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What to Do When You Suspect Your Business Partner of Fraud

William B. Hanley Sept. 28, 2021

Operating a business with a partner or partners can present a unique set of challenges. Often, partners don’t agree on the direction of the company, or one partner may try to exert too much influence and control. When things get tough, one partner may seek a quick exit and demand to be bought out.

But what if you suspect a partner is committing fraud? In a business sense, fraud usually deals with matters of money. One partner may have set up a dummy business to which he or she is paying for “services rendered,” but in truth is just pocketing the cash. Or there may be kickbacks involved with a legitimate supplier. Whatever the fraudulent action, it is clearly a violation of the partner’s fiduciary responsibility and also a possible violation of civil and criminal codes.

Clearly, fraud can bring down the company if it goes unchecked, but what can you do?

If your business is operating in or around Irvine, California, as well as Orange County, Los Angeles County, or San Diego County, contact William B. Hanley, Attorney at Law. Attorney Hanley has 40-plus years of experience in helping businesses ferret out internal problems and finding a legal resolution to them.

If You Suspect Your Business Partner of Fraud

If you suspect a partner is using their position to unduly enrich themselves, their friends, or their family members, you definitely need to take action — but don’t let emotions get the better of you and make threats or unsubstantiated claims. You first must document everything.

Once you’ve assembled enough evidence to prove the fraud, then you need to obtain the legal counsel and services of an experienced attorney. If matters cannot be resolved internally, then civil action can be initiated to seek restitution.

Types of Fraud

According to the Association of Certified Fraud Examiners (ACFE), businesses on average lose 5 percent of revenue each year to fraud. The most frequent type of fraud, at 85 percent of all fraudulent activity, is called asset misappropriation. Financial statement fraud is the least used but the costliest, with a median loss of $1 million.

Asset misappropriation can take several forms:

Authorized Maker: An authorized maker is a person entitled to issue and sign checks for a business. The maker can issue a check to himself or a friend or family member and then list it as being paid to someone else in the accounting records.

Check Forgery: This involves someone obtaining a company check and forging the authorized maker’s signature.

Altering Checks: After receiving a check, someone alters the payee or the amount.

Concealed Checks: Someone who prepares checks, but is not allowed to sign them, slips a fraudulent check in with a stack of legitimate checks, hoping it will be signed.

Expense Reimbursement: Submitting inflated or fabricated personal expenses for reimbursement can be hard to detect, but often a pattern of abuse will become evident over time. 

Billing Schemes: This involves submitting false invoices to be paid to a fraudulent payee. The two most common ways this scheme occurs are through the use of a “shell” company — which then issues the false invoices — or by simply double-paying a legitimate vendor.

Non-asset misappropriation can also take place. This involves taking company materials, goods, or physical assets for one’s personal use, or even selling them. As for financial statement fraud, this is what is popularly known as cooking the books. The preparer of the financial statement can hide or relabel transactions that were self-serving, so no one really knows that the money is missing.

An ACFE study also found that it takes an average of 18 months to uncover a fraudulent scheme, but that takes into account larger corporations where it’s easier to cover up schemes, as opposed to a small business with only a handful of personnel. Also, though owners and executives on average account for only 19 percent of all fraud cases, they also cause the highest median loss to companies, averaging $500,000.

Fraud and Deceit of Others: A partner might also seek to enrich the company by defrauding or deceiving others. Such fraud may not directly benefit the fraudster as much as it will the company, but it is illegal. Fraud generally involves contracts and contractual obligations, while deceit can involve anyone so long as there is any effort through misrepresentation to induce an action that might be harmful to the victim, financially or otherwise.

Suppose a partner is making wild assertions or claims about a product your company sells. Consumers who buy the product then discover the claim isn’t true. The company’s reputation may be ruined, and there may be lawsuits arising if the harm to the consumers is substantial. You need to monitor and prevent any attempt to deceive or misrepresent.

Proving Fraud

Defrauding or deceiving others generally involves four elements: a false representation by the defendant, an intent to deceive, justifiable reliance by the plaintiff, and resulting damages. However, when it comes to internal fraud such as asset misappropriation, you will need to assemble hard proof, such as fraudulent checks, or the testimony of witnesses or others involved. According to the ACFE, most fraud is discovered by tips from employees.

When you suspect fraud, seek the involvement of a business litigation attorney immediately to help you uncover evidence of what’s going on to stop it and seek restitution.

Getting the Experienced Legal Counsel You Need

William B. Hanley, Attorney at Law, has helped clients with business disputes and disruptions since 1974. If you suspect a partner is involved in a breach of fiduciary duty through fraudulent activities, he will meet with you to go over the details of the situation and advise you of your legal recourse. If matters cannot be resolved internally, then he stands ready to take the case to court.

Move quickly before the actions of one partner bring the whole business down. If you suspect partner fraud in or around Irvine, or anywhere in the counties of Orange, Los Angeles, or San Diego, contact William B. Hanley, Attorney at Law, immediately.