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Avoiding the spectre of catastrophic loss – commercial fraud

November 12th, 2015 - Posted by Guest blog from John Walmsley of JKW Law, London in Anti-Bribery And Corruption

Headlines have once again highlighted allegations of fraud - Volkswagen's admission that they were designing and installing software in millions of diesel engines to cheat official emissions testing.  The consequences, civil, regulatory and criminal, of such actions look likely to be severe.

Fraud is estimated to cost the UK economy £70 billion per annum.  Third party current account fraud grew 12 times faster than first party current account fraud last year, and identity theft now represents 69% of all current account fraud (Experian 2015). Certain sectors and geographical locations are more vulnerable to fraudsters. Businesses operating in wholesale and retail trade, manufacturing, financial and insurance services and construction need to take particular care.

The insurance market has a significant problem with reports that every day in the UK insurance fraud worth £3.5 million is uncovered (The Guardian May 2014). However, all sectors are vulnerable, most recently, the phone and broadband provider Talk Talk, which has over 4 million UK customers admitted that banking details and personal information have been accessed by hackers in a recent cyber-attack.

So what is commercial fraud?
Essentially, it involves one party obtaining by dishonest means some type of financial advantage or causing some financial loss to another party. Commercial fraud is greatly varied and can range from diversion of funds, fraudulently creating and approving purchases, to business intermediaries trying to divert funds for their own gain.

Fraud prevention and due diligence
A recent case, Credit Agricole Corporation and Investment Bank v Papadimitriou (2015) is significant in recognising that whilst the specific circumstances are all important – where there is a high-value private banking transaction largely conducted offshore involving significant fee income for the bank – the bank must accept it is under a duty to examine the commercial purpose of the proposed transaction as part of its responsibility to conduct due diligence.
Clearly there is a huge ongoing challenge in combating commercial fraud.  Money laundering remains a substantial problem, with the International Monetary Fund estimating that around 5% of worldwide currency circulation is laundered money.

The UK's AML (Anti-Money Laundering) and KYC (Know Your Customers) guidelines recommend a risk-based approach to money laundering prevention.

Businesses that seek to protect themselves from the financial and reputational impacts of fraudulent attacks should put in place comprehensive anti-bribery, corruption and anti-money laundering policies respectively. Enshrined in any policy should be a commitment to screening and checking entities against all available data. All potential and existing businesses partners should be subjected to regular checks for any anomalies. It is also essential to proactively monitor for any unusual events, such as unusual transactions, that might be suggestive of fraudulent activity.

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