2.4.2.1 Fraud

Allegations relating to fraud were perceived to be personally threatening because of the high level of unknown risks in terms of the extent and severity of the financial and reputational damage to the company and the director concerned. Fraud exposure was often associated with a failure of managerial control and inadequate internal controls at subsidiaries. When fraud is suspected, there is consequently an immediate concern that parent company directors may not have been as ‘in control’ as they should have been and may be vulnerable to directors’ liability.

Several developments may potentially amplify a director’s sense of personal liability for corporate irregularities. For example, several participants mentioned the obligation to provide a whistle-blower scheme as part of the internal control framework and the corresponding duty to act on detection of irregularities.2 Moreover, group company directors are more attentive to the control measures at subsidiaries because they have to account for the group shortcomings regarding internal controls in annual reports.3 A second factor is that non-executive directors are keener to initiate internal or forensic investigations with or without the co-operation of the executive board.Many of the supervisory directors who were interviewed felt it was one of their important duties to act in response to signs of irregularity, whether of a general, operational or financial nature, but especially if these irregularities involved executive board members. A third issue relates to liability exposure due to international anti-bribery legislation as well as the books-and-records provisions under the US Foreign Corrupt Practices Act 1998 (FCPA). The FCPA imposes American anti-bribery laws on all (i.e. both US and non-US) listed and unlisted companies and natural persons, as well as accounting practices on listed companies.4 Consequently, the FCPA acts as an international standard on the basis of which the business integrity, books and records of companies are monitored worldwide. A small sample of important cases involving Dutch companies has made directors even more aware of the ways in which the anti-bribery and books-and-records provisions have increased potential personal liability exposure.5