When carrying out their day-to-day responsibilities, accountants must remain alert to the potential for wrongdoing against their clients - whether by employees, suppliers, or third parties. If you discover potentially fraudulent activity, your client’s approach at the outset can significantly impact the chances of a successful recovery.
There are several possible strategies to consider, but not all are appropriate or likely to succeed in every situation. It's therefore essential to seek legal counsel early to identify the best course of action and maximise the potential for recovering misappropriated funds.
In particular, contacting the suspected fraudster too early can risk tipping them off, allowing them time to move funds beyond reach. Where this risk exists, the alternative steps outlined below should be considered.
While it's good practice to involve the police and Action Fraud in cases of fraud - and the police and Crown Prosecution Service have powers to seize assets or seek civil recovery orders - they may not act immediately. Often, the most effective initial step is to pursue civil action, which can be undertaken in parallel with a criminal investigation.
As lawyers, we can advise on how best to protect and recover your client’s assets. In addition to traditional claims for compensation or restitution, we can obtain court orders for injunctive relief to prevent the dissipation of fraudulently obtained assets. We can also notify financial institutions to freeze accounts and prevent asset transfers.
A freezing order does exactly what it says: it prevents a fraudster from disposing of or dealing with their fraudulently gained assets. It's one of the most powerful tools available to recover fraudulently acquired funds.
It can apply to all assets held by a person a business in the UK, but can also operate worldwide. Alternatively, it may be limited to specific assets. Once granted, notice must be given to all banks holding funds in the name of the suspected fraudster, so they can take action to prevent removal of those funds.
Freezing injunctions are only available where there is a risk of dissipation, but in cases of fraud, courts generally presume this risk exists. Freezing orders must be applied for on an 'ex-parte' basis - that is, without notifying the defendant. If a fraudster is tipped off beforehand, it can hinder the application because it reverses the starting assumption that where fraud has occurred there is a real risk of dissipation. It's therefore critical to seek legal advice before taking any action that might alert the wrongdoer.
Sometimes, a full freezing order may not be proportionate or cost-effective. Even in such cases, it's still important to notify any banks involved.
Once a bank is made aware that funds in an account may have been obtained fraudulently, it's under a duty to prevent the removal of those funds. Failure to do so can expose the bank to liability from the victim for not safeguarding the assets.
A further point to note: since 7 October 2024, a mandatory reimbursement scheme protects individuals, micro-enterprises, and charities from authorised push payment (APP) fraud. Payment service providers are now required to reimburse victims up to £85,000 - unless the customer has been grossly negligent. There are strict deadlines for reporting such fraud, so timely action is essential.
Your client may have insurance cover that responds to fraud, such as cyber insurance, which can cover both the underlying financial loss and legal fees. These polices have strict notification requirements and could be invalidated through delays or improper handling – such as tipping off the fraudster. It's crucial to check the terms of any relevant policy early and notify insurers promptly.
Sometimes the identity of the fraudster is unknown. In such cases, a Norwich Pharmacal order may be useful. This type of order compels third parties - typically banks or service providers - to disclose information that can help identify wrongdoers and trace assets. These orders are particularly effective where financial institutions are reluctant to share information due to data protection or confidentiality obligations.
In cases of suspected fraud, early legal advice is essential to determine the best course of action and maximise your client’s chances of recovery. If you become aware of potential fraud, our commercial disputes team would be happy to discuss next steps.
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