updated on 14 December 2021
QuestionHow has the covid-19 crisis affected companies’ vulnerability to fraud and what do corporate lawyers need to consider as a result?
A loathing of Zoom. A love of banana bread. A fear of fraud. Home working during the coronavirus crisis has brought numerous changes into the lives of lawyers and their clients. While we bemoan the endless Zoom calls and take solace in our improved baking skills, the growing risk of fraud to both individuals and companies is a not-so anodyne change.
From the very start of the covid-19 outbreak, regulators warned of fraudulent schemes targeted at individuals. The rise in e-commerce and other online activities resulted in an almost immediate increase in ‘phishing’ attempts as cyber criminals sought to exploit the uncertain climate to obtain sensitive personal information maliciously.
But individuals have not been the only victims. Lawyers for corporate clients must consider how the increase in remote and flexible working patterns resulting from the pandemic has also heightened the danger posed by fraud to businesses and their investors. PwC’s ‘Global Economic Crime Survey’ revealed in March 2020 that nearly half of the 5,000 corporate respondents across 99 territories had suffered at least one fraud, with an average of six per company, in the preceding 24 months. The most common types experienced were customer fraud, cybercrime and asset misappropriation, deriving equally from internal and external perpetrators. The estimate total cost to the businesses involved? US$42 billion.
The covid-19 crisis has clearly disrupted corporate work habits to the benefit of bad actors. The switch from in-person meetings to Zoom calls, for example, can increase businesses’ vulnerability to impersonation. For companies experiencing financial difficulty, executives can be expected to be more focused on operational performance measures than compliance and tackling fraud, possibly leading to less attentive probing into suspicious activity. Equally, reducing headcount is often an immediate means for companies to make savings, which can create an incentive to commit fraud from employees themselves. Employer systems may not in turn be sufficiently sophisticated to detect poor behaviour when large parts of the workforce are operating remotely.
Investors should also be reminded to tread with greater caution when reviewing official company information issued during the time of the coronavirus pandemic. Accountancy firms have suggested that it would be prudent for investors (and auditors) to review relevant accounts with additional scrutiny. Some businesses might adopt so-called ‘big bath’ accounting tactics, namely seek to report a larger hit to earnings in the current period in order that future periods might appear more profitable.
Whether it be the Serious Fraud Office and Crown Prosecution Service bringing a prosecution for alleged fraudulent behaviour and dishonesty or a specialist white-collar crime law firm defending such a charge, these legal practitioners will invariably remain at the forefront of criminal fraud litigation. However, that the covid-19 outbreak has revealed itself as a potent stimulus for fraudulent activity means that all corporate lawyers ought to be alive to this dangerous trend. Corporate lawyers must be asking the right questions of business executives and their compliance practices, whether on behalf of a distressed company or of a current or potential investor.
It is worth remembering that law firms are themselves not immune. Law firms must also act to mitigate the increased risk of fraud to their businesses deriving from mass working from home. Allocating appropriately protected technological equipment to those working on client matters and communicating regularly with all staff on internal policies, procedures and controls regarding information security protection are just a couple of steps adopted by law firms to manage risks of staff working remotely.
Fraudsters have been quick to capitalise on the new opportunities presented by the change in working habits during the pandemic. As the shift to remote and flexible workspaces looks set to become the ‘new normal’, lawyers and their clients must be equally quick to counter this challenge.
Amedea Kelly-Taglianini is an associate at Weil, Gotshal & Manges (London) LLP.