No one knows the true cost of economic crime to UK businesses. But with current estimates running at over £40bn a year, it’s no wonder that boardrooms are finally taking the issue more seriously.
The obstacles in fighting financial crime haven’t changed for decades; businesses rarely report suspected fraud to the police for fear of reputational damage, and there’s the perception that fraud squads don’t have the necessary resources.
Businesses are also reticent to report fraud committed on their premises because of concerns about a lack of control over the investigation, according to David Alexander, fraud investigation partner at KPMG.
But the drivers to combating fraud have changed radically. The myriad accounting scandals that have hit the headlines, resulting in ongoing criminal trials, have served to focus minds. Regulators and legislators have been booted into action in the US and Europe, leading to new rules that require companies to tighten their internal controls. The rules also make directors personally responsible.
‘Companies tend to go down the civil route, bringing in forensic accountants to track the problem,’ says Alexander. But he argues that reporting cases to the police provides a strong deterrent to employees. ‘It shows that the company does not tolerate fraud and will report it to the police. Of course, this has to be balanced against the downside. It depends on the size of the loss.’
Andrew Durant, forensic partner at BDO Stoy Hayward, adds: ‘There used to be an embarrassment about the “F-word”. There has been a sea change from 10 years ago about reporting fraud to the police. No one wants to go to jail, it’s a strong deterrent.’
Anecdotal evidence shows one in 10 cases of corporate fraud is reported to the police. And although research indicates an emphatic 93% of boards agree it is their ultimate responsibility, ‘corporate denial’ remains rife.
Only 57% of UK boards believe they have an understanding of the financial cost of economic crime, but six out of 10 respondents to the study by RSM Robson Rhodes believed the threat of economic crime is set to get worse over the next three years.
Initiatives between the police and the private sector to exchange information are helping the fight, but there are only about 600 police officers dedicated to fighting fraud.
The stakes are high, and getting higher. Technological advances have made life not only easier for business, but also for fraudsters.
KPMG’s fraud barometer, which tracks cases over the value of £100,000, revealed that, although the value of frauds committed had dropped over the last year, the number of fraud cases rose by 14% in 2004.
Management and employees accounted for a third of all cases, defrauding their companies of around £106m through processing payments to bogus suppliers or fictitious members of staff, according to the study.
The rise in these kinds of fraud has been explained by the growing popularity of electronic payment systems. ‘The processing payments fraud is the modern day equivalent of cheque fraud. There are great opportunities in this area.
‘Controls normally lag behind technology change and that has created an opportunity to take advantage of,’ explains Alexander.
Payment scheme fraud has hit a number of high-profile companies. But the cases have reached the courts with successful outcomes for the companies in question. The one most fresh in observers’ minds involves Joyti De-Laurey, former PA to two senior managers at Goldman Sachs, who defrauded the investment bank of £4.3m to enjoy a lavish lifestyle.
As always the adage ‘prevention is better than cure’ is fitting. Experts say companies must stop denying they are at risk. Once company directors understand the risks, they can start implementing basic measures to prevent and detect fraud, says Alexander.
There is sophisticated software that can carry out consistent checks on financial controls. But there are more basic controls that can be implemented, such as highlighting codes of conduct, screening staff, emphasising a whistleblowing policy and running regular bank reconciliation checks.
Ultimately, the best way forward is for a combined approach. ‘I work closely with the police. The more we work in partnership, the better it will be. The more the private sector understands what the police need to make it easier to prosecute, the more we can fight against it,’ says Alexander.
Durant supports this policy. ‘The police need our support and companies need to realise that they might have to pay for their assistance or provide resources to help.’
Sadly, for companies their main priority has traditionally been to minimise reputational damage and have money returned, not to prosecute.
Until businesses realise that they will have to invest more to combat economic crime, fraudsters will continue to reap the rewards. ‘£1,000 spent on preventative measure can save hundreds of thousands of pounds lost through fraud,’ warns Durant.
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