What to do if...you suspect your charity is being defrauded by someone you have a commercial relationship with

Unfortunately, we cannot always rely on others. This is even more so in the current climate, where the temptation to “skim a bit off the top” is greater. Fraud by someone you have a business relationship with, be it an employee, agent, consultant, supplier or board member, is something all charities should be prepared for and have an action plan in place to ensure their interests are protected and prospects of recovery are high.

People who you thought you could trust could be taking secret commissions, submitting false accounting to claim more money than one is entitled to, taking advantage of holes in your policies and processes to steal funds, or you may have fallen victim to a cyber crime. So what should you do when faced with such a situation?

First and most importantly, avoid tipping the potential fraudster off. If they get wind that you may be aware of their deceit, they may take steps to delete evidence and move their assets out of reach to mean there are no prospects of recovery against them. Carry on as normal (as much as possible) and do not ask them to explain themselves, until you have had time to complete the following steps. 

Notify your insurers as soon as possible, to ensure cover for any fraud claim you may bring. If you had made payments to the fraudster on false pretences, it sometimes can be worth contacting your bank to see if they can freeze or reverse the payment. 

You also need to decide if and when you need to report matters to the Charity Commission or equivalent as a serious incident, or any other bodies. In tandem, you want to start considering how the fraud happened and whether changes need to made to processes to stop a similar situation happening again. 

Gather and preserve evidence so you can analyse the situation and decide on next steps. Search for emails, texts, invoices on your own systems which have given you an indication of the dodgy dealing. Be careful not to alter meta data of evidence in doing so, and if possible take a backup / copy of your systems. Seek information from third parties if you can do so without tipping the fraudster off – if they have a relationship with the fraudster, avoid this until you know more. Keep the circle of people who know about this at your charity small, to avoid tipping off. 

Next, analyse the situation. Is there evidence of some sort of unusual dealings here? There are a number of ways to pursue a party for fraud, such as if they are conspiring with others to disadvantage you, if they are taking secret commission, if they are submitting false accounting records or invoices, or just plain old theft. If there is enough to cause you to raise an eyebrow, then this is when you might want to get lawyers involved, to analyse if there is a case here, and advise on what the next steps might be. 

Next, do some background research on the fraudster. Do they have assets in the UK – a search on companies house can show you recent accounts if a company or potentially shareholdings if an individual. The Land Registry can also show if they own property. If they have no assets at all, it may not be worth pursuing them unless you can show they have assets overseas, or if they still have your property. It may be worth instructing a private investigator. 

Then it is time to consider the strategy for recovering proceeds taken by the fraudster. Charity trustees have duties to safeguard the assets of their charities, so considering and if appropriate pursuing recovery of stolen funds/assets is crucial. 

Consider whether you want to go to the police (such as action fraud), and/or handle matters in the civil system. Sometimes there's an obligation to report matters to the police, but not always. The criminal justice system can be useful, due to the investigative powers the police have. It is also free. However by going to the police, you lose control of what happens. The pace can be slow, and the police do not always have the resources or the appetite to pursue fraudsters, especially if there is an overseas element or the quantum is low. Under the criminal system, it's not likely you will receive recovery any time soon, if at all. There's also a higher standard of proof than in civil cases, where the fraud has to be proved beyond reasonable doubt, whereas in civil proceedings, it is on the balance of probabilities. Ultimately, if you want to get your money back, you should bring civil proceedings. 

It is sometime possible, and can be useful, to pursue criminal and civil proceedings in tandem, but the criminal system may require the civil proceedings to be put on hold. 

Then choose from the vast menu of tools you want to use to go after your fraudster. Here are some of the main ones available in the English courts:

1. Orders against third parties (known as Norwich Pharmacal Orders, Bankers Trust Orders and Chabra Orders) to provide you with information to allow you to gather further evidence and identify further wrongdoers. For example, ordering banks to give you bank account records of the fraudster so you can trace where stolen funds have gone.
2. A freezing injunction, where you go to the court in secret, convince the court that there is a good arguable case of the fraud, and get an order that the fraudster’s assets up to the value of the loss are frozen (either in the UK or worldwide) until the case is resolved.
3. A disclosure order, where the fraudster has to provide details of all of their assets, so you can monitor and control them and take action to freeze them if needed. The fraudster will have to provide details of the sums in their bank accounts, and of their properties, shareholdings, and other assets.
4. A proprietary injunction, where if the fraudster has your property (which can be cash), or even if they have turned your property into other assets, that property or other assets are frozen, and they have to tell you what they have done with your property.
5. A search order, where you can search the fraudster’s premises/computers etc for evidence of the wrongdoing.

These tools are extremely powerful in a fraud case. They can bring the fraudster to heel, meaning it is then much easier to negotiate a result quickly (as opposed to waiting for a trial). However, they require a degree of uploading – you need to do a lot of work to ensure you have enough evidence of the fraud and therefore incur a high cost in order to get them. It is a question in each case whether it is worth it. 

Alternatively, sometimes it might be appropriate to seek to engage with the fraudster at an early stage, for example if the fraudster already knows of your concerns (meaning they might have dissipated their assets already, so a court would not grant a freezing injunction), or if the fraudster has other interests to protect, meaning they may be willing to pay you back or return your property. 

In such cases, it is important to act strategically and efficiently. Victims should obtain advice from experienced lawyers on what to do and how to do it in such a situation, as soon as possible. Fraud in the charity sector is unfortunately rife, and certain steps should be taken. The government has published some helpful advice which can help charities.  

If you would like to find out more about this topic or you if need legal advice, please contact Sarah Jacobs or any of our fraud lawyers.