Proving fraud in complex cases: new guidelines

The Kazakhstan case

In brief summary of the background, the Commercial Court considered claims by the claimant companies against three former company directors in respect of fraudulent schemes involving construction and land acquisitions in Kazakhstan. The directors denied any involvement in the fraudulent schemes.

The court held the following:

• The former directors were guilty of fraud.
• The claims were within the applicable limitation period.
• Even if the claimants had been time barred under the limitation period, the court would have disapplied the limitation period in this instance. To time bar the claimants would have inflicted clear hardship, as they were victims of fraud on a significant scale, the claims were substantial and the claims were not obvious.

Even though the claims were brought in the English courts, the court was concerned with, and applied, the law of Kazakhstan. As a result, the decision (PDF) provides key guidelines on proving complex fraud and the effect of fraud on the law on limitation.

The guidelines that came out of the case are as follows.

Proving complex fraud

Claimants seeking to bring a fraud claim should consider the following:

• Fraudulent funds: it is not necessary for you to show that the defendant has ended up with the funds in their pocket. Instead, you must be able to demonstrate the defendants were connected to the entities that have received the funds. It is still fraud if funds have been fraudulently obtained from your business and are no longer in the hands of the defendant.
• Standard of proof: the civil standard of proof applies to fraud claims, which means guilt is established on the balance of probabilities, i.e. what is more likely. However, in practice, more convincing evidence will be required to prove fraud has taken place instead of negligence. As a result, it is important you act promptly when dealing with allegations of fraud in order to obtain relevant evidence.
• Dishonest defendant: if the defendant is dishonest in giving evidence, the court held “this inevitably calls into question why such lies have been maintained" and will be taken into account when deciding how probable it is that the alleged fraud did occur. However, the court will not deal with your allegations of dishonesty if these are not pleaded.

Limitation

A number of other points arise from the case in respect of limitation periods:

• Disapplying limitation: the court held they would disapply the law on limitation where its application would result in a conflict with public policy, including where this would cause “undue hardship” to a party to the proceedings. It is important to remember that, even if you appear to be time barred under foreign law limitation periods, the court is open to hearing why it should overlook that time bar.
• Public policy: the limitation period will be contrary to public policy if it conflicts with the fundamentals principles of justice which are readily and clearly identifiable. The court considered its role was to fulfil foreign rights and not destroy them.
• Undue hardship: the court found that undue hardship will occur in circumstances where:
  • there are victims of fraud on a significant scale
  • the frauds are not obvious
  • the claims are substantial.
• Claimant fault: you should always avoid intentional delay, but remember the court acknowledged in this case that dealing with the fraud itself can prevent the claimant from timeously bringing a claim.

Practical recommendations

When fraud is either suspected or discovered the first steps you take are critical. You should consider the following:

1. Legal advice: you will need legal expertise to help understand what has happened and what the available legal remedies are for your business. In cases of complex fraud a legal adviser with close relationships to accountants, investigators, data professionals and other third party professionals will maximise your recovery chances.
2. Emergency injunctive relief: you may need urgent legal advice on obtaining a freezing, search or seizure order. It is critical you take action quickly to help trace stolen assets, to the extent possible.
3. Internal investigation: if there is evidence to suggest that the fraud was perpetrated by, or involved, persons operating within the business, then a forensic internal investigation is recommended.
4. Mitigate loss, risk and recurrence: you should consider whether the losses are met, all or in part, by a responsive insurance policy. You should also review the systems that have been breached or abused. For example, determine who has access to your business usernames, passwords and payment systems, and decide if these need to be reviewed.
5. Liaising with the police and/or other enforcement authorities: it is important that you inform the relevant authorities about what has happened. ActionFraud https://www.actionfraud.police.uk/ and the police non-emergency number 101 can both be used to report alleged fraud.

How can Burges Salmon help?

If you would like help or advice please contact David Hall.