Commercial Fraud: the Client, the Thief, the Offshore Bank Account and the Lawyer
By John Walmsley of JKW Law, London
Headlines have once again focussed attention on allegations of fraud — most recently 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.
First, some alarming statistics. 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).
The insurance market has a significant problem in this regard, with reports that every day in the UK insurance fraud worth £3.5 million is uncovered (The Guardian May 2014).
What is commercial fraud?
It has been described as ‘a thing apart’. ‘Not a mere slogan’ but ‘reflects an old legal rule that fraud unravels all’. HIH Casualty & General Insurance Ltd & Others v Chase Manhattan Bank & Others .
Essentially, it involves one party obtaining by dishonest means some type of financial advantage or causing some financial loss to another party.
The ingredients of the offence are:
1) A false representation of fact made to the claimant;
(2) A dishonest state of mind by the representor;
(3) An intention that the claimant relies on the representation;
(4) Reliance by the claimant on the representation; and
(5) Financial loss to the claimant caused by the above.
The burden of proof is the civil standard, namely the balance of probabilities test, but the standard is likely to require substantially more cogent evidence than would be required to prove a less serious offence.
Remedies for Fraud
The freezing order was previously known as the Mareva injunction and one of the law’s ‘two nuclear weapons’ (Donaldson LJ in Mellat v Nikpour (1985)). The other ‘nuclear weapon’ was the Anton Piller order, now renamed the search order.
The freezing order is granted for an important but limited purpose:
• To prevent the defendants dissipating their assets with the intention or effect of frustrating enforcement of a prospective judgment.
• They are not a proprietary remedy.
• They are not granted to give the claimant advance security for his claim; although in practice they may have that effect.
• They are not an end in themselves. They are a supplementary remedy, granted to protect the efficacy of court proceedings, domestic or foreign.
There is a requirement to have subsisting legal proceedings to which a freezing order could be ancillary or an undertaking to commence such proceedings immediately.
Key requirements fall into three categories:
1. Good Arguable Case
In The Niedersachsen (1983) Mustill J held that a “good arguable case” was “one which is more than barely capable of serious argument but not necessarily one which the Judge considers would have a better than 50% chance of success.”
The test is not as high as that of the test required to obtain summary judgment under CPR.
2. Real Risk of Dissipation
A claimant must adduce solid evidence to support an assertion that there is a real risk that the judgment or award will go unsatisfied. The test is objective and one of an assessment of the risk by a court that a judgment may not be satisfied. Factors that a court will consider relevant are:
a. The nature of the assets – so monies in bank accounts are much more susceptible to dissipation.
b. The nature and financial standing of the defendants’ business.
c. The length of time the defendants have been in business.
d. The domicile or residence of the defendants.
e. Any intentions expressed by the defendants about future dealings with their assets or assets outside the jurisdiction.
f. The defendants’ conduct in response to the claim.
It is important to note that a claimant is not required to show on the balance of probabilities that assets will be dissipated but rather there is a real risk that this will occur.
3. Just and Convenient
Is it, in all the circumstances of a case, just and convenient to grant an injunction? In freezing orders there is discretion to be exercised and the court needs to be satisfied that the injunction will promote justice and not work unfairly or oppressively. An injunction may not be granted if it would interfere unacceptably with third parties or might significantly damage a defendant’s business.
There is a duty to make full, fair and accurate disclosure of all material information to the court and to draw the court’s attention to significant factual, legal and procedural aspects of the case. This duty is an elevated one because the applicant in a without notice hearing is asking the court to grant an injunction against a party in his absence and without the opportunity of presenting his case.
There is a duty to place before the court all matters relevant to the Judge’s consideration of the application. The test as to materiality is an objective one. The lawyer’s role is to ensure that they have the ‘full back story’ from their client and that this is set out in a sworn affidavit. A witness statement is not good enough. There needs to be a proper identification of the sources of information and belief. Broad references to “enquiries made” or “documents in my possession” are not sufficient.
A freezing order should be drafted so that it causes the minimum interference with the defendant’s right as its purpose is not to punish the defendant but to protect the claimant.
When a court determines the financial limit for a freezing order – the court will consider the ‘good arguable case’ of the claimant.
The ‘nuclear weapon’ analogy of a freezing order is illustrated in the very wide range of assets that can be frozen and includes cash, properties and assets such as ships, aircraft and machinery.
The claimant when applying for an injunction will be required to give the court an undertaking to abide by any order for damages should the defendant suffer loss and the court is of the view that compensation should be paid. Usually this undertaking will be by a bond or payment into court.
Tracing is a legal process not a remedy and a claimant needs to demonstrate what has happened to the property, identify its proceeds and the persons who have handled or received them. The claimant asks the court to award a proprietary claim against the property or an asset substituted for the original property or its proceeds.
A forensic accountant working closely with the lawyer has an important role to play in following the money.
Constructive Notice of Fraud for Banks
A recent case, Credit Agricole Corporation and Investment Bank v Papadimitriou (2015) examined whether Credit Agricole had notice for the purpose of the bona fide purchaser for value without notice (BFPFVWN) test.
It was held that a bank does have notice where:
a. The bank appreciates that a proprietary right in the property probably exists.
b. A reasonable person with the attributes of the bank should have appreciated, based on the facts already available, that the right probably existed.
c. The bank should have made enquiries or sought advice which would have revealed the probable existence of such a right.
The case 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.
The case does not decide that banks must take reasonable steps to ascertain the commercial purpose of every transaction or that they be liable to a proprietary claim whenever they omit to take such steps.
Claimants will often seek to point the finger at banks which they suspect have failed to conduct due diligence – their customers or particular transactions which are fraudulent.
Finally, it is important to mention that neither legal advice privilege nor litigation privilege attaches to communications between a legal adviser and client produced for the purpose of committing or furthering a fraudulent act or crime. The rule applies whether or not the adviser is aware of the purpose for which they are asked to advise.
There is a huge ongoing challenge in combating fraud. Money laundering remains a substantial problem, with the International Monetary Fund estimating that around 5% of worldwide currency circulation is laundered money.
The lawyers and forensic accountants therefore have an essential role to play in the civil remedies employed to seek restitution for the victims of commercial fraud.