Are you a business owner? Well, it might interest you to know that almost a third (32%) of all cases of fraud committed in the UK in the first half of 2015 were by employees and cost firms and organizations over £46m (c.US$70m), according to BDO’s Fraudtrack report. But is it the proverbial tip of the iceberg?
While employee fraud in the UK runs across all sectors from real estate to education and manufacturing and accounted for 6% of the overall total according to the accountancy and business advisory firm BDO, by number of cases reported the sector was followed by investment fraud (23%) such as Ponzi schemes and boiler room scams, third-party fraud, which includes frauds committed by suppliers and customers (20%), and non-corporate fraud (16%).
Fraud clearly is still big business as the figures show, but many companies and individuals are still not doing enough to protect themselves from the fraudsters. One might describe the situation as endemic across the UK and the elephant in the room that people at the top of companies never seem to fully listen to. Perhaps they might do now after reading BDO’s alarming findings.
The total value of reported fraud in the UK in the first half of 2015 was £798m, which was around £80m (10.025%) more than the amount reported in the corresponding period last year according to BDO’s interim Fraudtrack, which gathers information from publicly available sources including the UK’s national and local press.
Resurgence In Reported Fraud
Kaley Crossthwaite, Partner and Head of Fraud at BDO with over 18 years’ experience in forensic accounting, commenting in the report’s wake says: “Our analysis shows a resurgence in reported fraud, indicating that people are still not being vigilant enough and need to step-back and think about how they personally or their business is susceptible to fraud.”
The report, which is based on all reported fraud cases over £50,000 (c.$77,000) between 1 December 2014 and 31 May 2015, revealed that the average fraud by value rose 79% to £3.27m - from £1.82m in the previous period.
By geography it shows that London, the UK’s capital, is a mega hotspot for fraud with the value of reported cases being £460m. It was way ahead of Yorkshire in second place at just over £166m and the East Midlands in third (£45.34m), while East Anglia came bottom of the pile in 11th with a reported figure of just £242,776.
Of course the precise figure for all fraud committed in the UK will remain a mystery as not all such crimes are reported. In many cases frauds go unreported because organizations prefer to swallow the loss rather than going public.
If we take a sector like the UK food and drinks industry, a report in 2014 by PKF Littlejohn found that fraud in that industry was so widespread that it costs the country up to £11 billion (c.$17bn) year - equivalent to around £424 (c.$655) per household.
The report, which was based on research of 73 listed food and drink industry companies (UK FTSE 100 right down to FTSE Small Cap companies) with total annual sales of more than £200bn, covered people siphoning off cash at every stage of the supply chain, substituting ingredients, making false claims or simply stealing money. So BDO’s numbers might actually be at the ultra conservative end of the fraud spectrum.
Money Laundering & Third Party Fraud
Third party fraud and money laundering fraud for the latest period calculated by BDO Fraudtrack stood at just over £309m (39%) and £291m (36%), respectively, and were the largest areas of fraud by value. The most common types of fraud include the straight diversion of cash into bank accounts, changing supplier details to friends or family member’s bank details and direct payments to self/other bank accounts via cheques or online payment systems.
Time To Detect Fraud Can Be Lengthy
The culture in a business can have a significant effect on whether fraud is detected or the length of time it takes to detect. According to BDO’s Crossthwaite, who has also been appointed an inspector to investigate insider dealing through the Companies Investigations Branch of the UK’s DTI: “In some cases it can be as long as seven years [to detect].”
She adds: “Detection can often take longer where there is more than one employee engaged in fraudulent activities at the same time and they are all utilizing the light-touch culture of a business to conceal these activities.”
Preventing this can be as simple as putting training in place, regularly checking fraud controls as well as “setting the tone at the top and ensuring it filters down into the organization, creating a culture of healthy scepticism.” But it may also involve making some further investment to bolsters systems, practices and potentially calling on the services of external experts.
Investment Fraud: 'Stand Out' Category
BDO points out that the level of investment fraud is the “stand-out” category. Crossthwaite says: “This may be the result of ‘too-good-to-be-true’ investment opportunities, such as those which offer investment in precious metals, gems and other esoteric products, turning out to be just that.”
There is a risk too that with the recent pension freedoms [in the UK], these illegitimate investment offers will continue and perhaps even increase, "luring a new generation of investors" with market leading returns.
Third Party Fraud
With third party fraud, the majority of frauds that BDO is seeing are along well established lines such as phishing and changing of supplier details. However, there are also worrying new trends that are emerging that organizations need to be on the lookout for.
These include, for example, false employees and contractor creation, generating an artificial inflation of costs and customers purchasing non-existent products such as flights, magazines and car insurance.
“From this it is clear that businesses need to be more thorough in all due diligence carried out - not only on sale and purchase transactions - but on their existing and new suppliers, customers and new recruits,” Crossthwaite argues.
She adds: “This is not only about preventing future losses but also thinking about the long-term damage that can be done to a business in terms of its ability to get new suppliers and customers as well as their reputation in the market.”
Levels of fraud differ across sectors, with the BDO research revealing that the public sector is falling foul to fraud most often. One in five (20%) cases of reported fraudulent activity occurred within public administration, which accumulated to a total value of over £257m.
Fraud in financial services was also relatively high with around one in seven (16%) cases being committed in the sector. That equates to a value of £210m. However, it is individuals that remain the main target for fraudsters. Scams continue to con the general public, accounting for more than a quarter of all reported fraud and totalling £188m of losses.
BDO’s Top 5 Tips For Preventing Fraud
The accountancy firm, which is the UK member firm of the BDO International network that provides business advisory services in 152 countries aimed at the mid-market with revenues of over $7bn, has provided five top tips for seeking to prevent fraud - as follows. Of course five tips might probably be just for starters.
Tip 1. Ensure You Employ The Right People: Try, as much as possible, to ensure fraudsters don’t enter your business in the first place. New employees should be properly scrutinised before being hired.
Tip 2. Undertake Training: Businesses that provide regular fraud training and awareness for all staff can often profit from the investment of time and resources.
Tip 3. Put In Place A Strategy: Large businesses should have a fraud department with a clearly defined prevention strategy detailing controls and procedures to prevent fraud before it happens.
Tip 4. Be Watchful Of Customers And Suppliers: Undertake due-diligence before starting any new customer or supplier relationship and regularly review customer and supplier lists.
Tip 5. Set The Tone: Make employees aware what is expected of them from the top and help ensure it cascades down the organization, which can help that the culture is one of healthy scepticism.
Crossthwaite concludes: “Fraud is prevalent across sectors and is a significant loss to many organisations and individuals. The increased level of reported fraud could be down to firms having less time or inclination to deal with claims internally and individuals also being too laid-back in protecting themselves. Fraudsters are not on the decline and therefore caution must be taken to look after and understand exactly where your money is.” So, forewarned is forearmed.
