A new 'Joint Fraud Taskforce' has been launched by Home Secretary Theresa May and Bank of England Governor Mark Carney. It encompasses the police, the Bank of England and British banks.

Compliance Matters spoke to Stephen Ross, the head of civil fraud at the international law firm of Withers. He was sceptical about the efficacy of the new initiative: "It doesn't get to the heart of the problem, which is preventing fraud and prosecuting the fraudsters. We find that the police have too much on their plate because these frauds are rife. There probably ought to be an injection of government money and it should go into the handling of cases. As it is, the effect of this exercise will probably be limited to awareness-raising and more statistics about fraud for the government to ponder."

CEO fraud on the rise

When asked what frauds were hitting private banks and family offices these days, Ross said: "The big one we're seeing at the moment is CEO fraud, which is a variation of bank mandate fraud. Let's imagine that I am your CEO and you are in charge of the finance function and can make payments on behalf of the company. You receive an email from me saying Chris, I'm terribly sorry, I know it's the end of the day and you're just about to leave, but I desperately need you to make this payment. It's commercially sensitive, so very few people know about it. I'm sorry I didn't keep you in the loop and I'm sorry that I'm not going through all the right channels but I need this to happen now.'

"So you make the payment. The only trouble is that the email wasn't from your CEO – it was from a phisherman sitting in Indonesia. He's somehow jumped into your system and has been monitoring company activity for ages. He's set up an account at the relevant bank, indeed at the relevant branch, in a name similar to the name of someone the company pays quite often. It's ultimately about hacking.

Family offices a target

"What happens in bank mandate fraud is that someone hacks into a company, or its client-firm or with a contracting party. A big payment is coming through. The hacker gets a stooge to set up a similar account in the name of the receiver at the receiving branch of the bank. Then he throws an email in. It's the right amount, from the right set of circumstances in which people at the company might generate such an email. It could even be part of an email chain. As soon as the amount is paid, it goes all around the world and vanishes. These attempts happen all the time. Financial firms do have systems that can spot this, but fraudsters are focusing particularly on HNW investors and family offices because they think their systems are weak and family offices employ fewer people than other financial businesses. They aren't necessarily right to do so, but this is where their efforts are going."

Roads not travelled

Ross said that when HNWs or banks go to the police they find that they lack the resources to deal with the frauds, which are increasing in number by about 8-9% per annum. Broadly speaking, he said, the police do not bother to touch a case that involves less than £1 million. This is not a hard-and-fast rule; if a victim's lawyer can present them with a smaller case that he has reseached well with excellent prospects of victory in court, they are more amenable.

The powers-that-be have suggested that there is going to be a national rolling-out of staff training, but Ross was sceptical about its worth as banks have been training their staff to deal with all manner of fraud for years. When asked whether the Government's new regime is to include 'gateways,' he said that it would not. Gateways are legal pathways through which money-laundering reporting officers, compliance officers, police people, lawyers and others can pass information or opinions that would otherwise be illegal because it breaches data protection laws or libel laws. A database that all banks share that contains all their MLROs' unsubstantiated suspicions (and law enforcers' unsubstatiated suspicions) about suspects who have been convicted of no crimes would be such a gateway if special legislation were to make it so; no such gateway, according to Ross, exists at the moment or anywhere in the new package.

Last year, the Office for National Statistics estimated that there were 5.1 million frauds in the UK. The City of London’s size and openness to global trade exposes it to such crime to an unusual degree. Theresa May, not content with roping the Bank of England into the new project, has also commandeered support from Ian Dyson, the new Commissioner of the City of London Police which operates the National Fraud Intelligence Bureau, and Lynne Owens, the new Director General of the National Crime Agency, Britain's answer to the Federal Bureau of Investigation.

The nature of civil fraud

Ross is Withers' head of civil fraud, the common-law civil alternative to criminal fraud. There is no actionable civil definition of fraud and the reason he gave for this was that any such definition would immediately inspire fraudsters to tailor their next efforts in such a way that it did not apply. There are three main causes of action for civil fraud: (i) conspiracy to defraud; (ii) deceit; and, on a more minor note (iii) breach of contract. Others exist but are less important. He said that high-net-worth clients could generally decide either to push for a criminal prosecution or a civil claim, but rarely both, making it a tactical decision for each client.

Law firms such as Withers do not have the asset recovery market to themselves. There are some companies, such as Interclaim in Dublin and Bishops in London, that buy the claim to some fraudulently sequestered money from the stricken financial institution at something like one-fifth of total value and then pursue the money themselves in many jurisdictions simultaneously. In effect, these firms 'become' the victim voluntarily. The only firm that does this among the big litigation funders in the UK is Burford Capital, which acquired an asset recovery firm called Focus in January last year.

There is an international side to the vast majority of financial fraud cases and at any one time there are many overseas parties who want to have their cases heard in the UK, which is famous for its rule of law. Ross, for example, has just finished dealing with an £8 billion Saudi fraud that involved the Cayman Islands and the British Virgin Islands. Some countries are good at responding to requests for freezing orders (previously known as Mareva injunctions) while others are terrible. When asked about Dubai, Ross said: “The Dubai International Finance Centre has its own court which dispenses English common law, so that's useful. Dubai is also trying to appear as a well-regulated place where the rule of law works, so its courts are getting better at co-operation than they were. Dubai is developing very quickly. Plenty of English cases go out there. It's a work in progress – watch this space.”

The Italian Torpedo

If both parties in a legal dispute agree on the UK as their forum conveniens or venue for the case, it will be held there. However, many battles occur over which country's courts should hear a case, with the ultimate decision being made by a judge, sometimes in the country where the most harm was done. There is often a race to take the case to court. It is also possible for uncrupulous fraudsters to use a wrangle over the right jurisdiction to delay a case almost indefinitely by means of the famous 'Italian Torpedo.' Ross explained.

“Italy has an incredibly slow court system. It takes years to go to trial and can take decades for an appeal to go through. If you definitely don't want to be sued in the English courts, you might think of commencing proceedings in Italy. If you are the one who is being sued, or who is going to be sued, you can still kick things off by going to an Italian court and asking for a negative declaratory declaration. You say 'someone's accusing me of fraud and I want the court to declare that I'm not in breach.' This latest government initiative won't do anything to change that, either. It needs teeth, with more government money directed to cases.”