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With instances of theft on the rise and ever-more sophisticated methods of fraud being used, companies need to know how to protect themselves and what to do when the worst happens.

The risk posed by theft and employee fraud is a very real one; fraudsters seized more than £1 billion from the UK economy in 2016 and theft from companies has grown sevenfold over the year, according to KPMG’s latest Fraud Barometer. An atmosphere of trust and weak internal controls often allow employees at all levels to access most, if not all, of a company’s systems (often allowing them to be exploited for nefarious means). Unfettered access to vital company systems is increasingly problematic in an environment where data is so abundant.

Perhaps surprisingly, it is most often employees and management who steal from companies rather than any outside agency. And for reasons that are unknown, the risk appears to be disproportionately acute in the manufacturing sector. Kroll’s Global Fraud & Risk Report noted that theft and fraud within the sector are 7% higher than the global average across all industries and that junior employees are the most common perpetrators of fraud, involved in 39% of thefts.

Away from the internal threat, fraudsters are also becoming increasingly sophisticated; KPMG have identified a 1200% increase in instances of cyber fraud since 2015, of which 70% involved viruses, malware or spyware. According to research by the Government, this comes at an estimated cost to the economy of £34bn each year and is the subject of our Rise of the Machines article.

Manufacturers appear particularly exposed to the risk of invoice fraud, where invoices are sent with incorrect or diversionary payment details and procurement fraud, where items are paid for but never delivered. It is most often individuals with legitimate access to payment systems who exploit them for criminal means. In a recent case involving a Cardiff-based construction company, an account manager who had worked at the company for 16 years was found to have paid herself up to five times a month from the company’s account and, over five years, stolen almost £350,000. Such examples are, unfortunately, commonplace; one report suggests that theft by employees, be it by procurement fraud, bribery or enticing suppliers to overcharge and pocketing the difference, accounts for 88% of all losses to UK companies which are attributable to theft and fraud.

The effect of theft on businesses can be huge. Aside from the direct impact of losses, which often amount to six or seven figure sums, trust within an organisation is likely to be undermined and repercussions felt at board level. Last year, Austrian aerospace parts maker FACC fired its president and chief financial officer after the company lost £36 million to an email fraud.

Theft and fraud can be addressed two ways: civil proceedings seek damages arising from the theft and criminal proceedings provide justice. We can assist on both fronts.

Manufacturers need to act quickly to avoid stolen assets being dissipated or exhausted. In civil claims, freezing injunctions can be used to good effect to ‘lock in’ a fraudster’s assets, assisting in the recovery of ill-gotten gains, but time is of the essence. Criminal prosecution may often prove to be a catharsis rather than a cure and often comes too late to stop the fraud in its tracks; bear in mind however that our Regulatory & Criminal Investigations can assist in bringing private prosecutions and seeking confiscation orders. Either way, legal advice should be sought promptly and steps taken as soon as possible to prevent money being transferred, spent or hidden by the fraudster.

Foremost in a litigator’s arsenal when it comes to theft by employees are freezing injunctions, which have been described by courts as the “nuclear weapon” of the law and are not granted lightly. We, however, have an excellent track record of success when it comes to obtaining freezing injunctions and recovering assets procured through fraud. To improve your prospects of success, early intervention is essential; a lawyer should be engaged as soon as theft has been uncovered or fraud is suspected. It is also worth bearing in mind that the fallout from employee theft often requires consideration of Employment, Litigation and Regulatory aspects of the law; as a full-service law firm we are well placed to be able to offer you all the advice you will need.

Prevention is always cheaper than the cure; businesses are encouraged to review their procedures and policies now rather than waiting for a theft or fraud to occur before taking action. We can assist in putting in place measures to minimise a company’s exposure to fraud, be it by robust internal policies which restrict access to sensitive business systems such as payroll and finance or by drafting employment contracts which protect the company in the event that a fraud is discovered.

Innovation mustn’t stop at the production line; companies must develop and refine internal systems and protocols to minimise the risk of falling victim to employee fraud. Whilst effective internal controls, good recruitment and robust management are all highly effective preventative measures, knowing where to turn when it happens is essential. Our Commercial Litigation team is the perfect starting point.

Published: 16 May 2017

Focus on Manufacturing - Edition 5

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James Berry