Member Article

Fundamental shift needed to tackle business fraud

A North East expert in insolvency has said measures to tackle business fraud will require a fundamental shift away from focusing on easy targets to confronting more complex cases.

Eamonn Wall, managing director of leading insolvency practice Robson Scott Associates, said proposals unveiled by business secretary Vince Cable were laudable.

But he added that in reality the emphasis was on punishing “easy pickings” while those behind large frauds continued to go unpunished.

In a speech on “responsible capitalism”, Mr Cable outlined proposals to improve company transparency and boost public trust in business.

Figures released by the Department for Business Innovation and Skills show that each year around 1,200 directors of insolvent companies are disqualified, and around 90 are prosecuted for criminal behaviour related to the management of a company.

Since 2010, more than 700 companies have been wound up in the public interest, 314 of them in circumstances where there was a lack of transparency regarding their formation, ownership or the veracity of documents filed with Companies House.

Mr Wall, whose company has offices in Darlington and Newcastle, said: “Mr Cable puts forward an appealing perspective, but experience and statistics tell us that, typically, it’s the low level offences that are punished.

“By far the most common offence that leads to disqualification of directors is the non payment of Crown debt because it is much easier to prove. Unfortunately, the directors guilty of this offence are not usually the ‘fraudsters’ Mr Cable wishes to punish.”

Mr Cable acknowledged that the public had questioned the inadequacy of the directors’ disqualification system as punishment for those acting fraudulently or continuingly ‘phoenix-ing’ their business.

He suggested a requirement for disqualified directors to undertake some form of education before being allowed to run another business, and to be fined to compensate creditors.

Mr Wall added: “The reality is that although the majority of the reports made against directors are for fraud-based allegations, less than ten per cent of the actual disqualification orders the Insolvency Service pursues are of this type.”

He said underfunding was also preventing the director disqualification process from being as strong a deterrent as it could be, pointing to a 40 per cent cut in the Insolvency Service’s budget.

“This has manifested itself in the number of directors reported for dishonesty rising by over 20 per cent in the past three years, while the number of cases leading to disqualification has stayed static,” he said.

“There is little point in the government looking to increase the level of punishment without also changing the system so the right errant directors are targeted. If you are unlikely to be pursued in the first place, why would a fine be a deterrent?,” he added.

This was posted in Bdaily's Members' News section by Martin Walker .