Financial Fraud Detection
Our commercial litigation team is a group of lawyers who are experienced in handling situations where companies or shareholders discover fraud has occurred. Maybe money or opportunities have been taken. We have litigated cases where assets were transferred from one company to another. We then unwind those transactions, putting everyone back in the position that they should have been. Our team has handled disputes all over the country.
Fraud can be found in many forms, from false invoices to identity theft. How do you identify fraud and what should you do if you find out that it has occurred? Fraud detection is a process that aims to catch suspicious activity, and make you whole. Legally, conduct that amounts to fraud is illegal. This can include a variety of claims, from breach of contract, negligence, misrepresentation, unjust enrichment, or unlawful means conspiracy. In the commercial world, we and businesses rely on a combination of technology, analytics, common sense, and other factors to flag up odd transactions or discrepancies before instructing us in seeking recovery. It is a common myth that fraud is a criminal offense and should be reported to the police. While this may be true, it does not equate to the recovery of money, assets, or intellectual property. This is where litigation can help.
Unfortunately, fraud detection is not a one-and-done situation where you can simply install software and let it run in the background. This is because fraud detection has its own challenges, such as balancing security and customer convenience. For smaller owner managed companies or where investors are slightly removed, that sort of technical oversight is disproportionately expensive and impossibly difficult to mange.
For businesses of all sizes where fraud is detected, acting promptly can be fundamentally important to protect and improve your, and the company, position.
Why Is Fraud Detection Important?
Fraud costs UK businesses billions annually, with the 2024 Annual Fraud Indicator estimating losses to the private sector at around PS1.17 billion. The financial impact is not the only thing that can be attributed to fraud. It can take many years to repair damage such as a damaged reputation, decreased employee morale and lost trust with customers or stakeholders. For shareholders considerable value can be lost where fraud is not tackled quickly.
Identifying fraud early helps businesses stay compliant with regulations and avoid penalties or losses escalating.
How Does Financial Fraud Detection Work?
Financial fraud detection is about spotting unusual activity and not making any assumptions (or automatically believing what is said by way of explanation) without first obtaining full transparency.
Businesses define what “normal” means for their operations. This includes spending patterns and regular transactions. It is important to note that even silence can be enough to warrant further investigation. It can also be the case that silence in itself can cause sufficient concern to merit further investigation.
For example if you note an unusual transaction and request an explanation but do not hear or receive anything in reply that might indicate something of concern.
Fraud detection systems, capabilities, and processes vary depending on a business’s size and needs. For example, a small business might rely on manual audits and reviews. You will need to have access to the information. Larger organisations use a combination tech, staff training and ongoing monitoring, with specialised employees who are responsible for fraud detection. Regardless of the size of the organisation, the goal is simple: spot issues early and stop them from growing into bigger problems.
Key Components of Fraud Detection
Fraud detection works by monitoring activity, identifying anomalies, and stopping threats before they escalate. It’s a combination of proactive systems, detailed analysis, and sharp human judgment.
Data Monitoring and Analytics
The most important pillar of fraud detection is monitoring transactions, accounts, and user activity. Patterns in the data, such as an unusually high number of transactions or logins from unfamiliar locations, can act as early warning signs.
Machine Learning and AI
- These tools help sift through massive data sets to identify patterns and anomalies that might not be immediately obvious to the human eye. For example, AI can detect subtle behavioural changes that suggest phishing attacks or synthetic identity fraud.
Human Expertise - Even with advanced tools, human oversight is essential. Fraud detection teams review flagged activity, separate real threats from false positives, and refine systems to improve accuracy over time.
Rules-Based Systems - Basic fraud detection often starts with rule-based systems, where predefined criteria trigger alerts, such as unusually large withdrawals. While less sophisticated than AI, these rules remain an essential first line of defence.
Real-Time Alerts - Speed matters in fraud detection. Systems designed to catch instances must notify businesses or individuals immediately when something doesn’t add up, and team members must follow up swiftly to minimise the potential damage.
Common Types of Fraud - Fraud comes in many forms.
Payment Fraud
We deal with many situations where directors or shareholders (or both) either brazenly transfer money to themselves or connected third parties, or create sham transactions justifying that same conduct. To protect against fraud, it is important to take care at the beginning. For example, consider a banking mandate that has sufficient protection like dual signing. We deal with situations regularly where a rogue conduct or transaction will occur that we have to stop or take steps to prevent, such as applying to the court for an injunction to prevent further transactions. This could be in relation to money, property or other assets.
Invoice and Supplier Fraud
Fraudsters often send fake invoices to businesses, pretending to be legitimate suppliers. Companies can lose a lot of money if these invoices are not scrutinized. Often, fraudsters will impersonate existing suppliers, altering payment details to divert funds, making detection even more challenging.
Identity Theft
This involves stealing personal information such as names, National Insurance numbers, or bank details, to impersonate someone. Fraudsters can then use this data to open credit lines, withdraw funds, or carry out other financial crimes under the victim’s name.
Phishing and Email Fraud
Phishing scams trick victims into sharing sensitive information, such as passwords or account details, often via fake emails, texted links, or websites. Cybercriminals disguise themselves as trusted entities like banks or service providers to gain access to personal or business accounts.
The Challenges of Fraud Detection
Detecting fraud is no small task. The constantly evolving tactics of fraudsters are a constant challenge for businesses. While technology and experience can help, they also present ongoing challenges. Pressures on individuals leading to fraudulent behaviours can be hidden and might not be immediately visible.
Insider Threats
While most detection efforts focus on external threats, fraud from within a business, such as embezzlement or data leaks, can be even harder to spot. Employees, directors, and shareholders who have access to sensitive systems can exploit their position, and then cover up their tracks. This makes it harder for detection systems. The best advice if you suspect that something is happening is to seek legal advice. We have access experts such as forensic accountants and investigative computer scientists. We can use a variety of tools and techniques to review systems and hardware in order to find traces of wrongdoing. This evidence can be used as part of a lawsuit against the rogue.
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