Corporate fraud

Published October 25, 2021, 10:10 PM

by Atty. Jun De Zuñiga

Atty-Jun-de-Zuñiga

Many years ago, I was invited to attend in Vienna an international colloquium on corporate fraud sponsored by the United Nations Commission on International Trade Law or UNCITRAL. It was a gathering of legal experts who presented actual cases of fraud committed on corporations, dissected them, and came out with notable conclusions. The question then is how did the fraud cases happen? The lessons I learned from that forum will address this question.

The first lesson imparted from the forum is to conduct due diligence on all transactions, whether big or small. The actual case presented was a maintenance worker whose job was to see to it that all lighting bulbs and lamps in the building complex are in order, which means he has to replace those that get busted. He went through his job doing inspection, monitoring and requisitioning petty cash for the replacements and nobody really minded him because the building was always well-lighted until, at the end of the story, the company found out that he has become a millionaire from rebates, discounts, ghost deliveries and price differentials resulting from inferior products. This case delivered the message that miniscule amounts, when multiplied many times over, could amount to a big fraud.

The next lesson is to make sure that you understand fully the transaction you are entering into. An actual case was a company desiring to invest its excess funds and in the process came across a financial broker who offered attractive financial products. The voluminous investment documents were then referred to the company lawyers who cleared them. It turned out that the documents gave the broker absolute discretion to draw from the funds, a large portion of which did not come back. The finding here is that the company lawyers are not well-versed in investment instruments and that they did not understand the transaction.

In the course of my long career as corporate general counsel, I have encountered financial transactions with which I have had no previous exposure. However, I am called upon to guide the management on whether a contract shall be executed and thus I have to review them and submit my recommendations. My instruction to my legal staff is simple: have the proponent department explain the transaction from beginning to end, step-by-step, with flow charts as may be needed, so that we will completely know the nature of the contracts and our rights and obligations thereunder. As general counsel, I will not affix my signature on a document I do not understand.

The third lesson I learned from the forum is to recognize your own capability and limitations. My law career has been essentially focused on banking and finance and if, for example, by some circumstance, I find myself in the midst of legal proceedings involving infrastructure, aviation or maritime laws, I certainly would feel inadequate to represent my company there. The prudent thing to do is to engage a legal practitioner in these fields. In that manner, not only will I find comfort that the interest of my company is sufficiently protected, I would also be able to save my name as a professional from reputational risk.

There is a common element in all cases of fraud: abuse of trust and confidence. The perpetrator is enabled to commit the fraud because of the trust reposed on him. As a countermeasure in all these cases, as exhibited above, there is also no substitute for due care and diligence.

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The above comments are the personal views of the writer. His email address is [email protected]

 
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