Uncovering Fraud: First Response

Partners Jane Colston, Anupreet Amole and associate Joanna Curtis recently published a special report featured in the December 2019 issue of Financier Worldwide Magazine. 

"Crisis hits. One of your company’s overseas branches reports an issue: missing funds. Is it a potential fraud? An accounting error? A software problem? Who do you turn to? It is essential that ever-watchful suspects are not tipped off, thereby allowing them time to cover their tracks and get their stories ‘straight’.

‘Fly the plane’ i.e., do not ignore the basics

When fraud is suspected the first steps will include: (i) do not ignore the ‘warning signs’; (ii) limit information to the ‘need to know’; (iii) assemble a trusted response team; (iv) ring-fence the suspect; (v) promptly obtain a lawyer’s independent assessment on options, together with how communications should be structured to preserve privilege; (vi) agree an overall strategy: who will do what, what proceedings need to be brought and in which jurisdiction? (vi) consider with lawyers any employment issues, including electronic searches and email monitoring; (vii) preserve key evidence, including discreetly interviewing staff; (viii) remove the suspected fraudster’s security and bank authorisations, including remote access to electronic data; (ix) alert your fidelity insurers (if appropriate); and (x) consider instructing private investigators to ensure that they do not flee the jurisdiction.

On this last point, care should be taken. Recent English cases over these investigations have shown that privilege may be inadvertently waived if illegal methods are used and harassment and trespass claims made.

What is legal privilege?

Under English law, legal advice privilege will generally keep communications between a lawyer and their client confidential. Litigation privilege will protect communications which are (i) confidential, (ii) made for the dominant purpose of litigation (whether civil or criminal) and (iii) relate to litigation which is pending, reasonably contemplated or existing.

Litigation privilege will apply to communications involving a lawyer and a client or a third-party (provided the above three-limb test is met). The point in time when litigation becomes reasonably contemplated will depend on the facts of each case. The Court of Appeal in ENRC vs SFO (2018) held that litigation privilege can apply before a decision to prosecute has been taken or even a formal criminal investigation has been commenced. The likelihood of litigation must, however, be a real likelihood rather than a mere possibility.

Map the jurisdictions where proceedings could take place

Consider where to sue. This usually requires significant analysis to maximise the nature and scope of relief available, including injunctions and disclosure, but also to minimise the risk of proceedings being derailed by defendants challenging jurisdiction and thereby putting a spoke in the wheel. The chosen forum is often different from the place where the crisis has arisen or damage suffered.

The applicable rules on privilege may differ depending on the location of the proceedings. You therefore need to identify the key contracts between the various parties involved, including employees, consultants, contracting parties and any other stakeholders. What do the contracts say about governing law and dispute resolution? A number of jurisdictions will uphold an express agreement on where and how disputes are to be resolved, for example jurisdictions where EU law or the Hague Convention on Choice of Court Agreements apply.

Consider where the other parties are incorporated. Where do they carry on business? If there is no express dispute resolution agreement, the appropriate forum may be the jurisdiction in which the defendant is domiciled, as is sometimes the case under EU law.

Consider where the events or damage have occurred. It may be possible for proceedings to be issued in any of these places.

Seek legal advice in each of the jurisdictions you have identified

Find out what types of privilege are recognised in each relevant jurisdiction. If communications between a lawyer and a client are protected by privilege, ask whether this will apply to communications with all staff at the client, or only with those individuals who are specifically tasked with seeking and receiving legal advice. This is the position under English law, following the case of Three Rivers DC vs Bank of England (2003).

Ask whether privilege will protect documents created for the purpose of anticipated litigation. If so, from when will this protection be deemed to apply? Does a lawyer need to be included in such communications?

Identify any regulatory risks

It is important to consider whether your company or any of the other parties involved will come under regulatory investigation in any country.

In England and Wales, the same rules on privilege apply to civil, criminal and regulatory proceedings. Privileged documents will still be protected, although a party may choose to disclose them in order to cooperate with a regulatory investigation. In other jurisdictions, regulatory or enforcement agencies may have wider powers of discovery. Ensure that privileged documents are clearly labelled so that they can be identified and separated in any investigation or disclosure exercise.

Corporate groups: is there a joint or common interest?

Consider which entities within your corporate structure are affected. Are they separate legal entities? Which entities deal with which counterparties, such as customers, sub-contractors and funders? Are there common servers?

Privilege under English law belongs to the entity asserting it, so must be assessed separately for each entity involved. If legal entities within the same group are involved, they may each be able to assert privilege over communications between them, for example on the basis of joint or litigation privilege. Where the entities share a common interest, they may also be able to share documents between themselves without being deemed to have waived privilege. This is known as ‘common interest privilege’.

Where joint privilege or common interest privilege apply, the parties will be able to assert privilege as against third parties, but not as against each other (Cia Barca de Panama SA vs George Wimpey & Co Ltd (1980)). It will be important for both entities in that situation to maintain confidentiality over shared documents, and to keep any potential conflicts of interest under regular review. Neither can unilaterally waive joint privilege.

Think about your team communications

Think about your teams and how they will need to communicate. Consider the types of communications listed below.

Gathering factual information. This has been a key area of focus in recent English case law, as regulatory and law enforcement agencies are keen to access first-account evidence. Seek legal advice from the relevant jurisdictions and bear in mind that not all first-account evidence may be protected by privilege. For example, under English law it will be key to consider at what point litigation is reasonably in contemplation (SFO vs ENRC). If litigation privilege is not applicable, it may be advisable for lawyers to lead the information-gathering exercise as part of their retainer to provide legal advice.

Employees should be aware that, if giving evidence for an internal investigation, privilege may belong to the company but not the employee. If there is any potential for individual employee liability (whether criminal or civil), consider whether they should be given the opportunity to seek separate legal advice. Will your D&O insurance cover this advice? Do you instead have to indemnify them?

Instructing external lawyers. Make sure that your external lawyers are instructed by the right client entity or entities. Under English law (Three Rivers DC) it is important to establish a designated ‘client group’ to ensure protection under legal advice privilege. This should include the individuals specifically tasked with seeking and receiving legal advice for the company as a whole.

Internal communications. Consider including any senior and overseas colleagues who need to receive legal advice in the ‘client group’. Circulate communications protocol to these relevant staff to mandate that they keep the communications with the legal team confidential. Curless vs Shell International Ltd (2019) is a recent reminder of how ‘careless talk’ can waive privilege. In Curless, it took the Court of Appeal to rule that an in-house lawyer could not rely on an overheard privileged conversation in a pub to support his employment claim. Much time and costs will therefore be saved if those having privileged conversations remember that ‘walls have ears’.

Strategic discussions. Ensure that discussions about the legal strategy are kept separate from discussions about commercial strategy. Under English law, discussions which are of a purely commercial nature may not be protected by litigation privilege (WH Holding Ltd and another vs E20 Stadium LLP (2018).

Plan your external communications strategy

Engagement with non-parties, such as the media or counterparties, should be thought about in advance but, pre-injunction, kept to ‘radio silence’. Once proceedings have started, as Lady Hale stated in Cape Intermediate Holdings v Dring (2019), “the default position” given the “importance and universality of the principles of open justice”, is to grant the public access to all documents placed before the court. This means that the media will be able to gain a lot of information from the court file (which is often electronic) about the case. A spokesperson should therefore be appointed to field all such enquiries so that a single message is thought about with the legal team ahead of time and delivered. Staff should be instructed to refer all enquiries to such spokesperson and that ‘careless talk’ is prohibited.

Conclusion

Upon uncovering a fraud, a company needs a cool head to take the many decisions required quickly, on limited information and without alerting the suspects. Anticipation, training and a strategy planned in advance can all help minimise mistakes. This of course might also have the added advantage of revealing gaps in systems which make fraud easier and which need to be closed."

Read the full Financier Worldwide Magazine article here.

This article was first published in Financier Worldwide Magazine December 2019 Issue, and is reproduced by kind permission of Financier Worldwide.