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Points to keep in mind if fraud is discovered within your company

May 24, 2016
Yvette Borrius and Cathalijne van der Plas, Höcker Advocaten, Netherlands

Hocker-logoYou’re faced with a case of fraud within your company. How big is the chance that you’ll be able to get the diverted assets back?

If fraud is discovered, it’s crucial that you tell as few people as possible about the fraud. After all, you’re not sure yet who may have been involved in the fraud. The fraudster must be prevented from learning about your discovery and then destroying evidence and/or diverting the property further.

Time is of the essence. Get a lawyer and an external (or other) investigator on board as soon as possible. In light of the lawyer-client privilege, it may be useful to have the lawyer furnish the engagement to the investigator. Based on the available information, the investigator will provide as good an overview as possible of the fraud. Insofar as information from third parties is necessary (for example, transaction data from bank accounts to which the fraudster has transferred money) and this information is not provided voluntarily, your lawyer may file an application with the court to inspect the information under Article 843a of the Dutch Code of Civil Procedure, preceded, if appropriate, by a seizure of evidence. If the assets turn out to have been diverted out of the country (which frequently happens), information from other jurisdictions will generally be needed, too. Gathering information in different jurisdictions requires good coordination and collaboration, because, in some jurisdictions (such as ours), an information request is not made ex parte and the fraudster may unintentionally become aware of what’s going on. For the same reason, it’s sometimes better to hold off on taking seizure measures.

Courses of action to be followed in addition to trying to recover the assets
Initiating criminal proceedings in addition to civil recovery (or other) proceedings may have added value. As a rule, the company, as the aggrieved party, will gain access to critical information from the criminal file (which may be used for a liability claim or settlement to be reached) and may be the beneficiary of confiscation orders demanded by the Public Prosecution Service. We recommend having the civil and criminal lawyer concerned coordinate this properly.

Besides an investigation into the fraud ‘as such’ which has been committed, the company will have to find out how it was possible for the fraud to occur. Hence, aspects of the administrative organisation and internal control will need to be examined within the context of the internal governance investigation. ‘Lessons learned’, which may serve as a basis for implementing points for improvement, may emerge from the report.

Depending on the nature and scope of the fraud and the market’s awareness of this, external statements may be made that the company ‘is on top of the matter’, has initiated an internal or external investigation, and is awaiting the results of this investigation. The idea is to be cautious about making announcements about people possibly involved in the fraud, as this can cause unnecessary damage.

After the facts have been set out carefully and the people who were part of the investigation have been given the opportunity to state their positions through a process in which both sides are heard, a liability action against the perpetrators of the fraud may be expedient. The elements of such an action will partly depend on whether or not the property spirited away has been successfully tracked down and recovered. This may take the form of civil proceedings to obtain compensation for the damage, a settlement to be reached (with the insurer’s assistance) or a well‑considered choice not to take further legal measures. The action which best serves the company’s and its stakeholders’ interests in these circumstances will become apparent through an informed decision-making process.

The general counsel, of course, can play an important coordinating or other pivotal role regarding various aspects of fraud issues.