Fighting Fraud and Recovering Assets: Civil Versus Criminal Remedies

By Richard Clayman and Holly Buick

Save for certain regulated industries, there is no legal obligation to report an incident of fraud to the police. However, in order to maximise chances of recovering assets, victims of fraud must act quickly once they become aware of their loss, even before knowing all the relevant facts. Here are various considerations that a victim must contemplate when responding to fraud.

 

Incidents of serious and sophisticated fraud continue to rise, and economic crime is now estimated to cost the UK economy £200 billion a year. However, it is not only individuals who are at risk. Last year’s ransomware attack that crippled the NHS in England is now understood to have cost the state £92 million.1 Price Waterhouse Coopers’ 2018 Global Economic Crime and Fraud Survey revealed a litany of alarming statistics,2 half of the 7,200 organisations surveyed had been the victim of fraud or economic crime in the past two years and of these incidents, approximately 10% cost the victim more than $5 million. In the UK, fraud is increasingly a cross-border phenomenon, with around half of all fraud and cybercrime originating from outside the jurisdiction.3 Save for certain regulated industries, there is no legal obligation to report an incident of fraud to the police. However, in order to maximise chances of recovering assets, victims of fraud must act quickly once they become aware of their loss, even before knowing all the relevant facts. This will include deciding whether to make a criminal complaint or pursue civil proceedings against the perpetrator. In the commercial sphere, a victim’s primary focus will often be to recover misappropriated assets; however, many businesses and organisations also want to see the perpetrator face criminal justice, particularly when the fraud has been carried out by somebody within their organisation.

Ultimately, victims of fraud need to devise smart strategies that best serve their priorities, and are achievable with the time and resources available. The following comparisons of English civil and criminal remedies highlight the various considerations that a victim must contemplate when responding to fraud.  

 

Speed

A key advantage of civil proceedings is that the victim has a much higher degree of control and can move quickly to instruct lawyers and investigators, locate assets, formulate and issue proceedings, often within a matter of days. The Courts of England and Wales are a world centre for commercial fraud litigation due to the significant legal experience in this field, and the availability of powerful interim remedies which can tackle the sophisticated modus operandi of modern fraudsters.

In this climate, victims of fraud who want to see the perpetrator face criminal charges are increasingly turning to private prosecutions as an avenue for redress where the authorities do not have the resources or will to prosecute.

By contrast, a criminal prosecution will only be an option if an enforcement agency is prepared to investigate the fraud. Only the most serious cases will fall within the remit of the Serious Fraud Office (SFO), the UK’s specialist authority which deals with the most complex and high value economic crime. SFO investigations tend to involve sums in tens or hundreds of millions, and concern major domestic and international businesses, such as recent investigations concerning Tesco, Rolls-Royce and Barclays. It can take years for an SFO investigation to result in charges, let alone a successful prosecution. 

Smaller scale incidents are usually reported to the police via Action Fraud. The service receives some 40,000 reports per month, however a recent report by the consumer group Which? indicated that more than 96% of cases reported via this channel are closed without a successful outcome.4 Where an investigation is opened, the victim has no control over the pace at which matters are progressed, and again it may be months or years before a perpetrator is charged with the fraud.

In this climate, victims of fraud who want to see the perpetrator face criminal charges are increasingly turning to private prosecutions as an avenue for redress where the authorities do not have the resources or will to prosecute. A private prosecution allows the victim to conduct a criminal case against the fraudster using his own resources. Private prosecutions are not cheap, however, often costing as much as (if not more than) civil proceedings.

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Locating and Securing Assets

In civil proceedings, a range of tools are available to ensure that assets are located and recovered before they can be concealed, removed from the jurisdiction, or otherwise placed out of the reach of the victim and the courts.

The freezing injunction is the “nuclear weapon” of civil justice. It allows a victim of fraud to obtain an order preventing the defendant from dealing with their assets, including spending money in specified bank accounts, until judgement can be enforced against them. The penalties for breaching such an order can include committal to prison for up to 2 years. The application will usually be made without notice, meaning that the fraudster will not be made aware of the proceedings until their assets have been frozen. Further, such orders can be made against third parties, for example the spouse of, or a company owned by, the perpetrator, against whom no direct allegation of fraud is made.

The English Courts are also prepared to make such orders on a worldwide basis, meaning that the individual is prohibited from dealing with their assets up to a certain value, no matter where in the world those assets are located. Similarly, the English Courts are willing to grant search orders against individuals not party to the proceedings,5 to grant orders allowing claimants to search for and remove property such as electronic devices, and to allow software to be run on those devices to “crack” password-protected documents so that they can be reviewed, all on a without notice basis.

Criminal prosecutors have similar powers to preserve assets at an early stage, through applying for without notice restraint or account freezing orders. However, prosecuting authorities will be reluctant to apply for restraint without strong evidence that a fraud has taken place, because of the risk of being ordered to pay the defendant’s costs if the investigation does not proceed. While confiscation is available to victims pursuing a private prosecution at the end of successful proceedings, restraint orders at the outset are not, unless the state prosecuting authorities are prepared to seek such an order on the victim’s behalf.

 

The Route to Trial

Claimants in civil proceedings have the maximum degree of control in terms of selecting their legal representatives, deciding which defendants to claim against, which to settle with and on what terms. In some cases, it may be possible to bring civil proceedings to an end without a trial, through settlement or summary judgment.

In criminal proceedings, the victim of the fraud is simply a witness to events, and as such has no control over the proceedings. This is also true to some extent where the victim pursues a private prosecution. The victim’s lawyers must be very careful in conducting the investigation and prosecution so as not to taint the evidence of their witnesses, including the victim, by allowing them to confer or influence each other. In contrast, the victim claimant in civil proceedings is entitled to know what others have said in their evidence, and indeed to direct the selection of witnesses to call in support of its claim.

Finally, criminal prosecutors must convince a jury “beyond reasonable doubt” in order to secure a conviction. In civil cases, the standard of proof required to secure judgment is notionally lower: the “balance of probabilities” standard. However, the seriousness of an allegation of fraud means that civil judges will expect the evidence of fraud to be cogent and compelling.

 

Recovery of Assets

In criminal proceedings, confiscation orders aim to remove the benefit of the crime by ordering the defendant to pay back the proceeds of the crime, or face imprisonment. In terms of redress for the victim, the prosecution may also apply for compensation to be paid. However, a compensation order will only cover loss caused by offences actually charged in the proceedings. Further, confiscation can be a lengthy process which often fails to result in full recovery.

At the conclusion of a successful civil claim, damages may be awarded with the aim of putting the claimant in the position they would have been in if no wrongdoing had taken place. The courts can also trace misappropriated sums as they are transferred through bank accounts around the world or laundered, for example, through the purchase of property. Claimants can assert proprietary claims over property which represents the proceeds of fraud, even where it has ended up in the hands of third parties. A civil judgment is also often easier to enforce against a defendant’s assets in foreign jurisdictions.

 

Cost of Proceedings

Where the criminal authorities are prepared to investigate and prosecute, some cost is likely to be incurred by the victim in gathering and providing evidence, particularly in the case of a corporate which has been the victim of a large-scale fraud.

Often, the greatest risk associated with bringing civil proceedings is the cost. Successful litigants can normally recover a large proportion of their costs from the other side, although this is dependent on the opponent having assets against which to enforce the judgment. If the victim were to lose the claim, they would be liable to pay the defendant’s legal costs, which may be equal to their own. Claimants can however mitigate costs risk through conditional fee agreements, after the event insurance, or as is increasingly common, third party funding agreements.

Where the criminal authorities are prepared to investigate and prosecute, some cost is likely to be incurred by the victim in gathering and providing evidence, particularly in the case of a corporate which has been the victim of a large-scale fraud. However, these costs will be far lower than in civil proceedings.

Private prosecutors may apply to recover their reasonably incurred costs either from public funds or from the defendant, but also risk having to pay the defendant’s costs, for example if the matter does not proceed to trial because the prosecution offers no evidence, or the proceedings are conducted improperly.

 

Running Parallel Civil and Criminal Proceedings

There is nothing in principle to prevent both criminal and civil proceedings being commenced, and in some cases, this will represent the most effective strategy. However, there are a number of risks inherent to running parallel proceedings which include:

• Increasing the overall length of time a victim is involved in litigation. Civil proceedings will not automatically be delayed until the outcome of a criminal case, but each case will turn on its facts. In some cases, the defendant might try to exploit the fact of parallel proceedings to justify failure to comply with Court orders.

• Evidence gathered through one process cannot automatically be used in the other. For example, evidence obtained through civil proceedings cannot be handed to the police.

• It is not permissible to rely on the threat of criminal proceedings as leverage in settlement negotiations. To do so may amount to the criminal offence of blackmail.

There are also particular risks involved with running a private prosecution alongside civil proceeding:

• Communications between claimants and their lawyers may not be covered by legal professional privilege.

• If the criminal courts find that the prosecution has been brought for the improper motive of forcing settlement in civil proceedings, the claim may be taken over by the authorities and discontinued or stayed as an abuse of process, with cost implications.

 

Conclusion

More often than not, the strategy pursued by a victim of fraud will reflect the financial resources they have available to them. A government entity or large corporate may be well placed to pursue an aggressive civil litigation strategy, armed with investigators’ reports and aided by freezing and search orders, with a view to backing the perpetrator into a legal corner from the outset, and winning a swift and favourable settlement or summary judgment in return. However, for smaller businesses and individuals, there may be little option but to rely on the police to investigate and bring the perpetrator to justice.

Naturally, when confronted with this picture, individuals, businesses and governments would be wise to heed the old adage “prevention is better than cure”. By reviewing their fraud prevention measures, identifying weaknesses and building defences, they stand the best chance of avoiding the far greater cost of remedying incidents of fraud in the future.

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About the Authors

Richard Clayman is an Associate at Peters & Peters Solicitors in London. He is a highly experienced lawyer, specialising in high-value and complex, multi-jurisdictional claims and obtaining asset recovery. During his career Richard has been involved in proceedings before the Supreme Court, Privy Council, Court of Appeal and European General Court.

Holly Buick is a Trainee Solicitor at Peters & Peters Solicitors. Prior to joining the firm, Holly spent 4 years in Buenos Aires where she worked at Argentina’s leading human rights organisation on litigation at the Inter-American Court of Human Rights.

 

References

1. http://www.nationalhealthexecutive.com/Robot-News / wannacry – cyber -attack-cost-the-nhs-92m-after-19000-appointments-were-cancelled

2. https://www.pwc.com/gx/en / forensics / global – economic – crime – and – fraud – survey – 2018.pdf

3. https://www.actionfraud.police.uk/data#dataexplained

4. https://www.which.co.uk/news/2018/09/exclusive – more – than – 96 – of-reported-fraud-cases-go-unsolved/

5. Abela and others v Baadarani (Third Party: Fakih) [2017] EWHC 269 (Ch)