Realising reparations: asset tracing amid COVID-19

February 2021 | FEATURE | FRAUD & CORRUPTION

Financier Worldwide Magazine

February 2021 Issue

As the impact of coronavirus (COVID-19) continues to reverberate across the globe, many companies have found themselves the victim of pandemic-related fraud. Illicit activities have left them financially bereft and fighting for survival.

Instances of such fraud – be it application fraud, phishing, whaling, invoice fraud, supplier fraud, purchase cards, or malware and ransomware, among others – skyrocketed as the pandemic tightened its grip, with fraudsters taking advantage of the disruption to both businesses and their customers.

Testifying to the explosion of fraud during the COVID-19 era is analysis by Barracuda Networks, which found that the number of phishing attacks carried out by fraudsters increased by 667 percent in March 2020 alone. Many of these phishing attempts involve threat actors impersonating government organisations such as the World Health Organization (WHO) to solicit fraudulent donations or distribute malware.

As well as external threats, companies also face an increased risk of employees misappropriating funds in order to supplement their income during the pandemic. Such subterfuge has resulted in a fresh impetus to implement systems to prevent fraud, as well as an increased demand for effective means of recovering losses after the fact.

“COVID-19 has had a profound impact on how people live and work. Increased home working, remote authorisation processes and weaknesses in systems – both systemic and human – have resulted in increased opportunities for fraud to be committed,” says Andrew Pavlovic, a senior associate at Russell Cooke. “For example, there have been a number of COVID-19 themed cyber attacks emerging, such as phishing emails from fraudsters, as well as rogue entities impersonating the likes of the WHO and HMRC.”

To recoup their losses from the perpetrators of fraudulent activity – such as disgruntled employees, malicious third parties and external bad actors, among others – compromised companies have been increasingly turning to the asset-tracing process as a means of achieving redress.

Courts and COVID-19

Drilling down, companies, and the investigators working on their behalf, face myriad challenges as they undertake asset-tracing engagements, particularly when the location of assets is a cross-border matter. Furthermore, with costs also an issue, a cost-effective outcome is desirable.

“To recoup their losses from the perpetrators of fraudulent activity compromised companies have been increasingly turning to the asset-tracing process as a means of achieving redress.”

“The challenge in any fraud case is to identify the fraudulent activity at the earliest opportunity and, having done so, take swift and decisive action to try and secure, freeze or identify the location of any misappropriated funds,” affirms Mr Pavlovic. “Companies with inadequate systems in place to prevent fraud occurring risk criticism from shareholders as well as the court, particularly where they may need to consider a claim against their professional advisers, such as auditors, for failing to identify fraudulent activity sooner.

“In our experience, courts have dealt with the challenges presented by COVID-19 and have demonstrated an ability and willingness to conduct urgent applications and hearings remotely,” he continues. “An order made against a respondent in an asset-tracing case will usually contain a penal notice, meaning that a failure to comply with it could result in that respondent being in contempt of court.

Mr Pavlovic also dismisses any suggestion there may be judicial leniency exercised for those subjected to the asset-tracing process, given the unprecedented nature of the pandemic. “We have not experienced any particular leniency toward individuals and entities that are subject to such asset-tracing processes during this period,” he says. “To the extent that any leniency may have been shown at the start of the pandemic, recent judicial comments indicate that courts expect that parties to litigation, particularly those that have legal representation, will have adapted their procedures and processes to ensure prompt compliance with court orders.”

Following the money

With no definitive end to the pandemic in sight – the success of vaccination programmes notwithstanding – the size and scope of asset-tracing investigations is set to escalate amid the proliferation of fraudulent activity.

“There are likely to be increasing numbers of asset-tracing cases in courts in the months and years ahead,” expects Mr Pavlovic. “These issues are invariably identified more frequently in periods of recession. There is also likely to be further judicial consideration of how search and seize orders, an important weapon in the arsenal of a defrauded party, may be adapted to take into account any relevant COVID-19 guidelines which may be in force at the time.

“Companies are naturally reluctant to commit substantial funds to asset-tracing cases,” he continues. “It is expected that law firms will need to think innovatively and be more willing to consider alternative funding arrangements, such as conditional fee and damages-based agreements in order to finance these types of claims.”

While undoubtedly a robust mechanism for recouping losses incurred on account of fraud, the asset-tracing process is, at the same time, subject to sudden changes in scope and is often time-critical. Ideally, for those tasked with tracking and recovering hidden assets, especially in the current climate, there should be no inhibitions as they set about following the money.

Fraser Tennant