Commercial fraud rarely announces itself. A trusted supplier quietly inflates invoices over months. A joint venture partner diverts business away to a competitor. An agent pockets payments meant for advertising costs. By the time these schemes surface, losses have often escalated into disputes that consume years in litigation.
Business organisations worldwide are grappling with increasingly sophisticated schemes that exploit gaps in contractor oversight and cross-border complexity. This article provides practical, legal, and governance guidance for corporates, high-net-worth individuals, and family offices entering or managing business relationships. The goal is straightforward: help you identify fraudsters before they become your partners, and equip you to respond decisively when warning signs emerge.
Understanding the Scope of Fraud Risk in Commercial Relationships
Fraud risks arise at multiple levels within any commercial arrangement. Directors may authorise questionable or improper accounting to mask deteriorating financial health. Partners may misrepresent their ownership structures or regulatory standing. Suppliers may perpetrate procurement fraud through sham invoices, duplicate billing, or charges for goods/services never provided. Agents and intermediaries may engage in identity theft, business email compromise, or diversion of payments to accounts they control. Even within ostensibly arm’s-length relationships, personal or professional ties can create undisclosed conflicts of interest that compromise the integrity of transactions.
The common types of corporate fraud in these relationships follow predictable patterns. Misrepresentation of financial strength tops the list, such as a supplier overstating production capacity to win a major contract, only to miss delivery deadlines and trigger contractual penalties that ripple through an entire project timeline. Falsified bank guarantees and false financial statements allow counterparties to secure credit or contracts they could never legitimately obtain. Invoice fraud schemes range from subtle (rounding up quantities or unit prices) to brazen (billing for entirely fictitious work). In more sophisticated cases, intermediaries create layered structures, including ostensibly legitimate companies like logistics firms or professional services providers to obscure beneficial ownership and facilitate corrupt third-party payments or money laundering.
The unsettling reality is that ostensibly reputable and qualified partners can conceal serious problems behind a veneer of legitimacy. A company with decades of filing history at Companies House, audited accounts, and blue-chip client logos on its website may nonetheless be teetering on insolvency, subject to undisclosed regulatory investigations, or controlled by individuals with concealed criminal backgrounds. English law imposes potential civil liability for misrepresentation, deceit, breach of trust, and breach of fiduciary duty. Whilst counterparties may face criminal exposure under the Fraud Act 2006 for false representation, the UK Bribery Act 2010 for corrupt payments to government officials or private sector partners, and the failure to prevent fraud offence under the 2023 Act.
Beyond direct financial losses, fraud in business contracts creates cascading consequences. Regulatory scrutiny following a fraud discovery can delay or derail M&A transactions and licensing approvals. Reputational damage may cost future business opportunities far exceeding the initial theft. Strategic projects or planned exits can collapse when key counterparties are revealed as fraudulent, leaving investors and shareholders questioning management’s oversight. The UK’s Action Fraud reported over 400,000 fraud cases in 2022 with total losses exceeding £2.3 billion, and the Association of Certified Fraud Examiners estimates that business organisations lose approximately 5% of revenue annually to occupational fraud, averaging $1.8 million per case globally.
Early Warning Signs: Spotting Fraud Before You Sign
Most serious frauds present detectable red flags months before contracts are signed, often during pre-contract discussions, RFP processes, or initial due diligence exchanges. The challenge lies in recognising these signals amid the normal noise of commercial negotiations and having the discipline to pause rather than proceeding under pressure.
Behavioural red flags deserve particular attention. Unusual pressure to close deals quickly without adequate due diligence should trigger immediate scepticism. Fraudsters understand that time pressure short-circuits scrutiny, and they may claim that a competing bidder is about to sign, that special pricing offers expire imminently, or that regulatory windows are closing. Resistance to standard KYC questionnaires, reluctance to provide verifiable references, or hostility toward audit and inspection rights all suggest a counterparty with something to hide. Commercial terms that appear “too good to be true” e.g., significantly below market pricing, unusually generous payment terms, or implausible delivery commitments often signal either desperation (a financially distressed counterparty willing to promise anything) or outright fraud (a party with no intention of performing).
Documentary and data red flags provide more concrete evidence. Inconsistencies between company names across different documents, discrepancies between Companies House filings and information provided directly, and unexplained ownership changes within the preceding 6–12 months all warrant investigation. Review financial and contracting records carefully. Invoices which do not match agreed milestones, purchase orders with unexplained amendments, and accounts that lack detail or show unusual patterns deserve scrutiny.
Structural red flags often indicate deliberate concealment. Complex cross-border holding structures, particularly chains running through high-risk secrecy jurisdictions with minimal substance make it difficult to identify ultimate beneficial owners and trace fund flows.
Once a relationship has commenced, operational warning signs may emerge. Consider this scenario: a long-standing supplier suddenly requests that payment be routed to a new bank account in an unrelated jurisdiction, citing a “change in banking arrangements.” Within weeks, the legitimate supplier contacts you to enquire about overdue invoices, and it transpires the account change was fraudulent, and funds have been diverted to criminals. This business email compromise pattern, often executed through hacked email accounts or carefully spoofed domains, has cost UK firms hundreds of millions of pounds.
Due Diligence as the First Line of Defence
Comprehensive due diligence is a non-negotiable step before entering material commercial relationships. A well-executed compliance program begins with robust onboarding procedures for all significant partners, suppliers, and other business associates.
For UK counterparties, start with foundational checks at Companies House. Verify that the company is actively registered and in good standing. Review the confirmation statement and annual accounts for at least the last three to five years, looking for late filings (which may indicate financial stress or poor governance), qualified audit opinions, and unusual fluctuations in revenue, assets, or liabilities. Cross-check directors and persons with significant control (PSCs) against the information provided directly as discrepancies between registry data and representations in proposals or contracts are a serious warning sign.
For counterparties in other jurisdictions, investigating potential foreign representatives requires adapting your approach to local requirements and data availability. Search relevant company registries, litigation databases, and insolvency registers. Check sanctions lists maintained by HM Treasury, OFAC, and the EU, along with enforcement notices from sector regulators. Be aware that data quality and accessibility vary significantly with some jurisdictions offering real-time electronic access to comprehensive records, while others require in-country agents or manual searches.
Reputational and media checks complement registry searches. Conduct targeted press searches across major news databases, including non-English sources where relevant and archives predating 2010 (some fraudsters rely on short corporate memories). Review social media presence for consistency with claimed business activities. Search specifically for any prior business fraud allegations, regulatory enforcement actions, or allegations of bribery, money laundering, or other financial crime issues. For counterparties operating in high-risk sectors or geographies, consider checks against databases of politically exposed persons and adverse media screening services.
Enhanced due diligence is warranted for high-risk partners operating in sectors like aviation, defence, pharmaceuticals, or public procurement, or in jurisdictions with elevated corruption or money laundering risks. Site visits to operational facilities can verify that claimed manufacturing capacity, inventory, or personnel actually exist. Reference calls with banks, key customers, and industry peers may reveal undisclosed problems or confirm positive track records. For transactions of significant value or strategic importance, consider engaging independent forensic or investigative services from firms specialising in background investigations, asset tracing, or undercover operations.
Internal governance structures underpin effective due diligence. Establish standardised onboarding questionnaires for all new suppliers and partners, capturing information on beneficial ownership, anti-corruption certifications, financial standing, and key personnel. Implement risk-rating matrices that assign higher scrutiny to counterparties based on sector, geography, transaction value, and prior relationship history.
Contractual Protections Against Fraud
Contracts increasingly need to reflect enhanced fraud and compliance expectations. Key representations and warranties form the foundation of contractual protection. Business should require counterparties to warrant the accuracy of their financial statements, the absence of undisclosed liabilities or pending litigation, and the authority of signatories to bind the entity. Include specific representations regarding compliance with anti-fraud and anti-bribery laws, including the UK Bribery Act and (where applicable) the Foreign Corrupt Practices Act. Where possible, insist on full disclosure of beneficial ownership structures and any relationships with government officials or politically exposed persons that could create corruption risks. These warranties should survive termination for a defined period, typically two to three years in order to preserve claims that may emerge only after the relationship ends.
Indemnity clauses addressing fraud-related losses provide direct financial recourse. Draft indemnities covering losses arising from misrepresentation, fraud, and regulatory investigations triggered by the counterparty’s conduct, including legal fees, settlement costs, and business disruption. Define key terms precisely—“fraud” should encompass both criminal fraud and civil deceit, and “losses” should include consequential and reputational damages where appropriate. Ensure indemnities survive termination and specify clear monetary and legal damages recovery mechanisms.
Audit and inspection rights enable ongoing verification of counterparty compliance and performance. In long-term supply, distribution, or joint venture agreements, reserve the right to access relevant books and records, interview key personnel, and appoint independent auditors at reasonable intervals or upon reasonable suspicion of irregularities. These rights should extend to subcontractors and sub-agents where the counterparty relies on third parties to perform material obligations.
Monitoring mechanisms should be embedded in ongoing relationships. Require mandatory periodic certifications confirming continued compliance with anti-corruption and fraud prevention obligations. Obligate counterparties to notify you promptly of any investigations by law enforcement agencies, regulators, or tax authorities. Reserve rights to request updated KYC information, beneficial ownership, directorship changes, material litigation on at least an annual basis or upon any significant corporate event. These provisions create an ongoing fraud risk assessment framework rather than treating compliance as a one-time onboarding exercise.
Termination and remedy clauses must address fraud scenarios explicitly. Reserve immediate termination rights for fraud, serious misrepresentation, or material breach of anti-corruption warranties, without cure periods that would allow wrongdoers to dissipate assets or destroy evidence. In critical service or supply contracts, consider step-in rights allowing you to assume operational control pending transition to an alternative provider. Include liquidated damages provisions where losses from fraud-related disruption can be reasonably estimated. Expressly preserve rights to seek injunctive relief, specific performance, and all other remedies available at law or equity as some counterparties may attempt to limit remedies in ways that would undermine fraud claims.
Responding When Fraud Is Suspected
When fraud is suspected, speed and control determine outcomes. PwC’s Global Economic Crime Survey data indicates that swift response recovers approximately 40% of misappropriated assets, compared to only 10% in delayed cases. The first hours and days after suspicion arises are critical but acting precipitously can destroy evidence, alert wrongdoers, and undermine legal remedies. A measured, systematic response protects both immediate interests and long-term recovery prospects.
The initial response should focus on securing assets and evidence without tipping off potential wrongdoers.
Documenting everything from the moment suspicion crystallises creates the evidentiary foundation for subsequent action. Maintain a central log recording events, decisions, and communications chronologically, including dates, times, and individuals involved.
Early legal advice is essential rather than optional. Specialist fraud counsel can assess contractual termination rights, potential civil claims (including deceit, conspiracy, and unjust enrichment), and obligations to report to regulators or law enforcement agencies. Legal privilege protects communications with counsel and work product from disclosure, enabling candid assessment of the organisation’s position and potential exposure. Counsel can advise on whether internal investigations should be conducted, and if so, how to structure them to preserve privilege and comply with employment law requirements.
Where assets are at risk of dissipation, urgent court applications in England and Wales offer powerful remedies. Freezing injunctions restrain defendants from disposing of assets below a specified value, preventing wrongdoers from moving funds beyond reach. Search and preservation orders (Anton Piller orders) permit entry to premises to secure evidence. Norwich Pharmacal orders compel innocent third parties, typically banks or cryptocurrency exchange platforms to disclose information identifying wrongdoers or tracing funds. Bankers Trust orders specifically target information about bank accounts through which misappropriated funds have passed. These applications typically proceed without notice to the defendant and can be obtained within 24–48 hours in urgent cases.
Lessons for High-Net-Worth Individuals and Corporate Leaders
High-net-worth individuals, founders, family offices, and board members frequently enter commercial relationships on the strength of personal familiarity such as a fellow member of an investment club, a family friend’s business connection, or a long-serving adviser’s recommendation. This trust-based approach to new business development has generated enormous wealth over generations. It has also enabled some of the most damaging frauds in financial history.
Personal familiarity is not a substitute for verification. The organisational anti-corruption policy and counter fraud measures that protect corporations must also extend to personal and family wealth structures.
Corporate good governance begins with embedding fraud risk management into formal governance frameworks rather than relying on informal trust. Supplier onboarding policies should apply consistently regardless of who makes the introduction. Conflict-of-interest registers should capture all relevant relationships, including those of senior executives and their family members. Documented approval matrices should require independent sign-off for significant commitments, particularly those involving new counterparties or unusual terms. Periodic independent reviews of key relationships whether by internal audit or external control mechanisms, provide assurance that procedures are followed and risks are identified.
The value of early intervention cannot be overstated. Addressing issues promptly, through queries, audits, or enhanced monitoring, frequently prevents escalation into multi-million-pound disputes and years of litigation.
A proactive legal strategy, combining thorough due diligence, robust contracts with appropriate report back procedures, ongoing monitoring, and prepared response plans protects more than balance sheets.
Review your key supplier, partner, and joint venture agreements now. Assess whether your internal controls, onboarding procedures, and monitoring mechanisms meet the heightened expectations of 2025 and beyond. Interview questionable providers before problems escalate. Engage specialist legal representatives to audit your fraud prevention framework and update contracts to reflect current best practice. The cost of proactive preparation is measured in thousands; the cost of reactive response to major fraud is measured in millions, and in years of distraction from the strategic work that actually builds value.
For further information, please contact r.grace@rfblegal.co.uk, who can provide you with advice and assistance tailored to your circumstances.
Ryan Grace
Managing Associate
