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Fraud in the UK shot up by nearly 30 per cent in 2005 |
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Tuesday, 21 March 2006 |
The value of reported fraud in the UK shot up by nearly 30 per cent in 2005 (compared with 2004) to almost £1billion, and has virtually tripled since 2003.
So says the annual FraudTrack report from accountants BDO Stoy Hayward. The analysis suggests that UK businesses are losing more and more at the hands of their own workers, with the value of employee fraud increasing by more than 80 per cent since 2004 (and 200pc since 2003).
Nearly two-thirds (65 per cent) of frauds where a motive was reported have been as a result of greed and the desire to lead a lavish lifestyle. A further 11 per cent were linked to gambling and 10 per cent were to pay existing debts.
Other research by BDO Stoy Hayward suggests that, when it comes to stopping fraudsters, businesses are failing to make use of their main ally: the honest majority of workers. When questioned, most staff said they would want to report dishonest colleagues, but many would be deterred through not knowing the correct procedure or through fear of recrimination.
To better understand the attitudes of the UK workforce towards fraud and 'whistle-blowing' (that is, reporting dishonest conduct) BDO Stoy Hayward commissioned UK research into this subject, questioning around 1,500 people in employment. The good news is that the majority of employees, more than 90 per cent, would want to speak out if they found out that their boss had committed a serious fraud.
However, the accountants add, this was balanced with the findings that many employees find dishonest actions acceptable. One employee in eight feels it can be acceptable for managers to award a lucrative contract to a company secretly owned by a relative.
What they say
Andrew Durant, Head of BDO Stoy Hayward’s Fraud Investigations Team, said: “Awarding contracts to businesses secretly owned by family or friends is a very common method used by fraudsters. The services will be overpriced or may never even materialise at all. At a very minimum, companies should expect a full disclosure of any connection a manager has with a supplier. Either way close family connections to a supplier, whether secret or not, will almost inevitably create conflicts of interest for even the most honest manager.”
As for jail sentencing of fraudsters: in 2005, the typical prison sentence for a fraudster taking £1m was under four years. Three-quarters of people think this is insufficient to deter a fraudster (16 per cent feel it is sufficient) and 61 per cent feel the sentence should be longer (24 per cent thought a sentence of four years or less was sufficient). In fact, despite the value of frauds going up, the length of sentence is declining slightly to just under two years and 11 months. Some 17 per cent of those convicted received a non-custodial sentence in 2005 (compared to 21 per cent in 2004 and 10 per cent in 2003).
Andrew Durant said: “Given the government is currently trying to remove trial-by-jury for serious frauds to make it easier to convict in such cases, it is ironic that few people feel that the sentences being handed out when a conviction is secured provide much of a deterrent. Removing trial-by-jury is presumably cheaper than increasing prison sentences for this harmful and invidious crime. It is disappointing that employee fraud continues to rise at such an alarming rate. The finding that employees are still in fear of their livelihood when reporting fraud, despite the introduction of the Public Interest Disclosure Act back in 1998, does not surprise me – in every fraud I have investigated at least one employee admitted to suspicions, but often failed to report them for fear of recriminations. The Financial Services Authority has recently and rightly warned financial sector firms to be on their guard against criminal gangs that are increasingly targeting them. However, for most businesses in the UK the reality is that when they are the victim of fraud the perpetrator will not be a mobster. The fraudster will be an ordinary and trusted employee who has developed a taste for exotic holidays, fast cars and a fast lifestyle. Our research shows that very few employees (one in 12) expect any sort of reward or recognition for alerting their management to suspicions of a fraud - clearly, attitudes need to change. Directors need to ensure their businesses move away from a culture where the whistleblower is seen as a ‘grass’. The analysis of employee fraud shows that procurement and payment frauds account for the highest number of employee-based frauds, and revenue diversion accounts for the greatest volume, which is in line with my experience of investigating hundreds of frauds over the past decade.”
BDO Stoy Hayward FraudTrack report’s main findings include:
The taxpayer was the biggest victim of fraud, with the value of tax fraud increasing by 16 per cent since 2004 and by 159 per cent since 2003 to £350m in 2005.
By value, nearly half of all fraud reported (£465m - 47 per cent) was committed in London and the South East, with the rest of the UK accounting for £516m.
The biggest sector in terms of frauds taking place was financial services (accounting for half by value – nearly £0.5 billion), followed by the wholesale trade at 26 per cent (about £0.26 billion).
Fraud continues to be a male-dominated domain, with women accounting for only 18 per cent of those convicted for fraud. However, for the first time since the analysis was started in 2003, women under the age of 20 have been convicted for involvement in fraud.
Of the 90 per cent of employees who claimed they would report a fraud if they discovered it, only eight per cent would report it directly to the police. A quarter would raise it with an outside adviser such as a lawyer or their trade union, while 53 per cent would want to report it to someone senior at work. However, of those who would report it at work, over one third feared some sort of recrimination, whether losing their job, being cold-shouldered by colleagues or in some way having their career prospects harmed – only eight per cent expected reward, recognition or promotion.
About frauds
Procurement frauds typically involve an employee rigging the tender for a contract in return for a bribe or placing orders with businesses in which they have a secret financial or family connection. Payment frauds involve the payments, whether for real of false bills, being diverted to the fraudster. Revenue diversion frauds typically involve payments to the business being intercepted by the fraudster, who then destroys evidence that the money is owed (eg by erasing the original invoice).
Some of the cases in 2005
The largest frauds in 2005:
£156m - A fugitive VAT fraudster made £156m from the illegal sale of computer chips and mobile phones (around three times the size of the recent high-profile robbery in Kent). In April Nasser Ahmed, formerly of Knowle, fled his trial minutes before a jury found him guilty and was sentenced in August in his absence to six years in prison. The £156m would have put him among the top 250 people in the UK according to 2004 "rich lists". The court was told he had absconded from bail twice but was given bail again before his third and final disappearance on the last day of his trial. (Source: Bristol Evening Post)
£76m - financier Ian Andrew Leaf was found guilty at Southwark Crown Court of 13 counts of fraudulent trading, following an eight year investigation by HM Revenue & Customs and in December was sentenced to 12 years and six months. The complex £76m fraud featured thousands of fictitious documents centred on a company purchase scheme which involved Leaf buying 13 UK subsidiary companies. Leaf created fictitious documents from a bank registered in the Pacific island of Nauru, controlled by him, which fictitiously showed the companies had borrowed huge sums of money. The resulting fabricated interest payments were used to reclaim corporation tax rightly paid by the companies before he purchased them. (Source: HMRC & BBC Website)
Examples of employee frauds
Payroll fraud – in February 2006 hospital manager Joy Henry was sentenced to four years for defrauding the NHS of almost £600,000 through creating “ghost” employees whose salaries she and associates received over a 2.5 year period. The fraud at the Kings College Hospital NHS Trust involved her putting 10 bogus employees on the payroll, and was used to fund a luxury lifestyle, including an expensive Audi convertible and regular holidays to America and Nigeria. (Source: Daily Telegraph)
Procurement fraud – Havering council officer Kevin Barry, 52, of Basildon, was sentenced in August to 15 months for rigging the tenders for IT contracts, resulting in the council paying over-the-odds for PCs, printers and software. Christopher Clarke, 42, of Springfield, the managing director of Orbital Solutions of Essex was sentenced to a year for the scam, which took place over a 14-month period. (Source: Essex Chronicle)
Payment fraud - solicitor Ian Macfarlane, 45, of Blandford, Dorset, stole £825,000 by setting up a bogus account in the name of “I Revue” was jailed for three-years-nine-months. The fraud lasted for nearly eight years and involved 164 cheques that should have been paid to the Inland Revenue. The money was used to develop his own property business and pay for his children’s school fees. (Source: Press Association).
About the research
FraudTrack is prepared by BDO Stoy Hayward and is based on all reported fraud cases of over £50,000 during the period from January to December 2005. The sources for the database include: The Serious Fraud Office, the Department of Trade and Industry, the Metropolitan Police and the UK’s national, regional and local press. The data represents 221 cases of fraud with a total value of £981m.
About the opinion research
Conducted by opinion polling firm YouGov in February 2006. The survey of employee attitudes was based on a representative weighted sample of 1,360 people in employment (from 1,426 interviews). Questions about sentencing were based on a representative sample of 2,010 responses from adults.
Source: http://www.bdo.co.uk
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