Danske Bank’s acting CEO, Jesper Nielsen, recently reported that the bank has almost two and half billion dollars set aside to handle the potential fines that are still yet to come following the firm’s money laundering which dates back to 2007. The scandal involved over 15,000 customers and more than nine million transactions.
NatWest customer Arthur had been defrauded following a violent mugging in December last year (2017) which left him lying unconscious in hospital.
Charlotte Higman lost over £4,300 from her RBS bank account when a fraudulent caller requested to alter her bank details for security reasons.
The bank followed protocols and called Charlotte’s landline directly but the fraudulent caller anticipated this and diverted the call to a mobile. Once the details were successfully reset, the fraudster requests that a sum of more than £4,300 is transferred to their bank account.
During the same call, the fraudster requests a second transfer but the bank flags up one of the security questions as being incorrect and denies the transfer but still allowing the first transfer of the initial £4,300.
The bank insisted they followed protocols in using Charlotte’s landline to verify her identity so she must be aware of the transactions.
“You can hear what the caller has tried to do is put together two transactions for the full balance of the account and the bank just don’t pick it up as a warning sign,” says Arun.
“They know at the end, this is fraud but they’ve done nothing about the first transaction and that’s why Charlotte should be so critical of the bank.”
Earlier this month, RBS apologised for the incident and issued a full refund to Charlotte.
Since her case, a new voluntary code of conduct which states that if a customer or a bank, has missed warning signs, they will be liable for subsequent losses. A number of banks have now signed up to this code – hopefully preventing others from going through Charlotte’s ordeal.
“Although the new code of conduct will help to address customers’ compensations for losses, it doesn’t necessarily help to prevent future losses,” adds Arun. “Customers should be cautious of their landline and mobile calls, contacting their provider if they’re concerned of any security breaches.”
For the full story, visit: https://www.bbc.co.uk/news/business-46274644
Fraud is an act of deception intended for personal gain or to cause loss to another party.
But how can you protect against email hacking and authorised push payment fraud?
Authorised push payment fraud is where fraudsters manipulate an individual into sending a payment, under false pretences, to a bank account controlled by them. These fraudsters may hack into email accounts to convincingly deceive their victims into sending payments.
As the payment is authorised in real-time – it is irrevocable by the individual or their bank – meaning that there is no financial recovery for those affected.
Individuals making a payment to bank details received via email must remain vigilant in order to protect themselves against this type of fraud.
Three top-tips for push payment fraud protection
Although this type of fraud is by no means new – it is certainly on the rise. Recently, the Payment Systems Regulator (PSR) drafted a new code in order to assure greater support and protection for those who fall victim to push payment fraud. Until this code is implemented by banks, however, individuals must treat vigilance as their primary protection.
Last week, Arun spoke with TV presenter Charlie Webster and retired headteacher James – both victims of different forms of identity fraud.
Charlie Webster first experienced a security breach when her card was declined – only to discover that somebody had accessed her information to impersonate her, cancelling the existing card and ordering a new one to be delivered. When Charlie ordered a new card – cancelling the current order – she discovered her post was being intercepted. The fraudsters – equipped with the new card after intercepting her post – proceeded to empty Charlie’s bank account.
James learnt his identity had been stolen when he returned to an old address to collect his mail – here he discovered a letter from HMRC detailing an investment company that had been set up in his name. This placed James in the potential line of fire for any disgruntled investors – he knew nothing about this.
“It’s great that Rip off Britain is spreading the word of how people of all generations and organisations should be vigilant of identity theft and be swift in their response to any breaches,” says Arun.
We are more than one year on from the landmark decision of Randhawa v Turpin, in which the Court of Appeal sought to limit the application of the Duomatic principle (a long-established common law principle which even pre-dates its title case Re Duomatic Ltd [1969] 2 Ch 365). In the Randhawa case, Tenet acted for Mr Gursharan Randhawa and Mr Sukhinder Randhawa (the “Randhawas”); creditors of BW Estates Limited (the “Company”). The judgment upheld principles of certainty, formality and strict compliance regarding the management of a company’s internal affairs. These are principles that underpin the concept of good governance which is something that Tenet advises on regularly.
Facts
The case arose from the appointment of administrators over the affairs of the Company. At the time of the appointment, David Williams was the Company’s sole director. His father, Robert Williams, was a disqualified director, but is understood to have still had conduct of the day to day business of the Company. Robert was the beneficial owner of 75% of the shares in the Company, which were registered in David’s name. Robert was also assumed to be the beneficial owner of the remaining 25% of the shares which were registered in the name of Belvadere Investment Company Limited (“Belvadere”), an Isle of Man company, that had since been dissolved (but not removed from the Company’s register of members).
At a board meeting in 2013, David, resolved to appoint Mr Andrew Turpin and Mr Matthew Hardy as joint administrators at which he was the only director present. Although Robert was not present, it was alleged that he was fully aware that BW Estates was being placed into administration and acquiesced to the process. The Company’s Articles of Association stipulated that a quorum for a board meeting was two, and that if the number of directors should fall below that number the continuing director may only act for the purpose of filling vacancies or calling a general meeting. The board minutes incorrectly recorded that a “quorum was present”. A quorum for a shareholders’ meeting was also two.
The Randhawas objected to the appointment of the joint administrators on the basis that the decision had been taken at an inquorate board meeting.
First instance decision
HHJ Purle QC concluded at first instance that the appointment of the Joint Administrators was valid because, from 2009 onwards, there was a consistent course of conduct under which Robert and David informally sanctioned the exercise of all the directors’ powers by one director alone, which operated as an informal variation of the Company’s Articles. He also held that the acquiescence of David as the registered holder or Robert as the beneficial owner of 75% of the Company’s shares was sufficient to trigger the Duomatic principle; where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, the absence of the formality of a general meeting will not render the decision invalid. The judge also said that the case brought by the Randhawas “smacks at best of an abuse of process”, because the argument that the appointment of administrators was invalid was previously open to them but not pursued.
Issues for the Court of Appeal’s consideration
The issues to be decided by the Court of Appeal were as follows:
Court of Appeal decision
After consideration of issue 1, the Court concluded that the Company never became a single member company as Belvadere remained on the register of members as holder of 25% of the shares despite the fact that it had since been dissolved.
Dismissing the Joint Administrators argument that paragraph 22(2) of Schedule B1 somehow overrides a company’s Articles, Sir Geoffrey Vos stated that “…there is nothing in Schedule B1 to suggest that either the company or the directors can act except in the manner set out in the articles of association under which the company was incorporated and by which the corporators agreed to be bound.”
When considering issues 3 and 4 Sir Vos held at paragraph 85: “…David’s resolution was incurably invalid. It could not be rendered valid by the application of the Duomatic principle, which only applies, as I have said, where “all shareholders who have a right to attend and vote at a general meeting of the company” assent to the course proposed. In this case, Belvadere did not assent, and its assent cannot be inferred by looking to what those who may previously have had an interest in Belvadere may or may not have thought.” The Court also held that the judge was wrong in his finding that the Articles had been informally varied by a consistent course of conduct by Robert and David, on the basis that such variation could have only taken effect by the application of the Duomatic principle, which was ineffective for the reasons given above.
The Court was then required to consider issues of acquiescence and abuse of process. The Court held that the challenge made by the Randhawas in March 2015 was not inconsistent with their subsequent contention that the appointment of the Joint Administrators was itself invalid. The Court did not consider the Randhawas failure to raise the issue of the validity of appointment in earlier proceedings an abuse of process. The Court also disagreed with the judge at first instance that the Randhawas were estopped by acquiescence on the basis that they were not involved in the affairs of the Company when David passed the invalid resolution and cannot, therefore, be held to have acquiesced to such appointment.
What the decision means in practice
This decision highlights the importance of strict compliance with a company’s Articles when managing its affairs. The decision also restricts the application of the Duomatic principle to circumstances where all shareholders who have a right to attend and vote at a general meeting give their consent to a proposal, with the effect that where a registered shareholder no longer exists, the Duomatic principle cannot apply. The decision serves as a reminder that deceased or dissolved shareholders remain members of a company until the shareholder register is updated.
There are a number of good governance tips that we can take from the judgment, namely:
The Randhawa judgment remains good law, with the Court following the strict interpretation of the Duomatic principle in the subsequent case of Ball (PV Solar Solutions Ltd) v Hughes and another [2017] EWHC 3228 (Ch) where directors were unable to rely on the Duomatic principle to defeat a challenge by a liquidator to a series of payments procured by the directors against their outstanding loan accounts (totaling £750,800), without documenting their formal consent as shareholders, and contrary to provisions within the company’s articles of association.
How Tenet can help
Since the ruling Tenet has been contacted about similar issues involving decisions that have been made at inquorate meetings – don’t get caught out. Often small business owners and directors are simply too busy to worry about documenting every decision and adhering to the small print, and as a result such businesses are particularly at risk from challenges due to inaccurate records or failure to document decisions. Tenet can advise companies on how to establish systems and structures that will ensure good governance and reduce the risk of future challenges.
Please contact Arun Chauhan if you would like to discuss this issue further.
James Anderson, England’s leading fast bowler, commented how the Australian national team in the last few years were “trying too hard to be aggressive” and Nasser Hussain, a former England Captain, aired his thoughts on his belief that the International Cricket Council’s (“ICC”) corruption charge against Sri Lanka’s Sanath Jayasuriya, was “just the start”. News stores over the past 12 months would seem to suggest that corruption or teams/individuals seeking to push sporting rules to the limit and beyond, are happening time and time again.
The high-profile story every cricket fan will recall is the infamous “sandpaper” ball-tampering scandal (which resulted in three Australian cricketers being banned) and the sledging in the winter Ashes series concerning the alleged headbutting incident between Jonny Bairstow and Cameron Bancroft. The thoughts of two well respected international cricketers bring to the fore how corruption and fraud not only affect individuals and businesses, but also high-profile sports such as cricket, boxing, cycling and football. The questions every sports fan would like to ask are 1) what drives respected sports stars to cheat and 2) are they apologising for having got caught as much as for the acts they were caught for?
Cheating and regret
When dealing with fraud investigations, it is commonplace that if a person is caught and admits to their actions, after the event they say how sorry they are for the way they have acted and how they will be a better person in the future. Despite being caught, very few individuals volunteer how many times they have done it before.
Michael Vaughan suggested that he believed the Australian cricket team had cheated in a similar manner during the Ashes in 2017/18. David Warner arguably dodged questions about previous cheating and who else was involved when he faced the media. and according to the ICC, Jayasuriya is refusing to cooperate with its investigation. Hussain believes the charge against Jayasuriya is just the “tip of the iceberg” and “other names are going to come out”.
When a person gets caught cheating, which in our world we call dishonesty or fraud, they have done it with a purpose, typically for gain but on occasion for more vindictive reasons. In our experience, once caught, a dishonest person will typically need pressure applied to them to admit the extent of their wrongdoing. That is because they still harbour hope of how much they can get away with to reduce the inevitable sanctions that are looming.
The mere act of cheating means that there has been a conscious decision to not follow the rules, be that legislation, regulatory best practice or internal policies, so to benefit themselves or an organisation they serve/represent. The benefit from cheating is inevitably linked to direct or indirect financial gain if the act of dishonesty works. That financial gain may be for them, a group or a wider organisation, for example sponsorship. If obtained dishonestly, this is financial crime, whichever your sector.
This begs the question, why do people commit fraud and cheat? Why risk throwing away all you have worked so hard for to achieve a little more?
This article provides an insight into why people commit fraud and considers if the drivers to do so are different in the sporting world to that in other sectors. It focusses on what drives self-control and discipline in respect to preventing dishonesty whilst summarising what is the purpose of having financial crime compliance as a key agenda item in the sports sector whether it be for clubs or governing bodies.
Why people commit fraud (financial crime)?
What is financial crime? By way of an example, in the financial services sector, financial crime includes internal fraud such as misappropriating money or goods, misleading others with false representations to enable financial gain, corruption, money laundering and enabling cybercrime just to name a few of the key areas. Fraud, itself is typically associated with an individual acting dishonestly.
For several decades, academics have tried to unlock the answer to what causes an individual to commit fraud. The benefit of knowing why someone commits fraud is to gain an advantage when seeking to prevent it. However, unpicking the reason why people commit fraud is not a one size-fits all answer and not a one sector answer.
The closest that the counter fraud profession have come to agreeing a uniform proposition is known as the fraud triangle.
The triangle states that individuals are motivated to commit fraud when three elements come together: 1) some kind of perceived pressure 2) some perceived opportunity and 3) some way to rationalise the fraud as not being inconsistent with one’s values. Volunteering the full extent of wrongdoing is not typically forthcoming unless incentivised or encouraged as part of the problem is that the wrongdoer cannot see past the blurred line between right and wrong.
The fraud triangle is shown below:
The person who is credited for developing the fraud triangle was Donald Cressey. His theory came to the fore in the 1950s. He defined the fraud problem as a “violation of a position of financial trust” that the person originally took in good faith. To quote from his book:
“Trusted persons become trust violators when they conceive of themselves as having a financial problem that is non-sharable, are aware that this problem can be secretly resolved by violation of the position of financial trust, and are able to apply to their contacts in that situation verbalizations which enable them to adjust their conceptions of themselves as users of the entrusted funds or property”.
In other words, he states people can articulate and rationalise their dishonest actions so in their own mind, their choice and actions are not inconsistent with their personal codes of conduct. In the context of sandpaper-gate, consider how a conversation between the senior team and Cameron Bancroft may have played out, one can almost imagine how he was possibly persuaded through the so called rational thoughts of others.
Cressey did not talk in terms of a triangle but the components have remained a bed-rock of the understanding behind why people commit fraud. A person feels pressure, see an opportunity, rationalise their taking that opportunity and then commit the dishonest act.
Another academic, Dr. Steve Albrecht, developed the concept to evolve the factors causing the pressure to commit fraud. These included living beyond personal income, a desire for personal progress, excessive gambling, high personal debt, pressure from family and friends, lack of recognition or reward from their employer and on occasion ‘fluid moral values’ and a desire to challenge or abuse the system.
Further research has been undertaken to highlight that amongst several the high profile financial frauds a further central theme runs through them, namely disenchantment. [1] Commentary has focussed on how justice has always been a major issue among people. Especially in an organisational context, where many employees with different values, interests, and problems should act in concert, a fair treatment is of huge importance. People who face injustice may become dissatisfied with their job, superior, or organisation and hence turn into a threat for the organisation by showing counter work behaviours, such behaviours leading to dishonesty activity such as fraud or being accepting of involvement in corruption.
The common thread as to why someone commits fraud is not however greed. It is commonplace in cases we have investigated or commentated about, that fraud does occur due to pressure and for whatever reason, the protagonist when caught tries to justify (rationalise) why they did it (if they admit their dishonesty at all).
The key issue to focus on when understanding why someone commits fraud is what pressure did they perceive to be under. Possibly in Cameron Bancroft’s and Sanath Jayasuriya’s case, that appears to be peer pressure as they were not likely to have been the instigator. However, is there a common thread in the wider sporting arena as to why people cheat?
Are the reasons for individuals committing fraud in sport different to other sectors?
At the heart of why people commit fraud in sectors outside of sport, undoubtedly is pressure. There is a case to say where that pressure stems from is subtly different for those cheating in sport.
In many cases of employee fraud, the cause of acting dishonestly may be pressure to achieve targets, which in turn means pressure to preserve employment. The cause may be disenchantment with being overlooked for promotion, or impossible performance requirements which leads to vindictive action.
These individual cases of fraud often stem from their employment or a party/organisation they represent. For athletes, their performance is their means of income. Unlike many other people working in “normal jobs”, for a professional athlete, their career may only comparatively last a few years. Of that comparatively short career, an athlete may spend only a few years at the top of their game and if lucky, at the pinnacle of their sport.
Success in sport brings a unique set of rewards which do not typically follow in other sectors. These may include significant earnings, fame and sponsorship, each of which can bring a natural high and a need to sustain those rewards. Whereas committing fraud in other sectors may be directly for financial gain or sustaining work, in the sports sector it appears more likely to be to elevate performance, sustain ranking or wider reasons that come from the pressure of being in an industry where performance and status is everything. Other reasons may include professionals with excessive gambling and alcohol addiction (of which there have been many examples).
At the heart of cheating for sports stars seems to be the pressure to be better than the next person, team or country. Once you are known as “the best”, even further significant pressure is felt to remain at the very top of your game. Professor Graham Brooks[2] explains how in certain circumstances there is an appeal to a higher loyalty. If you recall the case of Lance Armstrong, the justification that cheating was for the team or the success of colleagues was front and centre. Team mates of Lance Armstrong in the US Postal Service team admitted to using illegal substances such as EPO and other endurance enhancing substances when racing. Professor Brooks says perhaps the most telling justification was where team members said that “we were going to do everything possible to help Lance win”. It appears that form of conduct was expected as part of the team behaviour.
In a sporting context, identifying circumstances when people perceive pressure to bend the rules is therefore not easily identifiable. Professor Brooks recognises it is difficult to know what factors are responsible for acts of fraud and corruption, as they are multi-layered and complex as fraud and corruption themselves. However, it appears in sport, the pressures are greater due to the rewards and the creation of perceptions around those persuaded to commit fraud than in other sectors.
A good example of this is Dwain Chambers who admitted he hated having to cheat to win in the world of athletics. Chambers’ book, Race against Me (2009), recounts a conversation with Victor Conte from BALCO. It was about the substance THG. Balco is alleged to have explained when asked by Chambers if THG was illegal, that it was undetectable, not on the prohibited list and would not cause a positive test. It is said Chambers pushed again to stress that using THG would be cheating. Conte’s response? He said Chambers was talented but being cheated by other athletes and their teams as he was not on a level playing field. It was never a fair race unless Chambers got on board with THG.
Imagine a world where you were told unless you cheat, you would not be deemed good enough. Arguably that was the pressure on Chambers and he succumbed to the decision to cheat. One would imagine it was that, or in his mind (as created by Conte) career over. All his eggs in the basket of being a successful athlete hung on the pressure to be on a level playing field by cheating, the alternative was bleak and so his decision was made. That pressure on a person comparatively young in age is not typical in other sectors outside of sport.
It does appear that whilst the reason for a person acting dishonestly is pressure, there is much more of an acute type of pressure that causes athletes to perform, an insecurity of what happens if they do not, be it for them personally or their team. One can imagine the pressure of sustaining sponsorship or the reward of more sponsorship, the spin offs of coming first ahead of second (who remembers who came second a few years down the line), the press criticising poor performance must be far increased when a career can, which is relatively short in years, hang in the balance.
Given the size of rewards, short lifespan of an athlete and the pressure to sustain performance, it is arguable that compared to other sectors, the pressure is disproportionally intense. As a result, many athletes need protection to aid their own self-discipline so to ensure they are not enticed to commit acts of dishonesty for their own gain, the gain of their clubs and team and for external third parties who have a financial interest in their performance.
What drives self-control (i.e. compliance) for an individual?
There is an assumption that people in all walks of life will follow the rules. There are many explanations that show a full spectrum of possible reasons why one should follow the rules from an inherent desire to do ‘the right thing’, to being concerned of the repercussions of being caught.
There are various factors that drive self-control:
The individual
The majority of people in society will follow the rules, whether this be at work or in day to day life. They consider that it is the right thing to do and understand that following the rules makes for a better life for many. They believe that if all people followed the rules, society would work better and therefore their own moral compass keeps them in check.
Their employer
An employer, whatever the sector, will want their employees to follow the rules whether this be internal rules or external regulatory rules governing their sector. The motivation for the employer will be different to an employee. For example, with financial crime compliance in mind, a phrase used by David Jackman[3] is that certain organisations are more concerned with preventing the fine (by a regulator) than preventing crime. He talks in terms of ‘corporate maturity’ of organisations and how there is a need for values to lead the regulatory compliance journey. A summary of his take on the evolution of governance by companies can be found in his presentations.[4]
A good employer will seek to instil in their employees an understanding of why compliance is required and the consequences to all if it is not followed. Policies and procedures will be supplied to bring that compliance to life so that all in an organisation knows what to do (and what not to do), but also the sanctions if they fail. The employer helps individuals follow the rules.
However, the employer can be guilty of creating an environment that inadvertently causes breaking of the rules. A good example is in the financial services industry where there is so much pressure on targets, that individuals consider the only route to succeed is to bend the rules on compliance. It cannot be said the employer would be blind to that risk and therefore content to create the environment where the risk of breach of the rules increases, knowing that the success (i.e. profit to be gained) is worth exposing their people to.
Employers therefore should think through their responsibilities when pushing their employees to achieve as much success as is possible.
In a sporting context, we do question whether the pressure to succeed that can lead to cheating on the field of play is overlooked as an obvious risk. If you push people too far, what are their options?
Regulation
Regulators (governing bodies) are not designed to keep both employers and employees in check. That is a common misunderstanding. Regulators are there to protect the consumer and those working in an industry to ensure that whatever the sector, it is operated fairly, ethically and not to disadvantage, mislead or cause unnecessary damage or loss to those involved in that sector.
Employers and individuals therefore are encouraged to follow regulatory rules but often the message as to why they are being asked to do this is lost. The complication with regulation comes when different sectors (or in this case sport) will not apply a uniform sanction to the same offence as explained in the excellent article by Gemma White and Louis Weston which looks at how sanctions differ across different sports. [5]
Ultimately, it is the threat of the ‘stick’ of sanctions that causes certain people to not break the rules. There is a personal balancing exercise of assessing what are the risks of being caught and how bad is the sanction. Then an assessment of how those two factors weigh up against getting away with breaking the rules and the rewards on offer for the success that may follow as a result.
Legislation and criminal sanctions
The catch all is the Crown. The Crown Prosecution Service is tasked with prosecuting offences that breach legislation from theft, physical assault to many others including fraud. The Fraud Act 2006 creates for a number of offences focussing on the intention to commit fraud as opposed to the committing of fraud. There are strict laws around gambling and market abuse. These in many ways are the ultimate sanction as they impact upon liberty, not just financial fines and restriction from performing.
Many individuals will not understand or believe that breaking the rules in their employment or role may have the consequence of criminal prosecution. Whilst there are complications facing prosecuting bodies (in the context of sport, for example if an English participant commits an offence in competition overseas), if an offence can be proved and would be in the public interest to prosecute to set the deterrent effect, then it will.
Belief that criminal sanctions are possible therefore form a further motivation for self-discipline.
Ultimately, the purpose of financial crime compliance in a variety of sectors including sport is the same. It is to protect the consumers and those operating in the sector from themselves and others. That protection typically focuses on prevention of loss of money from industry for illicit purposes and ensuring consumers do not suffer a loss.
For sport, an increased focus on financial crime compliance should be no different. We must accept there are nuances in all sectors and sport is no different. However, one aspect for me is clear, pressure to ‘cheat’ however small or big is greater in the sports sector than many other sectors and carries the risk that young people will be labelled as dishonest for many years after they exit the sport they worked so hard to be a part of.
We therefore come full circle. To reduce those breaking the rules, greater focus needs to be given to why people do it. Young sports participants need to learn more about the types of motivations and consequences (immediate and long term) associated with breaking the rules. That is not just the responsibility of the individual, but the wider collective of clubs, agents, governing bodies and fellow participants. Saying you are sorry after you are caught will never be enough.
Conclusion
In sport, as with all sectors, it is a handful of people that break the rules. There is a need across all sectors to focus on financial crime compliance to allow for consumers and participants to be protected. Consumers (fans) need to be able to watch their sport without questioning what they are witnessing. Focus on preventing dishonesty allows for a fair and honest playing field and this is where governing bodies are needed to drive a programme of change to ensure financial crime compliance is on the agenda in their sport, amongst the participants and the clubs they stand for.
Arun Chauhan & James Modley
[1] http://www.europeanbusinessreview.com/the-psychology-of-disenchantment/
[2] Fraud, Corruption and Sport 2013 (p49)
[3] https://david-jackman.co.uk/
[4] https://www.jerseyibs.com/files/1514/5803/1132/David_Jackman.pdf
[5] https://www.lawinsport.com/topics/articles/item/why-sport-needs-a-unified-approach-to-sanctions-for-corruption-offences