Welcome to this lecture from the Insurance Institute of LondonIn the EU fraud and abuse costs businesses more than EUR 120 billion and the average business loses about 6% of their

Welcome to this lecture from the Insurance Institute of London

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The confidence to proceed.

Cozen O’Connor LLP

9th Floor, Fountain House

130 Fenchurch Street

London

EC3M 5DJ

Fidelity Subrogation Seminar

Recovering monies from fraudsters for

insurers

© 2011 Cozen O’Connor. All Rights Reserved.

In the EU fraud and abuse costs businesses more than EUR 120 billion and the average business loses about 6% of their total annual revenues to employee fraud.

On average, more than EUR 7 per day per employee is lost. Thus, for an organization with 40 employees, with 250 workdays in a year, this could amount to as much as EUR 70,000 off its bottom line.

One in four employees committing fraud against their employer has been with the company for more than 10 years

Many frauds go on for years, and - when discovered - the ultimate impact can be enormous.

How Common is Fraud?

© 2011 Cozen O’Connor. All Rights Reserved. 4

Fraud Investigations – Making Sure Crime Doesn’t Pay!


What is Fidelity Insurance?

Fidelity insurance protects organisations from loss of money, securities, or inventory resulting from crime.

Common claims allege employee dishonesty, embezzlement, forgery, robbery, safe burglary, computer fraud, wire transfer fraud, counterfeiting, and other criminal acts.

These schemes involve every possible angle, taking advantage of any potential weakness in the assured’s financial controls.

Fraud consists of fictitious employees, dummy accounts payable, false invoicing, to outright theft of money, securities and property.


The Fraud Triangle


Policy Issues in Fraud Claims

Has the insured notified the loss quickly, within the policy conditions?

Is the insured responding effectively and quickly?

Are the insured’s lawyers providing information?

Is the insured prejudicing insurers’ potential subrogation rights?

Is the insured keeping control of costs?

Are the police aware that insurers are involved?

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Subrogation in a Fraud Context

Subrogated recoveries, especially in Fraud claims, …

Are not a form of adjustment

Require management and preparation

Should be a partnership between the insured and insurer

Can make a difference to the balance sheet

Can be tricky

Cost v benefit, throwing good money after bad


The Advantages of Subrogation in Fraud

Claims

Subrogation in Fraud Claims does not face the common complications often associated with other recoveries.

Thus:

There is no ongoing commercial relationship.

There is no liability insurer for the fraudster.

Subrogation is not excluded by the terms of the fraudsters engagement (no waiver of subrogation clause).

The fraudster has few, if any, defences available.

And…

Hopefully, they have assets.


Investigating the Loss 1

Most fraud policies will permit the Insured to incur expenses (sometimes up to $1,000,000) for investigative and legal expenses.

There are two (main) issues here:

How to control these costs;

Playcorp

Logisticscorp (controlled)

How to ensure the Insured does not enter

into any agreement with the fraudster

which will constrain Insurer’s rights.

Oilcorp


Investigating the Loss 2

The Team: Before investigations begin ideally a team needs to be assembled. The team should include:

A senior management representative; Legal counsel; An internal accountant or internal auditor. It may also include an external auditor, a certified fraud examiner, or a private investigator.

Ensure, when selecting the team, that no one with the potential to have been involved in the fraud scheme is included.


Establishing the Facts

The team must establish the facts of the theft so that the loss can be reconstructed and documented

Typical tasks will include:

Identifying and copying supporting documents;

Preparing analytical spreadsheets, timelines, and flowcharts;

Obtaining statements, if possible, from the persons involved in the theft and others with relevant knowledge; and

Preparing a written narrative of how the

theft was conducted and discovered.


Identifying the Target

Potential subrogation targets

The fraudster (and his/her family (or mistress(es)) and friends);

Complicit personnel at the insured;

Third-party professionals (accountants/auditors or attorneys);


Acting Fast – Timing Issues

A failure to do so can:

Increase the likelihood of dissipation of assets;

A settlement by the Insured with the fraudster;

Impair subrogation by limitation; (Subrogation rights are the substantive claims of the insured)

Or other events that destroy meaningful efforts to obtain a recovery. Note: There are ways to protect insurer’s rights.


Examples of the Problems

insured’s solicitor entered into settlement with defalcator which vitiated insurers’ recovery action against him.

insured settled with scrap metal company and relevant employee and made redundant and failed to pursue individuals.

insured’s solicitors invoiced £500k in 3 months where police already obtained a Restraint Order against defalcator and third parties for £14k.

delay in confirming coverage permitted defalcators to draw £500 per week each for over 6 months.

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The Routes to Recovery


Criminal Route - v - Civil Route

Various enforcement authorities

In the UK these include:-

Economic Crime Units (ECUs)

Serious Organised Crime Agency (SOCA)

Serious Fraud Office (SFO)

Lawyers

Who pursues?



Starts before there is an arrest

Restraint Orders

Identifying the assets:-

Investigative Orders

Document Production Orders

Customer Information Orders

Account Monitoring Orders

Seize and Search Warrants

Starts as soon as the fraud is discovered

Freezing Orders

Investigative Orders (Part 8)

Disclosure Orders e.g. on banks

Search Orders

Finding the Assets



Restraining Orders

Made as the Court sees fit

Subject to POCA, section 40 conditions:

Any one of five conditions must be satisfied eg investigation started; defalcator benefited

Freezing Orders

Three conditions:

An arguable case

‘Real prospect’ the assets are located in the jurisdiction

Serious risk of dissipation of assets

Interim Injunctions


Hybrid Route

A Restraint Order is made

Conviction and imprisonment

MG19 Compensation Form

Intervention in confiscation



Confiscation Hearing

Court Appointed Receiver

Uses powers under Section 51, POCA

Particulars of Claim to Judgment

If debt unsatisfied:-

Statutory Demand

Petition for Bankruptcy

Trustee in Bankruptcy appointed

Data Protection not an issue

Collecting the Assets



Act quickly!

Priority of competing creditors – usually insurers

Assistance by the Defendant, if so willing

The creation of a European Account Preservation Order (‘EAPO’)

Draft EU Regulation issued on 25 July 2011

EAPO will allow creditor to freeze funds within any EU bank account

No need to depend on national law for their effect

Common Considerations


Mandate Fraud

Requests may be received by phone, letter or email to update account details (company details, including signatures on published accounts, can be copied from the internet).

Fraudsters rely on the Payee (Company) name not being checked by the Banks.

Why does it work so easily?

(1) In most cases, only the Sort Code and Account Number are checked by the receiving bank;

(2) The Banks do not seem to question large sums of money

.

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Preventing It?

Easiest way is to exclude this form of fraud.

Banks could do more, but undoubtedly will not unless Codes of Conduct change.

So falls upon an Insured to ensured procedures are in place

For example

Insured should not automatically use the information provided on letters, faxes and email.

Check against original contract documentation, payment records and other information.

Always contact the accounts department direct by phone and speak to someone known in the organisation (not the name on the letter).

Get a confirmatory email from the (known) email address

Ensure that 2 persons sign off any amendments to bank account details

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Documents

Welcome to this lecture from the Insurance Institute of LondonIn the EU fraud and abuse costs businesses more than EUR 120 billion and the average business loses about 6% of their