When you go into business with someone, you need a great business relationship. You are essentially gambling on your future by investing time and money into creating something that relies in part on someone else. There is a need to trust your business partner implicitly. But total security may not be in the palm of your hand, and that is an unfortunate reality.
So, what happens if you suddenly no longer feel you can trust others? What happens if your business partners commit asset misappropriation fraud?
Whether your part of a limited company or partnership, finding out one of your directors is committing fraud can be heartbreaking and confusing. You will need to know what to do.
What is asset misappropriation fraud?
Misappropriation fraud is when someone uses their position to steal from the business by means of fraudulent activity. It can also be known as ‘insider fraud’.
It could be committed by a company director or someone else who is employed and entrusted to manage the interests and assets of your organisation.
Assets do not only include money, but they can also include intellectual property and company data.
When asset misappropriation is defined, it does not include ‘straight theft’ from an organisation by general employees, like stealing stationery. This is a different issue. Misappropriation fraud is the stealing of money or assets on a grander scale, for example stealing lists and selling them to competitors, or messing around with the accounts to hide money the individual then benefits from. Often, the company’s cash flow will suffer immensely.
What happens if a director acts in his own interest?
When a director breaches their duty for self-interest, this misconduct can lead to a finding of unfitness, and result in a disqualification order for the director.
Section 172 of the Companies Act 2006 states that a director has a duty to promote the success of the company. The act of asset misappropriation fraud will breach these duties because assets are being used to serve the individual, not the company.
Under Section 172(3) of the Companies Act 2006 and Section 214 of the Insolvency Act 1986, directors must prioritise the creditors of the company by not reducing the value of its net assets. This is a common form of misappropriation of company assets.
The director plays a very important role within a company and should not act fraudulently. They must not put their self-interest over that of the company. They must declare any potential conflict of interest or benefits they might receive before a company becomes involved with another.
It is important to understand that you are in part responsible for the actions of other directors. If a loss is discovered because of misappropriation of company assets, you could be ordered to contribute to make them up.
What are the most common instances of misappropriation of company assets?
The most common forms of this type of crime include:
- Falsifying invoices
- False expense claims
- Payroll fraud
- Data and intellectual property theft.
If you believe a staff member is committing any of these issues, they could be in serious trouble. It is very important you take immediate action.
What should I do if I think someone is misappropriating company assets?
You should call the police. This is a crime. You are being stolen from, and the consequences can be grave. If you are a director, you might find that you lose money yourself, because you might be required to make up any losses.
You should also contact Action Fraud and make a report.
Any employees suspected of involvement should be immediately suspended to prevent further losses. You cannot just dismiss someone, you will need to investigate, and you will have to adhere to your company’s disciplinary procedure, or else you will find yourself the villain in an ‘unfair dismissal’ case.
You should spend time working out exactly how much you have lost because of the misappropriation of company assets in case there is a chance you can recover it.
How do I protect myself from asset misappropriation fraud?
Protecting yourself involves investing real time into preventing this type of fraud. You should carefully vet your employees before they start working for you, offer staff the opportunity to whistle blow, consider rotating jobs (so that any foul play could be picked up by another employee), make staff aware you have fraud prevention in place, and regularly check and balance your books.
You can avoid money fraud by requiring any expenditure be signed off by more than one employee. It is unlikely two staff members will commit this type of fraud together.
Contact JMR Solicitors
If you think a member of your staff is misappropriating your company assets, we can help you investigate. Call 0161 491 3933, or email firstname.lastname@example.org.