Dispute Resolution |

Kateryna GUPALO ,
Partner, Arzinger

Partner, Arzinger

Fraud of influence

Fraud is an increasing concern of the business environment. Reputable companies with leading positions on the market are experiencing attacks on their business and incurring losses. In these circumstances, the competitiveness and the investment prospects of certain branches of the national economy and the state as a whole, deteriorate. Recently, the international companies, running businesses in Ukraine, have also have fallen under the spotlight due to fraud.

What exactly in the activities of companies attracts fraud and, therefore, increases the risks of such attacks? We identified a number of factors which are preconditions to criminal actions. They include the following:

— problems in company management. Inefficient control over the company's management on the part of its owners results in situations where large powers concentrated in the hands of management cannot be balanced by means of control on the part of the owners;

— reinforcement of the companies' market share. Increasing competition on the market makes unfair players put their strongest competitors out of business or they take over their business;

— improper check of counterparties (it is necessary not only to check-in but also carry out regular monitoring of approved suppliers), conflicts with former counterparties;

— transactions with associated persons. Such relations can be used by management to disinvest profits and assets in their own interests;

— frequent change of counterparties, inability to work without intermediaries;

— lack of internal and external financial audit practice;

— use of specific types of transactions and agreements. They include transactions in the form of investment, leasing, agency transactions, gratuitous services, outsourcing, etc.

Talking of typical fraudulent schemes in business, we cannot but illustrate them with several recent examples from our practice. For example, the "Reliable Supplier" scheme. Its peculiarity is that the target of fraudsters is the relationship  the company has with its approved supplier. Fraud bets on a high level of trust.

In practice, it is not at all rare when a fraudulent third party intervenes between the company and its supplier: it introduces itself as a supplier to the buyer and, vice versa, it contacts a supplier on behalf of the buyer. In this case, fraudsters possess enough information on their "victims" (including internal ones) so that the victims haven’t got a clue that a third party is interfering with their communication.

The supply of goods at a competitive price is a logical extension of such communication: fraudsters offer more attractive prices than those on the market for each of the parties to the transaction. As a result, the parties decide in favor of supply. When documenting supply, the buyer receives a letter on change of banking details. And once the buyer places money to the account offered by the fraudsters, the situation reaches its culmination: the buyer demands goods and the real supplier – money; soon, they both begin to understand that they have become victims of virtuoso fraudsters. The most vulnerable in this situation are trading companies with large turnovers for which the speed of decision-making is the key to success.

Another fraudulent scheme is "Advertising Services." The specific nature of these services, as opposed to goods, is that you cannot feel them in your hands and they are consumed only at the moment of rendering. Therefore, the creative brains of fraudsters produce various schemes for dishonest appropriation of money in this area (whether it is advertising, marketing or advisory services): from overpricing of the services ordered to the forgery of documents on rendering of services for large amounts, while the company-victim never ordered such services.

What should the companies do in such a situation? As a rule, the company is interested not only in how to find and punish the fraudsters (everyone understands that this task is akin to something from science fiction), but how to return lost money. As this takes place, everyone recognizes that once the monetary funds "leave" the company’s bank account, the fraudsters immediately direct them to a number of firms, which, eventually, cash them. After that, you can cry over spilled milk but, as a rule, there is nothing to be returned. And even a judicial award on the recovery of funds can give only moral satisfaction.

How much time does a company have to catch and stop the flow of funds on their way to being transformed into cash? The answer is 24 hours! Active and correct actions during this period of time are the guarantee of success for all subsequent measures to return funds. A delayed or not entirely correct response lowers the probability of success proportionally to the time spent.

As a rule, one of the first actions taken by victim companies is to file an application on fraudulence to law-enforcement agencies. At the same time, all lawyers have first-hand knowledge that despite the imperative requirements of the Criminal Procedure Code of Ukraine, in practice, criminal proceedings are not always registered within 24 hours. And even after entering the relevant information in the Unified Register of Pre-trial Investigations, it is necessary to apply to a prosecutor/investigator to initiate the issue of seizure of funds in a court. Then, the investigating judge considers the petition. As a result, precious time flows away like water through your fingers. In this case, injunctive remedies (petition on the seizure of monetary funds) will not become a panacea in the commercial process: it is almost impossible to implement them within 24 hours even with the most loyal approach of the judge.

In our practice, we apply other (only lawful!) methods to halt the flow of funds. And only after that do we take active actions in the field of criminal proceedings.

"Forewarned is forearmed". This common truth always remains relevant and significant: it is of fundamental importance for the companies to focus on preventative methods to combat fraudulence, illegal takeover and other types of violations, including corruptive ones.

It is for these purposes that we provide three key recommendations. The first one is to carry out a comprehensive audit of the company's existing practices related to the selection of counterparties, conclusion of agreements/adoption of decisions on the purchase and sale of goods/services, verification of the cost of goods/services. The second one is to check the existence of corporate and labor restrictions regarding execution of documents, decision-making within the company, payments to counterparties. The third is to verify the system of document flow within the company.

Based on the results of this analysis, it is desirable to develop and implement an efficient compliance program which will contain detailed provisions regarding the following:

— the procedure for systematic and comprehensive inspections of counterparties with which the company works or plans to cooperate;

— mechanisms of internal control and detection of risk zones, including arrangement of internal investigations;

— efficient management of identified risks;

— degrees of responsibility in case of violations and ways to respond;

— preparation and signing of internal and external documentation;

— selecting the person who will be responsible for the functioning of the compliance system;

— raising staff awareness, including on the basic principles of compliance (through training and tests).

In doing so, the company will ensure delineation of the areas of responsibility and will be able to form a mechanism to manage risks in each area of the company's activities. Internal compliance helps to make current business plans secure and manageable, to adapt them to the continually changing environment and ensuring the peace and calm of the business owners.