14 Oct 2015

HADEF IN THE COURTS: FRAUD COMES IN MANY DIFFERENT FORMS

Authored by: Walid Azzam and Karim Mahmoud

FRAUD COMES IN MANY DIFFERENT FORMS

Fraud comes in many different forms and varying levels of sophistication. Larger companies, particularly financial institutions, tend to be targets of fraud, due to their size and the complexities of their operations. While some plans are complicated and masterminded, others arise from opportunity.

In our practice, we are increasingly encountering issues involving employees of financial institutions and other large corporations who use their positions and knowledge of internal policies and procedures to coordinate schemes for their benefit or assist their external contacts in fraudulent activity.

For example, one recent fraud case we acted on involved the transfer of funds out of bank accounts known to be dormant or not checked regularly. An employee used his access to amend contact details on the accounts which ultimately enabled the employee to approve orders and transfer instructions by telephone, resulting in the fraudulent transfer of funds out of those accounts.

In other cases we have acted on, the financial institutions were targeted by sophisticated groups that use shell companies, fake documents and dummy transactions to secure loan facilities. These activities are sometimes conducted as an independent fraud or with the assistance of someone inside the institution.

In such cases, while criminal liability for the fraudulent act committed by an employee is generally limited to such individual, the civil liability can also be borne by the employer under the doctrine of vicarious liability. Article 313 (b) of UAE Federal Law No. 5 of 1985 (the “Civil Code”) provides for vicarious liability in respect of “any person who has actual control, by way of supervision and direction, over a person who has caused the damage, notwithstanding that he may not have had a free choice, if the act causing harm was committed by a person subordinate to him in or by reason of the execution of his duty.” This means that the institution is likely to be held liable to compensate a client for the loss caused by the institution’s employees.

In applying Article 313 (b), the UAE courts have found that an employer is considered to be a “jointly liable guarantor.” This allows an injured third party to file a claim directly against the employer for the damages resulting from the unlawful acts of the employee. In such instances, and the third party is not necessarily required to include the employee when filing a claim.

Further compounding the exposure, an employer can be liable for unlawful acts by an employee “...even where such act has no relation to the duty assigned to him by the superior” provided that the harm is “committed during the performance of the duty or where the commitment is because of such duty, even if it is not during the performance thereof... so long as it takes place during the performance of the job duties.”

Moreover, external expert reports and court judgments recognize and make clear that internal policies, adequate IT resources and a diligent corporate governance system are essential in preventing and identifying abuses.

As such, institutions face direct liability for loss of funds when they are defrauded by an employee into issuing loans, credit card debt or other facilities. All too often, such frauds are only identified after they have taken place and, even worse, become too large to sustain. Accordingly, institutions can suffer, or even collapse, when significant losses are incurred.

In conclusion, employers, especially financial institutions have consistently been found liable for the harm cause by an employee’s unlawful acts.

Minimising such exposure requires internal policing efforts, which requires a combination of improved systems, processes and corporate governance checks to close gaps that dishonest employees may exploit, as well as adopting improved, multilayered verification systems to safeguard client information.

 
 

This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the developing jurisdiction of the UAE.