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Franchises and their decentralised nature makes them potentially expansive. However, this often gives rise to the potential for fraud. As a franchisor, you give up a certain amount of control to your franchisees and grant access to sensitive aspects of your business. Therefore, you should ensure you can trust your franchisees and have anti-fraud mechanisms in place. This article will provide some background on fraud and explain how you can protect your New Zealand franchise against it.

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What is Fraud?

In legal terms, fraud can cover a broad range of potential activities. Firstly, fraud can be intentional criminal behaviour that involves deliberate deception to gain an illegal or unfair advantage within a business. Ultimately, fraud includes an element of dishonesty, and it can include behaviours like:

  • claiming fictitious profit;
  • misreporting asset valuations on financial statements;
  • insider trading;
  • using confidential knowledge for personal gain;
  • credit card fraud;
  • identity theft;
  • accessing computers or digital documents for a dishonest purpose;
  • forgery or alteration of necessary documents; or
  • misappropriation of assets through false invoices, theft, or payroll fraud.

Fraud can occur from people within your franchise, whether it’s your franchisees or their employees. Additionally, as more systems shift online, the exact target of fraud and how it happens has seen many changes. Primarily, the end goal of fraud is often financial gain. Moreover, this can result in severe financial losses for your franchise. However, with the importance of data to businesses, data leaks are also an increasing possibility.

For instance, if a franchisee were to use their confidential knowledge gained from your franchise for unlawful gain, this could qualify as fraud.

The Nature of the Franchising System

Franchising is a business growth model that many industries use. Typically, it involves a franchisor engaging franchisees to run different installations of their business with the same model. Franchisees run copies of the original business in different locations. Therefore, a franchisor may give them:

  • training;
  • educational resources;
  • intellectual-property licences;
  • supplier access;
  • access to trade secrets; and
  • confidential business information.

In return, a franchisee pays the franchisor various royalties or fees. By nature of the system, a franchisee could have access to sensitive franchise information. However, franchisees themselves can also fall victim to fraud as the owners of their businesses.

Additionally, while a franchisor is not likely to be liable for a franchisee’s actions, any fraud within the company can still have larger legal consequences. Ultimately, having a dishonest franchisee can be devastating for a franchise’s brand. Moreover, such a case can negatively impact customers’ trust in your business. In addition, new franchisees may also be reluctant to engage.

Therefore, having clear and precise clauses in your franchise agreement is crucial to ensure that the obligations of all parties are understood.

Knowing What Fraud Can Look Like

One of the first steps to protecting against fraud in your franchise is knowing what it can look like. Moreover, there are various ways that fraud can occur. However, its indicators are often quite similar in each circumstance. When identifying fraud requires specialist knowledge and highly privileged system access, spotting it may not be easy. Therefore, the more high level or sensitive systems are, the more protection they should have in place.

In particular, warning signs of fraud within your franchise can look like this:

  • lavish gifts;
  • financial processes without appropriate checks or supervision;
  • unusual cash payments;
  • franchisees or your employees agreeing to illogical or unfavourable contracts;
  • missing documents;
  • unexplained preferences for certain contractors;
  • invoices missing details; or
  • avoidance of due process and checks.

For instance, calculating costs requires accurate reporting of those costs. If there are some inaccuracies around exact numbers or unusual numbers, this could indicate fraud.

How Can I Protect Against Fraud in My Franchise?

If you can identify a fraud case in your franchise, dealing with it can be challenging. The best way to protect against fraud it is to put in place pre-emptive measures to discourage it. Additionally, ensure that your franchise operations manual includes a fraud and corruption policy. Furthermore, this policy should detail for your franchisees (and their employees):

  • what fraud can look like within the franchise;
  • that you do not tolerate any instances of fraud;
  • how people can report fraud; and
  • the consequences for committing fraud within the business.

Do not skip out on proper supervision and regulatory processes within your franchise. Additionally, it is good to promote a culture of honesty and transparency and clarify who people can go to if they think fraud has occurred.

If most of your systems are online, invest in proper log recording and security measures. With a clear access record, you can see who access what information and when. This can then be useful for generating a paper trail.

Key Takeaways

In short, fraud can be challenging to deal with if you find it. Therefore, ensure that you have protections to protect against fraud, regardless of whether you are a franchisor or franchisee.

If you need help preventing fraud within your franchise, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.

Frequently Asked Questions

What is fraud?

Fraud is a kind of criminal conduct which includes intentional deception to gain an unfair or unlawful advantage. This can include lying about your profits or misappropriating business assets for your personal gain.

What is a franchise?

A franchise is a network of businesses using the same model, branding, and systems. The franchisor is the source of these, while the franchisee pays them fees to have the right to do this.

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