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What is Civil Fraud? How to Identify Fraud in Your Business

Author: Nicola Sharp  15 May 2023
4 min read

Organisations that fall victim to fraud risk heavy financial losses and costly damage to their reputation.

What can businesses do to be on their guard against civil fraud? In this article, we highlight the key red flags to look out for that suggest fraudulent activity. We give you practical tips to protect your business and help mitigate the impact of civil frauds.

What is civil fraud?

Civil fraud includes actions such as:

  • Fraudulent misrepresentation.
  • Unlawful means conspiracy.
  • Deceit.
  • Fraudulent breach of fiduciary duties.

We are not looking at criminal fraud in this article, which covers actions in theft, although the two do overlap in many ways.

Is there a difference between civil fraud and criminal fraud?

Yes. The first difference is the standard of proof. In civil actions, the victim of fraud must prove that the defendant committed the fraud “on the balance of probabilities.” The judge must be persuaded that the evidence shows that it is more likely than not that the elements of the fraud are present.

In a criminal fraud, the prosecution must prove that it is “beyond reasonable doubt” that the defendant committed the fraud. It’s a much higher standard of proof. The jury must be able to say that they are sure of the defendant’s guilt.

The second significant difference is the sanctions available. In a civil action, the sanction is compensatory - the defendant can be ordered to repay the stolen funds by way of damages. In a criminal action, the sanction is punitive. The punishment for the fraudster is a fine or imprisonment -and compensation orders to recover the losses are few and far between.

For those reasons, corporate entities tend to pursue civil actions, in which they can recover damages for their losses.

Identifying Fraudulent Activity in Your Business

Given that fraud is, by its nature, deceptive and clandestine, it’s notoriously difficult to spot the warning signs of fraudulent behaviour. But with the benefit of hindsight, we can learn from those unfortunate businesses that have fallen victim to fraudulent activity. We’ll now discuss two notable fraud cases and identify the red flags that indicated that fraudulent activity was in play. 

WANdisco

At the start of 2023, promising tech firm WANdisco was gearing up for a US listing, when an internal investigation showed "significant, sophisticated and potentially fraudulent irregularities" by an employee. It appeared that a senior sales employee had produced suspect purchase orders that vastly inflated its revenues in the previous year.

The red flags in this situation included:

  • Enormous growth in WANdisco’s trade receivables (the amounts owed to the business) within 12 months.
  • Ignoring concerns in an update a few months prior, which expressly highlighted this growth as a “possible red flag.”
  • Revenue had doubled, but receivables had increased at a far greater rate. The relationship between the two should have been easy to explain but the discrepancy raised unanswered questions.
  • Allowing the revenues to be inaccurately recorded indicated a lack of effective internal controls and risk processes.
  • A senior figure held multiple roles: chief executive, chairman and president. The lack of separation of these roles pointed to a potential governance issue.

These warning signs are not uncommon for a start-up that experiences significant and rapid growth. But they have to be recognised and addressed if a company is serious about tackling the risk of fraud.

Quincecare Duty

Banks have been under a ‘Quincecare’ duty since 1992, following the case that gave it its name: Barclays Bank plc v Quincecare Limited [1992] 4 All ER 363

Under the Quincecare Duty, banks must refrain from carrying out a customer’s orders if the bank is put on notice that the orders are part of a fraud. This means that banks have to be on their guard against any suggestions that a fraud is afoot. Of course, it is difficult to spot these signs, and the Supreme Court has even acknowledged that it is “not intuitively obvious why a bank should be liable for carrying out its customer’s instructions.”1

But over the years, the banks have become more accustomed to the warning signs of fraud, which tend to be:

Banks keep abreast of their Quincecare duty by creating the systems and culture that heed the requirements of proper due diligence. So that any red flag, however small or seemingly innocuous, is investigated before it spirals into a larger problem. 

How to Protect Your Business Against Civil Fraud

There is no failsafe way to protect your business from the unscrupulous actions of people intent on committing fraud. But these are the best practices to put in place to ensure the best possible level of protection:

  • Create accountability at management level. Separate your senior roles so that there are checks and balances in place on the people managing the business and controlling the accounts.
  • Encourage a culture of transparency, where mistakes are discussed as a learning opportunity and not disguised or hidden.
  • Don’t ignore concerns, however small. Whether it’s intuition or the submission of a suspicious activity report, make sure you investigate any potential warning signs. There is always something else to do in the business, but ignoring the warning signs could have a devastating impact.

Mitigating Against the Impact of Civil Fraud

Where you suspect possible fraudulent activity, it’s important to take action – and take it quickly. Under section 32 of the Limitation Act, you can bring a claim within six years of the date on which you discovered the fraud or of the date on which you could have discovered the fraud if you had applied reasonable diligence.

In a recent case, it was accepted that the lengths that the business could have gone to in order to discover the fraud were wide-ranging, including:

  • instructing lawyers and forensic accountants to investigate matters further;
  • commencing proceedings
  • writing to third parties for information

(See Manek & Ors v 360 One WAM Limited & Ors [2023 EWHC 710 (Comm))

In these situations, bringing a civil claim is often the only way to regain what you have lost to fraud. You may even need a freezing order to protect stolen assets.

As it can be a costly exercise to pursue a claim, it is worth investing in your internal procedures to maintain a robust defence against fraudulent activity in order to prevent the fraud happening in the first place.

1Stanford International Bank Limited (in liquidation) v HSBC Bank Plc [2022] UKSC 34 (https://caselaw.nationalarchives.gov.uk/uksc/2022/34)

Nicola Sharp C 09983

Nicola Sharp

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Nicola is known for her fraud, civil recovery, arbitration and business crime expertise, her experience of leading the largest financial disputes and multinational investigations and her skills in devising preventative measures and conducting internal investigations for corporates.

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