Fraud breaks £1bn barrier in 6 months

Recession exposes fraud while regulators are poised to pounce

The growth of fraud in the UK continues unabated according to BDO LLP’s six monthly update on reported fraud entitled “FraudTrack”. For the first six months of this year fraud losses rocketed to £1.06bn and eclipsed previous half year figures and were almost the same as for the whole of 2008. This is the first time fraud levels have soared above the £billion barrier during the interim period in the seven years BDO has been conducting its market leading survey. The average value of a single fraud has also increased to almost £6m, an increase from £5m last year, and shows that fraud in the UK is still big business. This half-yearly Fraudtrack analysis shows that fraud is undoubtedly on the increase and BDO fully expects this to be another bumper year for fraudster. In particular, BDO expects more enforcement action by regulators in the financial services arena with enforcement action for insider dealing also becoming more prevalent. Mike Mason, Head of Fraud at BDO LLP in Southampton says: “In the past we have seen a focus on procurement type frauds i.e. UK public and private sector organizations paying too much for goods and services. However as the recession continues we are starting to see the other side of the fraud equation, namely revenue dilution fraud. We are seeing companies where management commit fraud by either setting up ‘companies within companies’ or diverting lucrative contracts away from the company to third party accomplices.” Mason continues: “Linked to this unethical activity is an increase in insider dealing where management don’t directly defraud their own employer but their actions leave them open to stringent, and often public, enforcement action by financial regulators. The Financial Services Authority has been cracking down on insider dealing this year with a number of individuals receiving criminal convictions and/or confiscation orders.” Mason predicts that competition between regulators to ‘act tough’ will lead to regulators following an American model of intrusive regulation. “We have a combination of political pressure and the understandable desire, in a downturn, for the public sector and corporates to be seen to have a zero tolerance policy. We are therefore likely to see increasing regulatory action.” He goes onto say: “Quite rightly British regulators do not want UK investors to experience a Madoff type investor fraud. They are also determined to counter SEC type accusations that the UK is soft on fraud. At various times, we have seen American regulators float this unsupported argument in order to encourage entitles to list on US not UK stock exchanges”. Mason believes we will see regulators taking an increasingly macho stance as they compete with both domestic and international regulators to uncover abuse in regulated markets. Linked to increasing regulatory actions, BDO is anecdotally seeing a market response to this. Mason says: “Increasingly law firms are now starting to recruit experts in market abuse. This is especially telling when in nearly all other areas major law firms are curtailing recruitment.” From these interim results, BDO predicts that the average fraud will top £7m by the end of 2010. As the average value of each fraud rises inexorably over the years, companies need to continually assess the level of fraud and fidelity cover they need to combat the rising fraud threat. Leading insurance brokers are now using BDO’s Fraudtrack results as one of the measurements for these assessments. If your company is regulated, some top tips for combating fraud are: 1. To have established a good open relationship with your regulator before you have an issue 2. To question and investigate unexpected good news to the same degree as you would investigate unexpected poor performance 3. To have a clear and transparent bonus system which doesn’t expose you to dysfunctional behaviour, resulting in regulatory action. Sectors and regions most at risk: • The finance and insurance sector remains a dominant fraud risk with 49% of all fraud in this sector • Mortgage fraud accounts for a fifth of all reported fraud and 36% of fraud in the finance sector • Third party customers and suppliers are responsible for 17% of all reported fraud on businesses whilst internally management cooking the books have also caused 16% of reported fraud • Greed remains the key motivator for fraudsters with 85% of fraud being motivated by greed and the desire to maintain a lavish lifestyle London and the South East continue to be the hotbed of fraud activity with 71% of fraud but Wales has also experienced 15% of fraud in this interim period compared to only 2% last year. Mason concludes: “Fraud is even more prevalent now and companies need to turn the vigilance screw up a couple more notches in recessionary times. The key message is to think the unthinkable, question good, bad and the inconvenient news, look for any anomalies in the financial statements and any significant lifestyle changes of the people around you. The regulators will impose heavy penalties so make sure you’re confident in the health of your business.” -Ends –

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