Catch Me If You Can

Kwan Will Sen and Nathalie Ker provide insights on what to do if you are a victim of internal fraud.

Commercial fraud has been on the rise in recent years. Take the 2012 case where the directors of a now de-listed company who were eventually sued for among others, breach of fiduciary duties and misappropriation of funds. Just last year, a former senior manager was charged with 115 counts of corruption charges involving more than RM100 million for issuing unauthorised purchase orders purportedly for the supply of plastic resin to his former employer, a Malaysian unit of an international group of companies.
In light of the current predicament, what are the steps that companies should take upon the discovery of fraud and how can monies be recovered? This article aims to provide a practical guide on some measures which may be adopted in the investigation of fraud and the eventual prosecution of fraudsters.
When fraudulent activity has first been discovered (e.g. large amounts of unexplained transactions found in accounting records), the first step to take is to preserve the evidence. Any documentary evidence of the fraudulent transactions, internal and external emails between employees and between employees and third parties in relation to the suspected fraud should be kept in their original form. This contemporaneous evidence will serve as the foundation upon which a legal case for fraud may be built.
In order to put the pieces of the puzzle together, companies would have to assemble a team comprising different types of experts for an effective investigation. Firstly, an experienced legal team to work closely with the company’s staff to obtain details of the fraud to construct a strong legal case. Secondly, a good forensics consultant who will be able to image computer hard disks and other devices to extract relevant emails and documents showing the mechanics of the fraud, even if the information may appear to have been deleted from the hard-disks. Thirdly, a private investigator to obtain details of the potential fraudsters and their assets.
Once fraud has been established, a company may recover damages due to breach of fiduciary duties by directors or employees. It is clear that directors owe fiduciary duties to the company under company law. However, to impose a fiduciary duty on other employees, one must tie the fraudulent actions of the employee to breaches of particular duties that the employee owes to the company, e.g. the duty to act in the best interests of the company, which is usually found in the company’s terms of employment or employees’ handbook. To tie the fraudsters to the damages claimed, the law will impose a constructive trust which imposes liability upon the fraudsters for the monies or assets wrongly siphoned from the company. 
Search and freezing orders
After the initial investigations have been completed and the main perpetrators have been identified, the company may apply for search and freezing orders to assist in the legal case. A search order, also known as an Anton Piller Order, is an order of court which allows the applicant to search any premises specified in the search order for documents or other items which would assist the applicant’s case. For a search order to be granted, there must be a strong prima facie case, serious damage to the applicant, and the defendants must have in their possession incriminating documents or items with a real possibility that they may destroy such material if forewarned (see Arthur Anderson Co v Interfood Sdn Bhd [2005] 2 CLJ 889).
On the other hand, a freezing order, also known as a Mareva Injunction in Malaysia, is an order of court which prevents the defendants from dissipating their assets. For the Court to grant a freezing order, the applicant must show that he has a good arguable case, the defendants have assets within the jurisdiction and there is a real risk of dissipation of such assets (see Aspatra Sdn Bhd & 21 Ors v Bank Bumiputra Malaysia Bhd & Anor [1988] 1 MLJ 97).
As soon as a freezing order is granted, it should be served on all banks in Malaysia to ensure that the bank accounts of the defendants will be frozen. Further, it is important to include a mandatory disclosure order to compel the defendants to disclose information regarding their assets by way of an affidavit. It is not a straightforward process to obtain such an order, taking into account that the order may be oppressive. Hence, the applicant must provide an undertaking of damages the defendant, in the event the plaintiff fails to prove his case. There is also a need to allow for reasonable monthly withdrawal from a defendant’s bank account for sustenance purposes, and if the defendant is a company, then sufficient monies for the running of the ordinary course of its business. 
Following the money – asset tracing
Asset tracing requires the combined efforts of the company, its legal team, forensic consultant and private investigator. The key wrongdoers may be identified from information and evidence gathered regarding the fraud perpetrated in the company. Next, the information obtained from discovery applications filed against the banks and third parties (elaborated on below) would be analysed by the forensics team to determine the flow of monies from the company out to the fraudsters, and from the fraudsters to third parties.
Monies in banks – you can bank on it
A fraudster may transfer proceeds of the fraud to his bank account. He thinks that he may able to hide behind the curtains of bank confidentiality. Not any more.
In the landmark English Court of Appeal decision of Bankers Trust Co v Shapira [1980] 3 All ER 353, a specific discovery mechanism against banks was introduced by the Courts. A ‘Bankers Trust’ application enables discovery against a bank for information against a fraudster – such as bank statements, fund transfer documents, cheque images and bank opening forms. Order 24 Rule 7A of the Rules of Court 2012 also provides for discovery against third parties (which includes banks). The application can extend to bank accounts of fraudsters and other recipients of fraud monies.
Such an application can be filed either pre-action, or post-filing of the suit, depending on the strategy of a plaintiff. The former may be advantageous to ascertain if there is a cause of action against a suspected fraudster. A classic example is if there is an exponential spike in the monies in one’s bank accounts, which is likely to be from fraudulent proceeds. As for the latter, this is useful to determine where the proceeds of the fraud went, with a view of eventual recovery if a plaintiff succeeds in his claim.
Monies with friends and family – circling the inner circle
More often than not, monies are remitted to friends and family of a fraudster. Fraudsters prefer to keep the monies away from themselves, but close enough to be tapped into when need be. Hence, friends and family.
A cause of action may be found against these friends and family. To this end, an application for discovery against such third parties (or non-parties), commonly known as the Norwich Pharmacal application, can be filed. Such an application was first considered in the landmark decision of Norwich Pharmacal Co & Ors v Commissioners of Customs and Excise [1973] 2 All ER 943. This has since been adopted by the Malaysian Courts (see First Malaysia Finance Bhd v Dato’ Mohd Fathi bin Haji Ahmad [1993] 3 CLJ 329). As in the case of a ‘Bankers Trust’ application, Order 24 Rule 7A of our Rules of Court 2012 can be resort to for discovery against such third parties.
Monies elsewhere - a breeze to freeze?
The fraudster may have monies in foreign bank accounts and other assets out of the country. This is where the worldwide freezing order comes in. Monies and other assets of a fraudster which are located abroad may be frozen if a plaintiff is able to show the likelihood of dissipation of such monies, pending the outcome of the plaintiff’s suit against the fraudster. The legal principles relating to such orders have been recognised by our Courts (see Metrowangsa Asset Management Sdn Bhd [2005] 1 MLJ 654).
Criminal investigation – upping the ante
Civil suits and remedies are not the only weapons in the arsenal of a victim of fraud. There is also a criminal element to fraud. A victim of fraud should lodge a police report and where appropriate, to the Malaysian Anti-Corruption Commission for corruption-like offences.
If prosecution is commenced against the alleged fraudster, the victim may also consider participating in the criminal proceedings by holding a watching brief. The victim should also cooperate with the authorities and offer all forms of assistance requested.
This article elucidates the various measures one can take after fraud has occurred. Catching a fraudster is no mean feat, and requires stamina, time, effort and resources to be expanded, over and above losses which have already been suffered. It is critical to maintain vigilance, and insofar as companies are concerned, putting in place an effective system of internal controls and proper compliance mechanisms may reduce the risk of fraud. After all, it is better not to start the chase, if you can.