While the full extent of the fallout from covid-19 on the global economy is yet to be seen, history has shown that recessions often uncover and act as a catalyst for fraud.
This, coupled with the fact that past economic downturns have shown us that those negatively impacted by portfolio losses will scrutinise the actions of those managing their assets, means that litigation is likely on the horizon, writes Amy Harvey, counsel at Peters & Peters.
As fiduciaries, trustees are guided by the responsibilities imposed upon them under the relevant law, contract or trust instrument but, in essence, they are duty-bound to act in the best interests of the beneficiaries.
Financial intermediaries and advisers are also likely to have duties to their clients imposed upon them, either by way of their contractual terms with their clients or through general fiduciary duties that arise as a matter of law.
There is limited precedent to inform advisers whether new duties have arisen as a result of the pandemic but, in any litigation, courts are likely to focus on the adequacy of management and administrative processes, as opposed to eventual portfolio results.
Therefore, an adviser should be proactive and ensure that they evaluate whether their current processes remain appropriate.
Advisers should analyse and identify any new actual or potential risks to assets under management and explore potential methods to minimise any negative impact. One obvious identifiable risk is the challenge of ensuring the proper remote supervision of employees and assets. Consider undertaking an objective, thorough examination of your risk management and control systems – are they still fit for purpose?
Regular and proper communication is also fundamental. Trustees have a duty to keep beneficiaries reasonably informed regarding the trust and its administration, even if the future is unclear. While duties incumbent on advisers are different, frequent communication in troubled times could still help mitigate worry and avoid litigation.
Steps financial advisers can take should they suspect fraud
When fraud is discovered, it’s often by surprise. That’s because most of us trust our colleagues and would rather focus our efforts and management time on accomplishing our goals for the business.
However, fraud does happen and is often accompanied by behavioural red flags such as having an unusually close association with a client or showing excessive control issues or an unwillingness to share duties or information.
If a trustee is attempting to hide actions, delaying providing information or providing vague answers to questions these can all be warning signs that a trust is being mismanaged.
Trust mismanagement could involve:
- making investments outside the powers of investment or investment profile for the trust;
- failing to exercise reasonable skill and care when making investments;
- making decisions based upon personal interests;
- failing to take reasonable steps to protect the trust fund;
- distributing trust assets to non-beneficiaries;
- using trust funds for a trustee’s personal advantage (even if only “borrowed”), and
- reaping other financial benefits from trust assets.
In less serious cases, beneficiaries can demand financial information showing how the trust fund is being managed and if not forthcoming, can apply to the court for an order compelling a trustee to produce information.
If mismanagement is identified, remedies are available
Potential proceedings could be brought: to make good losses; to recover trusts funds that were wrongly distributed to non-beneficiaries or misappropriated; or against a trustee who has wrongfully profited from their position.
Action can also be taken to remove a trustee from office (although that power may already exist under the trust instrument), as well as against third parties who may have dishonestly assisted a trustee in their breach of fiduciary duty or who have knowingly received trust property to which they were not entitled.
But, if fraud is strongly suspected or discovered, making enquiries of the trustee may not be the best course of action and steps taken in the first few hours and days will significantly impact the course and can even make or break the outcome of a full investigation.
You should consider engaging, at as early a stage as possible, an outside firm that specialises in financial investigations whenever fraud is suspected. These experts will review your position and lead you through the next steps.
Proper evidence collection and maintaining confidentiality are key to achieving a positive outcome in the event of fraud.
Where there are fears that assets may have been dissipated and could be further dissipated, it may be necessary to take urgent legal steps (such as obtaining freezing orders) without any notice to the trustee/adviser and before entering into substantive correspondence which could “tip off” the bad actor. Once assets and information are secured then investigations and litigation can continue.
Concerned parties should always seek advice at an early stage and keep proper records of all their communications. In less serious cases, following this guidance could make it possible to maintain a working relationship moving forwards and in more serious cases, it is likely to lead to a more successful outcome in respect of recovering misappropriated moneys or assets.
This article was written for International Adviser by Amy Harvey, counsel at Peters & Peters.