The top 3 types of fraud and what victims can do

21 April 2022

This article first appeared on FTAdviser (19 April 2022), click here to read.

I have been compiling quarterly roundups of fraud-related cases since 2016. One of the insights this gives me is an idea of trends in the types of fraud that end up before the Courts of England and Wales.

In addition to this, my business is often contacted by victims of fraud seeking redress, which provides a closer understanding of what fraudsters are up to and the impact of those actions. In my experience these can be split into three general types:

  • The confidence trick.
  • The diversion of funds.
  • The too-good-to-be-true opportunity.

The confidence trick

Starting with what is often a fairly low level but deeply pernicious type of fraud: the modern day confidence trick. This could be a text message from a seemingly official source saying you have had close contact with someone with Covid, which then asks for payment for the necessary tests to be sent.

Or it could be a WhatsApp message from your ‘child’ telling you they have changed their mobile phone and been frozen out of their bank account after trying to link their accounts to the new device. Shortly afterwards there is a request for help with payment of a bill that is overdue.

Romance fraud is another growing scam where fraudsters prey on the unsuspecting

Often relatively low levels of payments are involved, then once one payment is made further requests are likely to be received, leaving the victim not only out of pocket but in some cases also heartbroken.

 

The diversion of funds

Authorised push payment (APP) fraud is so called because it involves the victim authorising a payment to be made out of their account (a pushed payment rather than a payment requested by the recipient such as a standing order). This often involves the provision of a false invoice, the hijack of emails or altered bank details with the aim of intercepting a genuine, anticipated payment and diverting the funds to the fraudster’s account and can catch out large companies and individuals alike.

This leaves the victim with the double-whammy of having sent money to a fraudster and being left with an unpaid (and due) invoice or completion sum.

While the confirmation of payee account name checking service introduced in June 2020 assists with this by flagging discrepancies between the name of the intended payee and the name on the bank account funds are being transferred to, it does not work in all cases. Remarkably not all banks have adopted the service, and it is not currently possible to undertake the checks on a transfer to an account held out of the country.

While there is a contingent reimbursement model (CRM) code, which is intended to protect customers by detecting and responding to APP scams, and to ensure that victims of APP fraud have access to compensation, the code is voluntary and, again, not all banks have adopted it.

Consumer group Which has collected data about complaints to the Financial Ombudsman Service relating to fraud and claims under the CRM code rejected by the banks. According to that data, almost three-quarters of the complaints considered by the Fos were upheld against the banks.

 

The too-good-to-be-true opportunity

Typically, larger losses are suffered by victims in relation to investment schemes where investors take a chance on an opportunity offering eye-catching returns. Fraudulent online foreign exchange market platforms and scam crypto platforms are examples of this. Victims can be novice investors through to sophisticated financial professionals.

In the first instance, investors receive payouts in line with what had been promised. Ponzi schemes operate by using later investors’ money to pay returns to the earlier investors, and rely on re-investment and word of mouth to continue. This is similar to pyramid schemes, which have the added incentive of increased returns for investors who introduce more people into the scheme. At a certain point the payments stop and the scam is discovered.

These tend to be the sort of matters fraud lawyers pursue, with famous cases such as Madoff going on some 14 years after the fraud was first uncovered and billions of US dollars recovered and distributed to victims. As with Madoff, today’s fraudsters often target investors internationally and frequently the schemes they operate involve an offshore element.

Losses suffered by victims in investment scams can range widely depending on when the investments were made in the lifetime of the scam, and the individual’s wealth and capacity for investment. I have seen instances in which people have used life savings and borrowed heavily against property after initial distributions were received at a level that (purposefully) encouraged further investment.

 

What can victims do?

The avenues available to victims of fraud will depend on a number of factors, not least whether the loss is sufficiently large to engage professionals and embark on an asset-tracing exercise.

There are criminal and civil options available to victims: the criminal system seeks to locate the wrong-doer, prevent them from committing further frauds and punish them for their wrong-doing. The civil system is designed to recover losses.

The following suggestions apply to corporate and individual victims.

Reporting

It is open to victims of fraud to report the matter to the police. This is usually via Action Fraud, a body whose purpose is to collect and collate data relating to frauds and pass that on to the National Fraud Intelligence Bureau or the City of London Police. 

However, it is worth remembering that the police are not able to investigate every crime, particularly where the sums involved are relatively small.

Where a victim has been tricked into making a transfer of funds to a fraudster’s account the first port of call should always be the victim’s bank to see if the payment can be stopped or recovered. Even if that is not possible, the CRM code mentioned above may offer a route to recovery, possibly by way of a complaint to Fos.

It is also worth a call to the recipient bank (identifiable by the sort or Swift code) to let them know that the account they hold appears to have been used in a fraud and may have received the proceeds of a crime. While this might not assist with recovery of funds, it might stop the use of that account for further fraud, or prevent money being withdrawn from that account.

Finally, where fraud is linked to adverts on social media platforms they should be reported to the host. Again, such reporting is not likely to result in any recovery (a Treasury committee has said that such platforms should pay compensations to victims where frauds are advertised on their sites, but there is no legal requirement at present) but it might help to prevent others falling victim to the same scams, and therefore prevent the fraudsters being further enriched at the expense of future victims.

Investigations and legal action

Where the sums involved necessitate further investigation, the victim has further funds available, or where a victim owes duties to shareholders to investigate, there are numerous steps that can be taken:

  • Where there is a suggestion that emails or other communications may have been hacked, an internal IT audit should be undertaken to ensure the fraudster does not have on-going access.
  • It is possible to obtain court orders to obtain copies of bank records and to disclose the identity of the holder of a bank account into which money has been transferred (likewise crypto exchanges can be compelled to disclose the identity of wallet holders where crypto assets are involved). These actions can be expensive and will only ever be the first step in legal action as they can only result in the discovery of information rather than recovery of money, but they can be a first step towards a claim.
  • Assets can be frozen in accounts that have received the proceeds of sale. The success of such a step requires action being taken extremely quickly after the fraud is discovered as stolen funds do not often stay in an account for long. Again, the costs involved in obtaining a freezing injunction put the step beyond the reach of many victims. A freezing injunction will prevent the dissipation or onward transmission of assets pending the outcome of a substantive claim.
  • In large-scale complex frauds it may be necessary to involve lawyers and investigators in different countries where money has been transferred abroad.
  • In certain limited circumstances there might also be claims that could be brought against the victim’s bank for failing to prevent payments intended to defraud the bank’s customer.

How to assist a victim of fraud

A common reaction to discovering a fraud is shame; that the victim was taken in by the fraudster or that they were not savvy enough to spot the warning signs. However, anyone can find themselves a target. Fraud is a growth industry and the people who commit fraud do it regularly, know all the tricks in the book and are often at the cutting edge of technology.

If steps are to be taken, it is important that they are taken quickly, so moving past any shame is critical.

Keeping records of all dealings on all platforms is important: downloading communications with the fraudster and taking screenshots of platforms can be useful.

Getting expert advice at an early stage can also make a huge difference. Some actions are only effective when they are taken quickly.

Claims to recover funds lost to fraud can be extremely complicated, and amateur sleuthing can not only contaminate evidence, but can also tip off a fraudster that they have been discovered, giving them the opportunity to move the proceeds out of reach.

Further information

If you would like further information on any of the topics raised on this blog, please contact Mary Young or contact a member of our Dispute Resolution team.

 

ABOUT THE AUTHOR

Mary Young is a Partner in the Dispute Resolution team. Her practice covers a wide range of areas but Mary’s particular interests and expertise lie in civil fraud and asset tracing as well as claims against professionals in negligence, breach of fiduciary duty and breach of trust

 

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