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Safeguarding for Businesses: Avoiding Financial Mistakes that Pose Legal Risks

Sound financial management is nothing short of vital for the success and stability of any business, particularly emerging businesses attempting to navigate a harsh economic climate. However, certain financial mistakes can inadvertently expose entrepreneurs to the risk of legal repercussions – that could cripple a business, harm prospects or even lead to punitive measures.

A comprehensive understanding of financial health and necessary legal compliance can help businesses avoid unnecessary risks and consequences. With this in mind, what are some of the more common forms of mistakes that businesses might encounter?

Improper Record-Keeping

One of the fundamental financial mistakes that can lead to legal risk comes in the form of improper record-keeping. Inadequate documentation, and disorganised financial records, can together lead to major compliance issues.

This is particularly the case when it comes to tax compliance, as poor record-keeping might lead to incorrect tax filings and debt to HMRC. HMRC audits would uncover the discrepancy with relative ease and could see the business sanctioned heavily as a result. There are myriad other reasons for which robust record-keeping is advised, including the satisfaction of investors and partners – who may have civil grievances where investment money is not correctly recorded.

Breaches of Contract

Failing to fulfil contractual obligations can lead to serious legal disputes and profound financial liability, even for smaller businesses. Contracts are much more easily breached than one might anticipate, too; duty of care is an implicit term in every contract made, and failure to uphold that duty of care could see a business liable for professional negligence.

There are, of course, many ways in which a contract can be breached, each of which brings its distinct form of regulatory or civil challenge. These are specific to industry, business and even individual contracts, but make judicious following of existing frameworks crucial for ongoing success.

Mishandling of Funds

Any form of fraudulent business activity can form the death knell for a given enterprise, but the most damning of these in the realm of financial errors comes in the form of mishandling company funds. There are a number of legal precedents for this, the most well-known of which is ‘embezzlement’ – the misappropriation of funds for personal gain.

Embezzlement might involve an individual siphoning off additional profits without recording them, or ‘borrowing’ money to scalp interest from it. Either way, there are many reasons why this can lead to negative consequences for the business in general – including a negative PR angle that could impact longevity.

Ultimately, commingling personal and business finances, diverting funds for personal use, or otherwise failing to maintain proper accounting controls can lead to legal disputes, financial liabilities, and potential accusations of fraud.

To overcome these different financial mistakes, and mitigate legal risk in the process, businesses should prioritise sound financial management practices. This might involve the hiring of a third party to examine financial systems and audit processes, but should also involve a top-down shake-up of company culture – fostering a culture of transparency and ethical financial practice.

What Are the Most Common Types of Financial Crimes?

The digitalisation of currency has solved some problems, but others have come to fill the gap. This is the plight of tech. It solves problems, but like the classic game of “whack-a-mole”, totally new issues crop up. The thing is, in the modern world, everything is digital. Did you know more than 50% of all internet activity is conducted on mobile devices?

Did you know white hat technology generates as much if not less than the “black hat” economy? The truth of the matter is both generate around $5 trillion dollars globally. So, naturally, there is a lot of financial fraud using digital avenues to cover digital “footsteps”, if you will. Let’s take cryptocurrency as an example.

The collapse of the cryptocurrency “FTX” is largely a result of financial fraud. FTX was, according to some, a political piggy bank; it was a sort of slush fund for certain interests. This fact is being disputed by the media presently. What is beyond dispute is that financial corruption, or criminal financial activity, resulted in the total collapse of this cryptocurrency.

So regardless of your perspective on this particular issue, it’s clear any business seeking to be financially secure in the regular acceptance or distribution of funds digitally needs to be aware of recurring cybercrime vectors. Following we’ll briefly explore five of the most common digital financial threats of this variety.

1. Money Laundering

It can be hard to determine if money laundering is going on in today’s deceptive digital environment. Cryptocurrency is a common way laundering is done, as discussed in the opening of this writing. Today’s crime-fighting software addresses this issue with AML, or Anti-Money Laundering, software. The following option has top-tier AML to fight financial crime.

You want to be sure investments are in companies that properly protect your digital assets. You also want to be sure you’re not financially involved with any business that generates funds through fraudulent means, as even if you’re not the perpetrator of such crime, association with such businesses represents a liability that might damage you later.

2. Identity Theft

Just because you’re a business doesn’t mean you’re immune from identity theft. Phishing attacks use false emails to trick personnel into providing financial access data or proprietary secrets. Hackers pretend to be managerial staff to hoodwink those down the chain. You need to be on your guard against this and develop appropriate preventative policy.

3. Insurance Fraud

Whether your business is really at risk for insurance fraud can be variable. Granted, schemes of this variety can affect any industry legally required to carry insurance, but some businesses are at greater risk. A fleet of semi-trucks will more likely be impacted than an accounting facility.

4. Credit Card Fraud

Credit card fraud is similar to identity theft, in that crooks steal information necessary to make purchases in place of the credit card’s owner. Be careful company credit cards are used properly and stored properly to protect them from being digitally manipulated.

5. Embezzlement

This is one of the biggest issues a business has to deal with. Whether embezzlement is through scraping digital quantities from the books, or in the form of stolen resources, your employees can be a threat. You need a means of measuring assets to determine if they’ve diminished internally.

Protecting Your Business from Common Financial Crimes

You can explore common financial fraud in greater depth here. Essentially, embezzlement, credit card fraud, insurance fraud, identity theft, and money laundering are some of the most common modern financial crimes your business needs to be aware of and set up protections against. There are others, but these are the “biggest fish”, as it were.