop the progress of the civil proceedings on the basis that it would infringe Article 6 of the Human Rights Act 1998 (the right to a fair trial) if the civil proceedings were heard before the criminal proceedings. The Court of Appeal decided that the right of silence which applies in criminal proceedings does not apply to civil proceedings so that the suspects could not refuse to disclose their case in the civil proceedings. The Court however accepted that there is a discretion to stay the civil proceedings if justice so requires.

From the perspective of the criminal trial, in Attorney General's Reference No 3 of 1999 [2001] 2 WLR 56 an argument that there would be a breach of Article 6 found no favour with the House of Lords who stated that a judge in the criminal trial always has a discretion to strike out proceedings which are an abuse of process or to refuse to admit any particular piece of evidence under s.78 Police & Criminal Evidence Act 1978 if to allow the evidence in would otherwise be unfair to the defendant.

What about email and the company's IT systems? Can the accountants and the lawyers look at all emails including private ones, for example those sent by the suspect to his home address? What about the right to privacy under the Human Rights Act 1998 and the Data Protection Act 1998? What about the Regulation of Investigatory Powers Act 2000 ("RIPA") – can the suspect be the subject of surveillance and his emails intercepted in order to catch him red-handed?

If the employee has consented to the interception, there is less difficulty. A well-drafted employment contract and internet and telecommunications policy will be of considerable assistance in this field. Proper drafting will include the provision of consent to the interception. However, even the provision of consent will not extend to private communications except in limited circumstances. One of the exceptions is that private communications can be looked at to ensure the business systems are being used for business purposes. This could justify a fraud investigation.

Where consent has not been obtained, an email cannot lawfully be read after it has been sent but before it has been delivered to the recipient. To do so will be a criminal offence and will also expose the employer to a civil action for damages. Intercepted communications cannot be used in legal proceedings in any event. Given the risks and the restrictions, it is rarely likely to be sensible for the company to undertake this kind of investigation.

Where an email has been stored in a folder or deleted but is recoverable by using forensic software tools, there will be no risk of breaching the RIPA.

But even if you can avoid liabilities under RIPA, what is the impact of the Data Protection Act 1998 ("DPA")? Can you read all of the suspect's sent emails? Can you search the suspect's briefcase? His desk? His company mobile?

Part 2 of the employment code of practice to the DPA regulates overt monitoring (the employee is told that his internet use for example is being watched) and covert monitoring (where the employee does not know he is being watched). Monitoring is intrusive and infringes privacy. To be lawful, it is necessary to balance the degree of intrusion and the degree of invasion of privacy against the reason for the monitoring. This impact assessment must be documented and must be supervised by senior management. A paper trail must be kept of what has been monitored. Those carrying out the work must be trained. Covert monitoring is only permitted if the investigation is into criminal or "equivalent" malpractice.

Looking around a suspect's desk is not so intrusive. Looking in it is. Looking inside the suspect's briefcase is even more intrusive. Examining a suspect's mobile even more so. Computer tools are considered less intrusive than human intervention. Taking advice on the availability of the latest monitoring software may well save embarrassment - and money.

If the suspect's rights are infringed, the company could be exposed to a claim for compensation for damages and distress. Naomi Campbell may have only been awarded £2,500 for invasion of her privacy but the European Court of Human Rights has made an award of Euro 30,000. Neither case was in the context of a fraud investigation, but they do illustrate the potential extent of the liability.

Getting this wrong may attract the unwelcome attention of the Information Commissioner who could impose a fine or closely monitor future compliance. Whilst in many cases unlawfully obtained evidence is not admissible in court, there is a discretion to allow it as in Jean F Jones v University of Warwick, privilege may be forfeited as in Dubai Aluminium Co Ltd v Sayed Reyad Abdulla S Nasser Al Alaw & others and penal costs can be incurred. By missing these points a company can end up depriving itself of the very ammunition it needs to bring home a successful prosecution or to make good a claim for compensation.

Freezing orders are usually required to ensure that the suspect's assets can be frozen preventing him or her from becoming judgment proof. Whilst a freezing order is not a remedy available as of right, the standard of proof need not be more than 50%. Usually, you will be permitted only one application for a freezing order. If the evidence is not strong enough to get an order on the first application, then it will either be necessary to mount a costly appeal to the Court of Appeal or to go back and try to obtain further information. If evidence was available but not used, the court may deny any subsequent attempt to try again for an order (Laemthong International Lines Co Ltd v Artis and Others). The courts are notoriously conservative, "an order against a person in his absence, particularly when it is a freezing order, which is a very serious infringement of his rights and liberties, can only be justified on approximately clear and strong facts and risks. It should only be granted in circumstances which provide maximum protection for the person against who the order is to be made."

Few companies are aware of the requirement to disclose all the weaknesses in their case (poor supervision, high staff turnover, lax controls etc) when applying to the court for a freezing order. A failure to disclose facts which the fraudster himself may wish to rely on as a defence can lead to the freezing order later being set aside with the inevitable consequence that the company will have to pay all of the suspect's legal costs as well as its own.

An application for a freezing order has to be supported by a cross-undertaking in damages. The authors are aware of one case where a suspected wealthy individual was joined as a party to a freezing order just before the police made arrests. He was notified of the freezing injunction on the last day of the tax year at a time when unbeknown to the company he and his advisers were attempting to create tax losses. It subsequently turned out that he was not implicated in fraud. Although it was arguable that he had received bad advice that certain transactions should not go ahead in view of the effect of the freezing order, the company had to pay several hundred thousand pounds to compensate for the value of the lost transactions.

Fraud investigations carry significant legal risk and cost a lot in professional fees. A co-ordinated approach which draws on the necessary legal, forensic and IT skills will ensure that the damage inflicted by a delinquent employee is not compounded by unnecessary investigation costs and liabilities are not incurred to the suspect for infringing the various rights he undoubtedly has.

Authors :

Mark Surguy, Associate, Dispute Resolution and Litigation Group, Pinsent Masons

Adam Smith, Director, Forensic & Dispute Services, Deloitte & Touche

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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