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Companies: Beware the Threat from Within

In a case which starkly illustrated the uncomfortable fact that the biggest threat to business success may come from within, the High Court has come to the aid of a financial services company whose trust was betrayed by a corrupt and dishonest employee who granted unsecured loans of more than $5 million to a corporate client threatened with insolvency.

The employee, who was head of the company’s risk management department, had acted fraudulently and in breach of his contract and fiduciary duties upon receiving a promise of receiving a $1 million ‘sweetener’. When that  was not paid, the Court found that he had taken the sterling equivalent from the company and used it to buy a house for himself.

The company, whose principal activity was foreign exchange broking, was not in the business of granting commercial loans. The employee had nevertheless extended loans to the client of whom he had little knowledge, without requiring any security and without performing creditworthiness checks or other due diligence. The client, a company based in the British Virgin Islands, subsequently failed and the company lost its money.

The loans were never brought to the attention of, or approved by, the company’s directors who only became aware of them when a ‘large hole’ was discovered in the company’s accounts. The employee had previously been admonished by the Financial Services Authority after irregularities were uncovered in a company of which he had been finance director.

The Court described the employee’s explanation for the loans and the promise that he would receive a $1 million payment for approving them as ‘complete nonsense’. The money was ‘a bung or bribe for granting a loan which was wholly un-commercial and disadvantageous’ to his employers.

In ordering the employee to repay to the company the amount of the loans, plus interest, the Court found that there was compelling evidence that he had acted dishonestly and fraudulently in his dealings with the client and seeking to conceal the truth from his employers. Although he claimed to be impecunious, he was also directed to pay the company’s substantial legal costs of the case.