The growth of fraud in the UK continues unabated according to BDO LLP’s six monthly update on reported fraud. For the first six months of this year fraud losses rocketed to £1.06bn and eclipsed previous half year figures and were almost the same as for the whole of 2008.
This is the first time fraud levels have soared above the £billion barrier during the interim period in the seven years BDO has been conducting its market leading survey. The average value of a single fraud has also increased to almost £6m, an increase from £5m last year, and shows that fraud in the UK is still big business.
This half-yearly Fraudtrack analysis shows that fraud is undoubtedly on the increase and BDO fully expects this to be another bumper year. In particular, BDO expects more enforcement action by regulators in the financial services arena with enforcement action for insider dealing also becoming more prevalent.
Simon Bevan, Head of the Fraud Services Unit at BDO LLP, says: “In the past we have seen a focus on procurement type frauds i.e. UK public and private sector organizations paying too much for goods and services. However as the recession continues we are starting to see the other side of the fraud equation, namely revenue dilution fraud. We are seeing companies where management commit fraud by either setting up ‘companies within companies’ or diverting lucrative contracts away from the company to third party accomplices.”
Bevan continues: “Linked to this unethical activity is an increase in insider dealing where management don’t directly defraud their own employer but their actions leave them open to stringent, and often public, enforcement action by financial regulators. The Financial Services Authority has been cracking down on insider dealing this year with a number of individuals receiving criminal convictions and/or confiscation orders.”
Bevan predicts that competition between regulators to ‘act tough’ will lead to regulators following an American model of intrusive regulation. “We have a combination of political pressure and the understandable desire, in a downturn, for the public sector and corporates to be seen to have a zero tolerance policy. We are therefore likely to see increasing regulatory action.”
He goes onto say: “Quite rightly British regulators do not want UK investors to experience a Madoff type investor fraud. They are also determined to counter SEC type accusations that the UK is soft on fraud. At various times, we have seen American regulators float this unsupported argument in order to encourage entitles to list on US not UK stock exchanges”.
Bevan believes we will see regulators taking an increasingly macho stance as they compete with both domestic and international regulators to uncover abuse in regulated markets.
Linked to increasing regulatory actions, BDO is anecdotally seeing a market response to this. Bevan says: “Increasingly law firms are now starting to recruit experts in market abuse. This is especially telling when in nearly all other areas major law firms are curtailing recruitment.”
From these interim results, BDO predicts that the average fraud will top £7m by the end of 2010. As the average value of each fraud rises inexorably over the years, companies need to continually assess the level of fraud and fidelity cover they need to combat the rising fraud threat. Leading insurance brokers are now using BDO’s Fraudtrack results as an one of the measurements for these assessments.
If your company is regulated, some top tips for combating fraud are:
Sectors and regions most at risk:
London and the South East continue to be the hotbed of fraud activity with 71% of fraud but Wales has also experienced 15% of fraud in this interim period compared to only 2% last year.
Bevan concludes: “Fraud is as prevalent now as it has ever been and companies need to turn the vigilance screw up a couple more notches in recessionary times. The key message is to think the unthinkable, question the good, the bad and the inconvenient news, look for any anomalies in the financial statements and any significant lifestyle changes of the people around you. The regulators will impose heavy penalties so make sure you’re confident in the health of your business.”
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Notes to Editors
Simon P Bevan is BDO’s head of the fraud services team. He has over twenty years experience of investigating fraud both in the UK and other international locations.
Procurement fraud: Typically found in an entity’s purchasing operation with a fraudulent employee perhaps working with an outside accomplice to defraud the employer through bogus or inflated invoices for goods and services. Large scale frauds often taken place in relation to sizeable purchases of Information Technology or other fixed assets. Will also include the corruption of management with purchasing authority by suppliers in order to encourage orders being placed with a particular business.
FraudTrack is prepared by BDO and is based on all reported fraud cases of over £50,000 from December 2009 to May 2010. The sources for the database are publicly available and include the UK’s national, regional and local press.
BDO LLP, a UK limited liability partnership registered in England and Wales under number OC305127, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. A list of members' names is open to inspection at our registered office, 55 Baker Street, London W1U 7EU. BDO LLP is authorised and regulated by the Financial Services Authority to conduct investment business.
The combined fee income of all the BDO Member Firms was US$5.026 billion in 2009. The global network has 1,138 offices in 115 countries and more than 46,000 partners and staff provide business advisory services throughout the world.