Fraud knows no boundaries

In the last few weeks, the so-called ‘NatWest trio’ lost their Enron-related
appeal against extradition to Texas, Ian Norris (former CEO of Morgan Crucible)
lost the first phase of his defence against charges of price-fixing to avoid
extradition to Pennsylvania, and another UK executive is already serving a
sentence in the US for allegedly ‘conspiring to bribe’.

The principle that law enforcement agencies must have cross-border powers,
including those of extradition, if they are to respond to the growing
internationalisation of financial crime is entirely reasonable. Unfortunately,
the mechanisms currently giving effect to this principle seem to lack the same
degree of reasonableness.

There is a growing realisation that the old rules involving a level playing
field are changing and that enforcement agencies will no longer be confined to
their own borders in pursuit of those they suspect of financial crime.

Despite the bizarre situation that prima facie evidence is not a requirement
for extradition, there is a requirement that the offence for which extradition
is sought must be a crime in England and Wales. Therefore, although the stakes
have increased and liability has been extended, the underlying cause for which
prosecution can be sought has not changed.

In February, the FSA released a paper based on an assessment of how senior
management were managing financial crime risk. It concluded, among other things,
that firms could do more to effectively manage fraud risk, and warned that
boards were not adequately involved in, and had unclear accountability, for the
delivery of anti-fraud strategic plans and developments and unclear or
inappropriate allocation of anti-fraud responsibilities.

It found fraud losses ‘hidden’ within bad debts, insurance claims and
write-off accounts which prevent management from assessing the true fraud risk
and taking appropriate mitigating action. It also found that firms that
underinvested in anti-fraud systems, controls and processes suffered relatively
high levels of fraud losses. Firms continue to assess proposed anti-fraud
investments against the same return on investment criteria as marketing
initiatives.

These findings seem to indicate that the full implications of the financial
crime risks faced by firms (and their officers) are not being sufficiently
considered and addressed.

In the absence of such consideration and investment to manage global fraud
risks, UK firms and their senior management will continue to be left with an
unmitigated risk, which is likely to culminate if further cases similar to those
highlighted in the past few weeks.

These previously isolated events may easily become permanent features of our
regulatory landscape.

David Sherwin is a partner in the fraud investigation & dispute
services practice at Ernst & Young