COVID-19 scams are on the rise. Know the signs and take steps to protect your business from fraud
Should companies be worried about business fraud during COVID-19? Almost certainly.
Fraud claims climbed dramatically in 2008 when the Global Financial Crisis hit. Similar behaviour occurred after the 1987 share market crash. No doubt it was also rife during the Great Depression (albeit in different forms).
COVID-19 has impacted almost every business. Some can’t operate at all. Others have had to stand down most of their workforce. Even industries which have been fortunate enough to avoid the carnage have had to make huge changes to their operations.
Add to that a generous measure of economic anxiety thanks to sudden and widespread unemployment. Together, these unique conditions provide motive and opportunity to create the perfect environment for business fraud to flourish.
Businesses should be alert to the possibility of fraud – even by an insider. By being proactive and reviewing your business practices, you can head off potential fraud before it occurs.
If you are the victim of a business fraud due to COVID-19 or otherwise, it’s vital that you seek advice as soon as possible. There are multiple remedies available and powerful tools to aid recovery of any loss, but you must act fast to limit the damage.
What makes businesses so vulnerable during COVID-19?
Fraud is often opportunistic. As so many businesses are changing the way they operate, new pathways to fraud are opening. For example:
Vulnerability to cyber crime
People are working from home for the first time en masse with little or no oversight. Most are using their own equipment, including personal laptops and other electronics devices, because very few businesses have the resources to provide everyone with a work laptop (or had the foreknowledge that portable electronic devices would be required for much of their staff). That leaves companies vulnerable to all manner of cyberattacks, especially where an individual’s personal computer or network is not secure.
We have seen instances where a fraudster hacks into the email account of someone in the victim-business and identifies invoices payable in emails from genuine suppliers. The fraudster then sends the victim-business a spoof email which appears to originate from the genuine supplier, asking for payment to be made to another bank account – and, you’ve got it, the bank account belongs to or is being used by the fraudster. When the genuine supplier demands payment from the victim-business, and the victim-business discovers that it has been scammed, is the victim-business liable to pay the original debt to the genuine supplier? Well, that depends. In some circumstances, the victim-business might be able to successfully argue that supplier is liable for the scam and thereby avoid paying twice.
Inability to vet third parties
With everyone working remotely, it is harder than usual to verify that someone is who they say they are. With so many businesses shutting their doors, many companies are either looking for new custom or dealing with new agents or suppliers.
Someone might hold themselves out as acting for their landlord, for example, and offer a rent reduction if the money is paid to a different bank account. A supplier might ask for advance payments and then never provide the goods. Or, companies which sell goods might find themselves victim to new ‘customers’ who order in bulk and fail to pay.
Disgruntled or anxious employees
Unemployment and underemployment are soaring. The Australian Bureau of Statistics estimated around 1.6 million Australians lost their income in the first week of the COVID-19 lockdown. Countless others have kept their jobs but worked fewer hours, or saw their revenue crash if they were a business owner or otherwise self-employed.
Employees who have been stood down or laid off might feel resentment toward their old company and desire revenge. Others might not intend any malice, but are worried about their reduced income and vulnerable to outsiders who offer them financial incentives to commit fraud. Personal addictions like gambling, alcohol and drug abuse all spike in times of anxiety and stress, leading to errors of judgement and a motivation to commit fraud against businesses.
Lack of oversight
Companies who are running on a scaled-back workforce, or who have moved their staff to new positions, may have reduced their compliance and oversight capacities. That leaves those businesses vulnerable to employees who want to commit theft and or fraud.
Whether it’s someone who pays invoices without the usual approvals in place, sells sensitive information or helps themselves to cash, there are plenty of risks to look out for. There may be a dishonest intent on the part of the employee. But, there might also be genuine mistakes like someone paying a duplicate invoice without checking that it’s already been paid, or being duped by a fraudster to send payment for an invoice to an account used by the fraudster rather than the supplier.
Sale of business fraud
In either a share sale or business sale, there is sometimes a time lag between execution (signing) of the sale contract, and completion of the transaction (when the new owner gets the keys to the business). Often, after the sale contract is signed, the old managing owners continue to be responsible for the day-to-day management of the business until the sale completes. At the time of signing the sale contract, the price for the business is agreed.
In the period between signing the sale contract and completion, the old owners could falsify supplier invoices (for goods or services never provided) in order to syphon money out of the business before the new owner takes over. Some of these risks can be reduced in the drafting of the sales contract and in the due diligence process.
How can businesses take preventative action to guard against fraud?
There are several legal cures for fraud, but an ounce of prevention is better still. Remember that you are not just guarding against fraud perpetrated on your business. Good business practice will also help prevent you from being implicated in a business fraud during COVID-19 due to employee action on your company’s behalf.
- Your employees can still do their usual job and that you’re aware of any constraints. You don’t want to discover that critical oversight tasks were left undone
- If you’re relying on third party technology, including meeting software, you’re aware of any security risks. Some platforms are vulnerable to outside parties ‘dropping in’ or overhearing discussions
- Any third parties, including suppliers, customers, agents and creditors, are either known to you already or proper vetting procedures are in place
- Employees are aware of a zero-tolerance approach to fraud and encouraged to report suspicious behaviour
What legal tools are available to a business who suspects fraud?
There are several. The most common, and perhaps the most powerful, is a freezing injunction.
A freezing injunction is a court order that prevents the alleged fraudster from disposing of, or dealing with their assets, including removing them across jurisdictions. It is sometimes known as a Mareva Order.
You can apply for a freezing order ex parte, which means that you can obtain it in the absence of the other party. This is important, because it means that you don’t have to alert them to your suspicions ahead of time. This is important because by alerting the suspected fraudster of your application for a freezing order could prompt them to dissipate their assets, and could even undermine your application for a freezing order.
If they violate the order, they can be fined or imprisoned.
This is useful where you are intending to bring a proceeding for white collar fraud against the offending party, or where a proceeding has commenced and you are worried that they will dispose of the assets before the court has made their decision.
Other court orders include:
- A Proprietary Injunction, which is a powerful but more limited injunction which prevents the suspected fraudster from dealing with specific assets
- An Asset Disclosure Order, which is an order requiring the alleged fraudster to disclose the nature, value and location of their assets. This is a really useful tool to identify the fraudster’s assets which can be used to recover any loss
- A Norwich Pharmacal Order which requires a relevant third party to disclose documents or information. This is often utilised to obtain information from the bank holding the assets
- A Search Order allows the victim’s lawyers to enter the fraudster’s premises and search for, copy and remove documents or electronic material relevant to the case
- Tracing which is a process that allows the victim to follow the trail of the removed property, even if converted (eg from cash to shares, or from real property to cash), so that they can join third parties to the action in order to claim the property
- A Passport Delivery-up Order requires the fraudster to surrender their passport in order to prevent them leaving the country
What civil remedies are available to victims of business fraud?
The orders above are tools to help you in your fraud claim. But what are the remedies available? If the fraud has a criminal element, such as theft, money laundering or bribery, the penalty may include serious fines, imprisonment and restitution for the victim.
For civil causes, the remedy is intended to compensate the victim for the loss incurred. You may choose to negotiate a settlement instead. Sometimes this is a more commercial outcome, and often facilitated where a freezing order is in place.
What legal claims arise through business fraud?
The following (non-exhaustive) causes of action could arise through fraud:
- Misleading or deceptive conduct occurs where someone has acted (or has attempted to act) to mislead or deceive another party, either while selling their goods or services to a client, engaging in contract dealings or in almost any other aspect of business
- Breach of contract may apply in circumstances where a valid contract existed between the parties and the fraud constitutes a breach of that contract
- A breach of duty by fraudulent conduct by a company director or officer. The breach of duty might give rise to penalty orders, compensation orders, equitable claims for constructive trust over profits, account of profits or equitable compensation
- Knowing receipt occurs when a third party receives property derived from the breach of a fiduciary duty by another. The third party might be liable to the victim
- Knowing assistance occurs where a third party assists another in a breach of fiduciary duty. The third party might be liable to the victim
- Conspiracy occurs where more than one person works together unlawfully to cause loss or damage to the victim. Where conspiracy is present, the victim can add third parties to the claim
- Civil fraud
What should a business do if it believes that there is a potential fraud?
- Act quickly. Consider whether you should obtain a freezing injunction. The sooner you can obtain the freezing order, the better your chances of recovering your assets or loss. As soon as you are on notice of a potential fraud, you should seek legal advice
- Do not tell anyone except your lawyer. Whether the fraudster is an employee or an external party, it is important that they don’t get wind of your suspicions. It only takes minutes to transfer funds or property out of the jurisdiction. This is why freezing order hearings are conducted ex parte (ie without the other side being on notice of the application). Only disclose what you know under the protection offered you by lawyer-client privilege
- Avoid creating documents including emails, text messages or voicemails, which may be used as evidence and could be discoverable by the other side in due course
- Gather information about where the assets might be. Once a freezing order is granted, your lawyers will need to put the holder of the assets on notice. That might be a bank, or a party holding property on trust for the fraudster. The sooner they can be informed the better
- If you are a public company, you will need to take advice about any market announcement you might have to make
Trevor Withane of Blackwattle Legal has extensive experience of acting for claimants and defendants of small and large fraud claims, both domestically and internationally. Trevor’s recent experience includes obtaining freezing orders from the New South Wales Supreme Court against an individual who diverted funds which were advanced for a specific purpose.
If you suspect or find that you are a victim of fraud or you have been accused of fraud, contact us to find out how we can help protect you and your firm.
For more information about how COVID-19 might make your firm vulnerable to fraud and what to do about it, please contact:
Trevor Withane: email@example.com, tel +61 (0)418 717 001