Investigation Bites: Investigatory Triggers - What do you do when you discover fraud within your organisation?

Fraud is an ever-increasing risk within our society, accounting for 40% of all crimes reported. Within the business world, over half of all businesses (64%) experience fraud of some description, with this number set to rise. This can range from deceptive business practices, accounting fraud, theft, and tax evasion. Fraud can also be committed across an organisation’s supply chain, which directly or indirectly prejudices and / or benefits an organisation. 

The starting point of how to respond to a fraud will be dependent on what policies and procedures govern your organisation and this particular trigger event. In our experience, organisations have different capabilities when responding to a fraud. Some will follow procedures set out in codes of conduct, anti-fraud policies and investigation procedures, involving compliance, HR and internal/external legal teams.  Some organisations will have a more basic infrastructure, with limited policies and procedures. 

However, there is now a statutory requirement to have fraud prevention procedures in place. Under the Economic Crime and Corporate Transparency Act 2023, an organisation can commit an offence of failure to prevent fraud, where an associated person of that organisation commits fraud with the intention to benefit that organisation, and where reasonable fraud prevention procedures are not in place. Fraud prevention procedures are designed to be a proactive system where organisations seek to deter fraud and associated practices, through policy, procedure, risk assessment, due diligence and monitoring. Therefore, it is critical to have these systems in place before a fraud event occurs. 

Conducting an internal investigation

If a fraud occurs, one of the first actions an organisation should deploy is the conduct of an internal investigation relating to the fraud. The objectives of such an investigation will vary but generally the purpose of the investigation is to understand the fraudulent practices, who has been embroiled in those practices across the organisation and supply chain and how that has impacted the organisation.

Internal investigations into fraud and other financial crime risk can be complex and data heavy, and organisations will need to ensure that they have appropriate resource dedicated to that investigation, with experienced investigators leading their internal investigation, under clearly defined terms of reference, with appropriate data mining procedures to collate and interrogate complex datasets.

An internal investigation into fraud and other similar misconduct often has to navigate tricky waters. For example, it is not uncommon that a senior individual within the organisation may be embroiled in the fraud, and an organisation will need to consider the implications of how to treat this key investigation subject, which may lead to significant business disruption and / or questions about the impartiality of any investigation. Given the interrelationship with regulatory intervention, an organisation may also need to consider at all stages of the investigation, whether their findings would warrant a self-report to law enforcement or a regulatory agency.

The benefits of legal support

It is always best to seek specialist legal support when an organisation first discovers a fraud. There are a number of specific reasons for this:

1. Organisations often find that the resources and expertise required for the undertaking of such internal investigations cannot be met within their existing organisation.
2. It is possible that the investigation subjects of the fraud (i.e. those suspected of wrongdoing) hold senior or sensitive positions within the organisation, and therefore the organisation considers the investigation needs to be fully independent and supervised by external legal counsel.
3. Fraud and associated conduct are criminal offences. There may be law enforcement or specialist agency intervention (SFO, HMRC, NCA) upon discovery of the fraud, or shortly after. The instruction of external lawyers may attract legal professional privilege (LPP) to the investigation, and associated materials. This is particularly important given the prospect of law enforcement or specialist agency intervention who will seek disclosure of an organisation’s internal investigation.
4. During an internal investigation of this nature, a company may need to decide whether to self-report to law enforcement or specialist agencies. The decision to self-report or not, will need to be taken with expert legal input.