Fraud, a betrayal of trust
White collar business fraud in the UK sadly continues to be a by product of corporate life. Rather like car accidents or physical crime most of us think “it will never happen to me”. Fraud inevitably takes its victims by surprise and is often a tragic breach of trust by friends, co-workers or business colleagues who are well known to the victim. In the case of pension fraud, it can have serious implications for the scheme and its members as pension schemes are, by their very nature, the custodians of large amounts of assets both in terms of cash and information.
Fraud is the betrayal of trust. Its prevention and detection requires transparency and accountability. Both trustees and scheme managers should be initiating and complying with strict checks and controls, but it is also important to use common sense and keep an open mind so that when a fraud is discovered, the scheme can move quickly to protect its funds, data and members’ interests.
Prevention, not cure
Under pensions legislation and the Pension Regulator’s (tPR’s) Code of Practice on Internal Controls it is essential that trustees and schemes have a dedicated fraud risk management plan in place for the safe custody and security of pension scheme assets. The first 24 hour period after discovering fraud is crucial and the checklist of action to take should include: scheme objectives for the outcome; a dedicated investigation team; possible suspension of the wrongdoer if appropriate; evidence should be protected, gathered and assessed; insurance check and notification; and management of the publicity as well as perhaps, in some circumstances, notifying members of the issue. Reporting fraud to a law enforcement agency may be required, but in itself may not lead to recovering any loss. But there are a range of civil recovery measures in place for that. The first step must be to protect the current position. A Court order can be obtained quickly to prevent transactions or to freeze assets. A search order allows entry into premises to look for, preserve and copy evidence.
Who to pursue?
Who should a claim for recovery be against? The perpetrator, or the party in possession? Or, maybe against the party who failed in their duty of care, such as a scheme administrator, a trustee or a professional advisor to the scheme. A simple request for repayment in some cases may suffice. Otherwise, insolvency proceedings may be the most effective tool to use. A trustee in bankruptcy can be appointed to investigate the extent of wrongdoing, while a similar role can be played by an insolvency practitioner where a company is put into liquidation. Whatever options considered, always consult an expert legal team first.
GP Noble Trustees Limited
A recent example of a major fraud of pension scheme monies and serious breaches of trust involved GP Noble Trustees Limited. GP Noble manager, Graham Pitcher, was convicted of conspiracy to defraud and given a jail sentence of eight years for transferring £52m from nine pension schemes into two offshore accounts, to invest in buying land for development in Thailand, an on line bookmaker in Australia and finance a Hollywood movie project. All of the people involved were able to hide their fraudulent activities from the parent company and regulatory authorities, and denied their part in the fraud in court. Whilst some of the people involved were cleared, the main instigators, who were jailed, held positions of responsibility and trust within GP Noble Trustees Limited.
The GP Noble case may seem extreme however; the principles behind pensions fraud, the prevention and recourse are equally the same whether there has been a fraud on a major scale or on a smaller scale. The effect of fraud on a pension scheme can cause major issues and have catastrophic consequences for the members, the future of the scheme, the trustees and sponsoring employer.
Trustees need to ensure they have a risk assessment and risk register in place which is reviewed regularly, that any custodians and any key persons are risk assessed and all mandated personnel whether on bank accounts, investments and assets are also risk assessed. The Trustee may wish to consider recruitment screening of key personnel especially those who monitor cash transactions and allow basic and random checks, including regular supervisory review of their working. Also a rotation of jobs within an organisation may not be popular but does make it more difficult for an employee to become ensconced and start to operate a system to their personal financial advantage. In terms of professional advisers we have listed the safeguards that trustees can take under our article detailing duties under the Data Protection Act.