Combating The Threat From Within

With corporate fraud the subject of unprecedented attention because of financial scandals in the US, in this series of three articles we analyse the legal framework in the UK for detecting and combating fraud and suggest how, in practical terms, UK businesses can protect themselves.

The recent financial scandals in the US (Enron, Allied Irish Bank and World-Com) all stem from impulses that are not new. What is new is the context in which these events have occurred, namely against a background of heightened terrorist activity and, in particular, governments' reactions to them. The response of governments has been tough and swift, with a view to protecting economies and maintaining investor confidence, so badly shaken in the months following 11 September 2001.

Governments have not always been so ready to intervene; in the past it was often left to the financial markets to absorb the effects of large-scale fraud. Now, however, governments are taking a hard-line approach. The spotlight is on regulators to tighten the reins on companies and big businesses. A higher premium than ever before is being placed on corporate governance. Put simply, employees and officers are being required to bear greater responsibility, and accountability, for the company or business for which they work.

All of this is set against a background of fundamental change to the context in which most businesses now operate. The last decade has seen increasing globalisation, a prolific increase in the use of electronic means to send and transfer information and money, coupled with growing sophistication in financial products and accounting. All of these factors have made it easier to perpetrate fraud and have, therefore, increased the risk of fraud immeasurably.

Now more than ever companies and their legal advisers need to be aware of the risks businesses face and the measures they can and, in many cases, must take to combat fraud. This article considers:

The current law relating to fraud affecting UK businesses.

Practical issues facing businesses that are potential or actual victims of fraud.

Proposals for reforming UK law relating to fraud.

Current law

A recent survey conducted by KPMG indicates that over the period from 1 January 2002 to 30 June 2002 fraud cases in the UK have increased by over 150% compared with the same period last year, totalling some 255 million (KPMG Fraud Barometer, July 2002). This includes a surge in public sector fraud, such as tax and VAT evasion, as well as a steep rise in financial and banking scams.

At present there is no criminal offence of fraud in English law. As a consequence, a number of theft and deception offences and the common law crime of conspiracy to defraud are used to convict fraudsters. However, in the past four years new laws have been passed that aim to combat and help with the detection of fraud. They are:

The UK

The Enterprise Act 2002.

The Proceeds of Crime Act 2002.

The Public Interest Disclosure Act 1998.

The US

The US Sarbanes-Oxley Act of 2002.

The relevant provisions of these Acts apply to a variety of persons, including employees, officers, corporate counsel, financial institutions and auditors.

Enterprise Act

The Enterprise Act 2002 (the 2002 Act), which received Royal Assent on 7 November 2002, contains provisions aimed at tackling corporate fraud that are intended to build upon those contained in the Competition Act 1998 (the 1998 Act), which was directed at preventing cartels.

By contrast with the 1998 Act, whose measures apply to companies, the relevant provisions of the 2002 Act apply to individuals. The offences are based on "dishonesty" and cover price-fixing, market-sharing, limitation of production and bid-rigging (section 188). It is expected that all of the competition law provisions in the 2002 Act will come into force in the spring or summer of 2003.

The new offence carries a maximum prison sentence of five years (section 190). It is anticipated that the Serious Fraud Office will be the lead prosecutor in England, Wales and Northern Ireland, with the Office of Fair Trading as an additional prosecutor for Scotland.

Proceeds of Crime Act

The Proceeds of Crime Act 2002 received Royal Assent on 24 July 2002 and the money laundering sections of the Act are expected to come into force in January. Its main features include:

The major extension of the scope of money laundering offences.

The introduction of various reporting requirements in respect of money laundering.

The establishment of an Assets Recovery Agency (ARA).

Please also see our article Update on the Proceeds of Crime Act 2002.

Public Interest Disclosure Act

The Public Interest Disclosure Act 1998 (PIDA) is aimed at providing protection for employees, thereby encouraging them to speak out about perceived incidents of corporate fraud. The benefits of...