It will not surprise you to learn, then, that the recent annual FraudTrack report from BDO Stoy Hayward suggests total reported fraud in the UK stood at GB pound 1.19 billion for 2008. That’s a rise of 14% on 2007’s figure of GB pound 1.04 billion.
However, that survey only covers reported cases of fraud in the UK at a time before the recession really started to bite. This is just the tip of the iceberg, as the total amount of actual fraud is certain to be substantially greater.
Generally, of the investigations that the professionals carry out, less than 5% pass through the Courts system. It’s also worth stating that the modest increase in reported fraud should not be seen as the giving of any comfort to UK plc. Corporate vessels will run aground, not just because of economic conditions, but also because they have been defrauded.
In truth we are just at the beginning. More and more fraud will be uncovered in the next two years, and some of this fraudulent activity will be stunning in its scale and cleverness.
Retailers are taking a hammering
Retail businesses in the UK are taking a good kicking from fraudsters. The lack of customer flow in shops may be a major headache for retail managers, but at the same time they’re also seeing an increase in the footfall of fraudsters.
Recently, there has been a massive increase in fraud perpetrated on retailers. From 2005 to 2008, that increase was measured at 674%. Over the past two years, the increase has been a steady 62%.
The increase in fraud on retailers is terrifying. We have recently seen several High Street names fall as a result, and it’s frightening to think that others could fail because retailers are increasingly being targeted by fraudsters.
Following the money
The BDO Stoy Hayward report highlights the fact that fraud in the financial and insurance sector increased by 83% to GB pound 788 million, accounting for 66% of all fraud perpetrated in the UK.
The financial and insurance sectors are where the money is. It’s little surprise that these sectors suffer the most. Frauds – particularly in commercial lending, where banks will find that they have been misled as to the value of properties taken as security for loans – will increase.
A third area of concern from the report is fraud perpetrated by third parties, such as suppliers and customers. Third party fraud hit GB pound 273 million during 2008 – an increase on the 2007 figure of 347%.
Examples include suppliers under-delivering goods and perhaps overcharging for the pleasure of that under delivery, too. Customers will defraud suppliers when they see weak systems – claiming under deliveries of stock when in fact the delivery was correct, withholding payment for ‘disputed invoices’ and simply disappearing without paying. All occurrences are now very common indeed.
Some investigators have given a ‘triple whammy’ warning – management stealing from their companies, suppliers ripping off customers and regulatory bodies breathing down business’ necks. This warning is now becoming the reality, and it will continue to worsen during the credit crunch.
Blowing the whistle
Many investigations are begun by a whistle blowing letter within a business or organisation. 99 times out of 100, there’s always something wrong at a business that has received a whistle blowing letter, yet they often cause management to squirm and become indecisive.
The advice is clear – always look into the claims made and always investigate. The whistle blower may not actually be correct, but there is usually something amiss.
Paradoxically, whistle blowing may fall during a recession. The reason for this is simple: employees will not want to rock the boat in the sea of a precarious employment situation. Stories about redundancies are now common, and many people are just thankful about having a job. Why would they want to cause trouble by whistle blowing?
More likely, they will put their heads down, work hard and be grateful they can still pay their mortgage.
There has been a noticeable increase in custodial sentences for those fraudsters who have been caught and put through the criminal justice system. The average sentence length is up by just under a quarter. In particular, the sentencing of those involved in major frauds (deceptions involving a value of GB pound 50 million or more) has increased substantially.
The motives for fraudsters rarely change year on year – greed and the want for a lavish lifestyle give rise to nearly two thirds of all fraudulent acts. The paying of debts and gambling problems make up the other usual suspects in terms of motive. Where potential fraudsters are motivated by debt or gambling, the fraud that they’re most likely to commit is employee theft and cash fraud.
The demographic of a fraudster is all too familiar year on year – males aged between 20 and 39 make up the largest group of fraudsters, with the second placed category being males aged 40 to 59. 80% of all the frauds in this year’s FraudTrack survey were committed by males.
Reducing the fraud risk at your company
So what can security managers do to protect the host business from fraud? Here’s a set of pro-active measures to help organisations through these difficult and fraudulent times.
– Motive
Be wary of false accounting
Particular attention should be paid to relationships between the sales team members and customers, with management looking at year end sales team behaviour and the post year end issue of credit notes.
Review your bonus structure
Fraudsters rationalise to themselves that their performance is worthy of reward. Ensure that your bonus structure is fair, transparent and aligned to the behaviours you wish to reinforce throughout the company.
– Opportunity
Consider remote locations
There’s often a link between fraud and the distance from head office. For example, within a London-based organisation a small, seemingly profitable regional subsidiary will often receive less management attention and, therefore, the opportunity to commit fraud increases.
Conduct zero based budgeting
Organisations should pick an area of their business, for example marketing, and embark on a ‘zero-based budgeting’ exercise rather than relying wholly on trend against prior year.
Pay attention to areas where there’s no physical product
Any area of the business that has no physical product – for example consultancy services, factory cyclical maintenance or advertising – are often more susceptible to procurement fraud.
Assess IT vulnerabilities
Fraudsters use widely available tools, such as keystroke loggers, to obtain sensitive data like PINs and passwords. Appropriate administrative controls and passwords, prevention of unauthorised software installation, restrictions on USB ports and other measures can reduce the fraud risks.
– Indicator
Don’t neglect over-performance
If something is too good to be true, it usually is. When you are assessing the performance of a business or an individual within it, make sure you pay adequate attention to over-performance.
Review changes to the supplier master file
This is part of a computerised accounts payable system where data is held on suppliers, including their bank account details. It’s very important that an exception report is produced of any changes to standing data on the supplier master file.
Monitor the car park
Although it’s stupid to flaunt your ill gotten gains at work, most fraudsters do. Pay close attention to the cars parked in the management car park and consider whether the salary you pay certain managers warrants the vehicles they drive.
Perform background checks on recruitment
Don’t give those with a flawed history the chance to commit fraud in your company. Over 50% of people lie on their CV, so pre-employment screening to detect such falsehoods can prevent the employment of those lacking integrity.
Pay attention to morale
Fraudsters are often dissatisfied with their work and rationalise their entitlement to further reward.
Investigate high staff turnover
It’s very hard to be a whistleblower at work. It’s much easier to polish your CV and look for another job.
Management should pay particular attention to those areas of the business that have high staff turnover. It’s good policy to have in place a system of exit interviews for staff, enabling them to tell you about concerns that they may not have raised prior to deciding to leave the organisation.
Fraud will never completely go away. However, that doesn’t mean that you cannot combat it. Keeping a watchful eye and ensuring that your staff know that fraud will be investigated and reported will go some way to protecting your business.
Simon Bevan is national head of BDO Stoy Hayward’s Fraud Services Team