Telecoms Fraud Liability and Responsibility
Danny Preiskel of Preiskel & Co is one of the world’s leading telecoms lawyers. In this final post of Manuel Basilavecchia curated posts on telecom fraud Danny looks at the subject of telecoms fraud liability from a legal perspective.
Considering the devastating effects telecoms fraud can have on a wholesale or retail telecoms business this post looks at some of the legal aspects and provides some guidance to minimise the impact from a contractual perspective.
Civil Litigation for Civil Fraud
Successfully suing in civil litigation for fraud and recovering damages is only possible in certain circumstances, and with fraud being notoriously difficult to prove, the risk of losing in court and being liable for the defendant’s costs often outweighs the potential award of damages. This is exacerbated by the fact that even if the telco victim is successful, the defendant company may not have the funds to actually satisfy any judgment awarded.
As with other jurisdictions, English law also allows shareholders and directors to hide behind the veil of incorporation. Only in limited circumstances will the English courts pierce the veil of incorporation to convict or fine the individual shareholders behind a company, though directors can incur liability in addition to the company. Typically in the UK we have seen that fraudsters can simply re-appear and commit more fraud by hiding behind another company name.
Another legal principle which may accidentally protect fraudsters is the privity of contract doctrine, whereby contractual obligations are only due to the contracting party and not its sub-contractors. For example BT fraud department will usually not deal with carriers with whom it is not directly contracted with. This can be problematic as often BT’s call records as well as the knowledge and actions of its fraud department can be hugely useful.
And finally, there are the UK insolvency laws which make it hard and expensive to recover monies from a company in liquidation or administration.
Insolvency proceedings in the UK involve an application to court for the winding up of the company, usually after service of a Statutory Demand; and the appointment of an insolvency practitioner (to collect and distribute amounts for all the creditors).
If the insolvency practitioner is not convinced there are sufficient funds in the insolvent company then it will ask the company appointing it to guarantee its costs. Whilst this is understandable it can be a huge disincentive bearing in mind that any amounts recovered by the insolvency practitioner will be for the benefit of all the creditors. It is not just in the telecoms sector that it is rare for creditors who are unsecured to get any meaningful percentage recovery.
If an insolvency practitioner is funded then it could potentially sue the fraudulent director and attempt to get a recovery as well as make a report recommending the person be disqualified as a director for several years. However the harsh reality regarding insolvency related proceedings in the UK, means that the failure to properly fund an insolvency practitioner often results in a director getting away with the telecoms fraud.
The Telecoms LCR Chain – Profiting From Fraud
When it comes to the wholesale industry we find ourselves in the curious position that, often it is not just the perpetrator of the fraud who seeks to profit. Understandably carriers in the chain want to be paid in full (including their profit margin), meaning that they profit from fraud, albeit not a fraud they have committed themselves. In essence it can be quite galling for a carrier that has been left with a gaping revenue hole, to have its supplier insist on recovering not only its cost of transiting the traffic but also its profit margin.
Please consider the important recent case Frontier Systems Ltd (t/a Voiceflex) v Frip Finishing Ltd  EWHC 1907 (TCC), where the Court required the telecoms carrier to be liable for the calling costs, even if the traffic was fraudulently generated. We advise that in light of this judgment in particular that carrier review carefully and make amendments to their end user and wholesale agreements.
Carrier contracts should not only exclude, to the fullest extent permitted by applicable law, all express and implied warranties but should require the other party to be responsible, even if traffic was fraudulently generated by a third party. Looking up the supply chain, we advise our client carriers to require that the supplier’s systems should be set to block fraudulent traffic and accordingly be liable in the event that they fail to block such fraud, even if it has passed through our client’s system undetected.
There is a lot to be said for such provisions to avoid uncertainty at the outset, minimising our clients’ exposure in terms of liability whilst importantly drawing the carriers’ minds to implementing appropriate anti-fraud measures before exchanging traffic.
What the Industry Can Do
Beyond the various technical measures (not mentioned in this blog note), the blocking of certain destinations by the way of default and some anti-fraud security provisions in the contract protecting the single carrier, the telecoms industry should consider an industry code of practice:
agreeing to help other carriers in the chain in identifying the fraud, even though there is no contractual relationship;
agreeing not to profit from fraud, i.e. take out profit element of charges;
appointing industry representatives to have a better working relationship with the fraud sections of the police and the regulator;
allowing companies to refuse to pay up the supply chain where there has been fraud suspected, albeit subject to certain provisos to ensure that nobody unduly benefits in such case;
providing a reseller kitemark approach to help combat dial-through fraud (e.g. the FCS’ fraud group that Preiskel & Co helped set up; or the International Interconnection Forum For Services Over IP (I3 Forum))
considering an industry fund to make a contribution towards costs of bringing enforcement action against fraudsters
identifying a cost effective insolvency practitioner who understands the industry
This concludes telecom fraud week on trefor.net, edited by Manuel Basilavecchia of Netaxis. Read our other fraud posts from the week:
Colin Duffy on “is encryption the answer to data loss”
Manuel Basilaveccia on Missing Trader VAT Fraud
Dave Dadds – “telecom fraud is industry’s problem not the customer’s“
Manuel Basilavecchia on “A mobile operator fraud case study”
Jonathan Rodwell on “Telecoms and IT Security” and with part 2 here