Five year fraud figure tops £7bn

Are whistleblowers running scared?

Reported fraud in the UK exploded over the last five years and broke the £7bn barrier according to figures recently released from BDO LLP’s annual FraudTrack report. BDO’s team of specialist fraud investigators predicts that the £7bn mark is just a precursor of worse things to come and warns that annual reported corporate fraud will continue to rise significantly over coming years. Areas fuelling this warning include fraud expected across commercial lending and mortgage markets. Although reported fraud dropped in 2010 to £1.4bn from £2bn the previous year, BDO’s fraud experts believe this is a temporary drop due to two issues facing the UK. The first issue centres on the fact that fraud figures are seriously skewed by the trial dates of very large frauds that frequently can take in excess of a year to settle. As a result, the reported downward trend should reverse next year as cases conclude and figures are reported to regulators. The more alarming reason is that in economic downturns whistleblowers tend to be less active. Despite pressure from management to squeeze out smaller frauds, larger frauds - which usually come to light due to the action of whistleblowers - remain undetected. At a time of cutbacks and increasing unemployment employees become disenchanted and are less likely to report suspicious behaviour. This is especially a threat to organisational survival rates as such frauds often seriously affect financial stability so in the long run everybody’s job is at risk. But if an employee feels their job is under threat or they no longer have loyalty to their employer, the likelihood is that they will not stick their heads above the parapet to blow the whistle on fraud. With an increasing focus on fraud and bribery by US and UK regulators these organisations do not actively go out looking for large fraud but react to reports of fraud making the role of the whistleblower critical to detection and prosecution. Mike Mason, Head of the Forensic Team at BDO LLP in Southampton, commented: “In 2010 we had 372 cases totalling £1.4bn in the UK. The highest fraud was £170m and the second highest £161m compared to the previous year that saw two frauds estimated at £200m each and one reaching the £400m mark.” Mason also believes that fraud is not flavour of the month with risk departments at the moment. “Every few years there is a different hot topic for organisations to address. In the past this has covered the Y2K bug and money laundering”. He continues: “The current flavour of the month is bribery. There has been widespread marketing by law firms on the Bribery Act as well as heavy press coverage that has distracted attention away from fraud as a priority. Although risk and compliance departments should address both old and new risks, they face limited resources and giving equal attention to matters is problematic often with new risks taking a lead.” Mason warns against this fascination with the new: “Although you may have a theoretical loss if one of your agents is bribing a customs official in Shenzhen, you will have a crystallised bottom line loss if your UK supplier is over charging you because of collusion with a member of your purchasing department.” Other findings of the research which examined reported frauds in excess of £50,000 include: • Average custodial sentences have dropped to just over three years from 3.5 years • London, the North West and Wales are the UK’s top fraud hot spots. In the South, there were only 15 fraud cases in 2010, totalling £7.1m. • Motivation - greed continues to be the number one motive for fraud in the UK, accounting for over 78 percent of frauds in 2010. Fraudsters will go out of their way to embed themselves in a business for personal gain and they also make sure that they won't stand out from the crowd. From investigating hundreds of frauds in recent years, BDO finds that it is often the most trusted people in an organisation that might defraud that business. • FraudTrack has produced the following interesting statistics: Industry sectors Total Frauds Percentage Finance and Insurance £783m 55% Public sector £288m 20% Professional and scientific £173m 12% Fraud types Tax Fraud 20% Third Party Fraud (suppliers and customers) 18% Mortgage Fraud 16% Risk Reward Ratio: Fraud sentences by sector Highest - Real estate - 4.3 years Lowest - Health care - 1.8 years Fraud sentences by type Highest - Breach of Statutory Regulations - 6.3 year Lowest – Payroll - 1.5 years Top 10 Frauds for UK Businesses Mike Mason lists the ten most common corporate frauds: 1. Procurement fraud - you are paying too much for goods and services. 2. Accounts receivable fraud - your revenue is being diluted. Your sales force is conspiring with your customers by giving unjustified credit notes or discounts in return for kick backs. 3. Treasury fraud - attempts to make large one off payments to overseas bank accounts. Unlike most frauds the individuals who commit this type of fraud don’t stay put but are last seen buying a one way plane ticket to South America. 4. Asset disposal - your management team are conspiring with prospective purchasers to buy land or assets below market value. 5. Business within a business - some of you employees have conspired together to set up a rival company that takes away revenue that would otherwise come to you. 6. Commercial Lending Fraud - you are a bank and borrowers are colluding with other professionals to deceive you as to their personal circumstances or the value of your underlying security, eg hotels, retail centres 7. Mortgage fraud - you are a bank and borrowers are colluding with other professionals to deceive you as to their personal circumstances or the value of your underlying security 8. Recruitment Fraud - a common fraud which may seem fairy low risk is that of falsifying CVs and references. However this can become a major fraud risk if those individuals go on to defraud you. 9. Asset Based Finance Fraud - the borrower provides fictitious information to the lender in relation to invoices he/she has raised in order to obtain credit. He/she then takes the business into insolvency after having placed assets out of the bank’s reach. 10. Tendering fraud - individuals collude together to inflate the price of goods and services to a buyer. The victim of such frauds is usually a public sector organisation. - Ends – Words: 1,080

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