Fraud Advisory Services

Support Publishing is a recognised term used for businesses that manage the publication of a range of items such as desk diaries, wall planners, pamphlets, magazines and books. The items will be used to promote a particular good cause. For example a diary might be prepared on behalf of a police sports foundation or a booklet might be published in support of child safety on crossings outside schools.

The intention is for the publication to be circulated to schools and community centres in such a way as to raise public awareness of the messages contained within, such as child safety, safety at work or the good work a charity might be doing.

Of course the publishing company needs to be paid for supplying the publication and there are two ways of doing this. The first is for the charity or good cause to approach the publisher and commission the required item. They may order and pay for several thousand desk diaries to circulate around potential donnors. Details of the charity and the work it is doing will be contained within the diary. This is no different from the marketing products that may be commissioned by commercial companies to raise awareness of their brands.

The second method for funding the publication is for the publisher to include commercial advertisements. An advertser may be happy to fund an entry in a good cause booklet knowing that the public will associate their name withe the good cause and in doing so raise the commercial awareness of their brand. In theory it would be a good method of marketing.

There is nothing futrther to mention concerning the first method of funding. However, the second method is wide open to abuse by con merchants who see this as an easy way to solicit money from the millions of gernerally small businesses around the country who find it very difficult to say “no” when asked to support a good cause locally while at the same time gaining valuable marketing exposure.

To illustrate the support publishing practice that has grown up in the UK over recent years consider the case of McPherson Stone Limited and Cavendish Green Limited. These support publishing companies have been well reported in the press following what was apparently the greatest number of complaints to Trading Standards offices around the UK ever received for one business. Because they were the same business, one simply setting up and taking over when the regulatory heat became too much for the other. Both companies have now been closed down by the authorities, there were foreunner companies and there are currently subsequent companies still operating!

The business produced quarterly magazines aimed at off duty police, ambulance and fire service personnel. The publication included a few articles of general interest, recipes and puzzles together with around 200 advertisements for local businesses. Each magazine was produced on a regional basis, with the same content but with paid advertisements from businesses in each region.

200 advertsiements through 50 regions, four times a year at an average cost of £250 per business gives a potential annual revenue of £10,000,000! When you consider that each advertiser received a copy of the magazine and a few hundred were distributed between a dozen or so police stations and ambulance centres – only about 50,000 magazines were printed each year.

Each magazine cost around £2 to print and post out. This leaves most of the £10 million to pay the dozen or so telesales staff around 40% commission and the rest, the lions share, going to the directors running the company.

The business worked because the sales team were self employed on commission, and used various means to hook the clients, whose names were simply extracted from phone directories and local papers. Most people dont like to say no when asked to support good causes, partcicularly if names of charitable causes are used as a hook. The first telephone call would spin the tale of widely distributed publications… “100,000s in your area” and solicit the interest. The second call, often only minutes after the first would be recorded and would exclude any detail of the false promises. It would simply confirm some details. The customer was often left somewhat bemused, thinking that they would make a final decision when they received their advertsiement copy for approval. However, what they would receive was an invoice with the only option for cancelling being the payment of a charge!

A large proportion of people will pay such an invoice not wishing to enter into any dispute. Those that knew their consumer rights a little better were more likley to bin the first payment demand or return it with a letter saying they did not wish to go ahead with the advertisement. But the support publisher has a plan for increasing the proportion of targets who pay from the initial 40% or so to around 60% or even 70% by a sequence of demanding letters and phone calls robust enought to shake the resolve of even the most resolute victim. In the illustration, the business even passed the unpaid bills over to another debt collecting business that it had set up itself to give the illusion of escalating seriousness in the matter. They even resorted to “door-stop” collection techniques and a video of the threatening behaviour of one particularly nasty instance was caught on the victim’s mobile phone and aired on BBC’s Watchdog in 2006!

That this is a fraud there is no doubt. However, it is a problem that is very hard to deal with. The methods used by the support publishers make it harder and harder to close them down, with sanctions being fairly lenient to date (director disqualification etc). It is likley that the Fraud Act 2006 could be a better route if it was possible to get the police economic crime units to take an interest. The trouble is they are very often unwittingly caught supporting these very cons by agreeing to take nominal quantities of the publications which they simply see as being “freebies”.

The telesales opperators in the business pay no tax. When investigating this particular support publisher I had a whistleblower contact me to say that all the staff used aliases and most were drawing supplementary benefit as well as earning £30 £50,000 per year!

So we have tax fraud, benefit fraud, Misrepresentation Act offences, Telecomunications Act offences, Data Protection Act offences and Fraud Act offences (plus the Company Act 1985 offences that I was investigating).

I tried to arrange a meeting with senior tax representitives from HMRC to inform them of the scale of the tax evasion, not only in the few companies that I investigated but concerning the industry as a whole, but the feedback was that theyconsidered the problem one that they could not deal with. The message was that theyw ould have to wait until legislation changed.

We eventually obtained a High Court Order to close the companies down. When the Official Receiver went in to the business the next day he found that the bank accounts had been stripped. Within a few days the business was back up running from the same (rented) premises.

Support publishing is a recognised problem within the Department for Business Innovation and Skills (formerly DTI/BERR) who continue to close these companies down only to have them reopen later under different names. Some open as partnerships or sole traders, having cottoned on to the fact that BIS will not investigate them then. The police are unlikley to have the time and therefore if they can make sure the complaints to Trading Standards are kept to a minimum by not pursuing debts too rigorously they will continue for the forseeable future to keep trading below the radar!

By Mark Jenner, forensic accountant and fraud investigation expert. You can keep up to date with his investigator’s diary blog.

In recent years the relaxation of lending criteria for those persons wishing to become property landlords has meant that the number of people buying houses purely to rent out to students and professionals alike has increased enormously.  No longer was there any  requirement for such mortgages to be limited to multiples of the borrowers earning capacity.  These loans were freely given on the simple basis that the anticipated rental income would cover the interest repayments by at least a specified margin.

Further protection for the lenders was supposedly obtained by the formal valuation of the property, and a willingness to lend only a proportion of this value to the prospective landlord.  The latter was therefore forced to stump up typically 15% of the purchase price as a deposit thus providing a margin of safety for the lender should there be a need for the loan to be called.

How did the situation arise then, where a taxi driver from Glasgow, of little means but who had previously never owed a penny to anybody, was made bankrupt as a result of buying four properties between 2002 and 2007?  Her properties turned out to be worth substantially less than her mortgages and the rental income was insufficient to meet interest payments.  What is more, she had run up £100,000 in debt in the form of loans taken out to try and meet the mortgage bills.

By “gifting” the deposit to the customer, the property developers were discounting their prices but are able to sell houses to people without incomes and without cash deposits purely on the basis that the rental income potential would cover the interest payments on what was effectively a 100% loan being taken out.

Indeed in 2008 I met one lucky customer whose day job earned him £30,000 per annum and who was persuaded by another property company to purchase 20 properties over a period of 6 months.

Lucky?  All he had to do was wait 10 years and the property prices would have doubled making his portfolio worth around £10 million.  Then he could sell the lot and pay off the £5 million he held in mortgages, the rental income servicing the loans in the intervening years.

You can imagine his horror when he eventually discovered that his properties were only worth £3 million and the rental income on the poor quality student lets fell far short of the glossy promises he had been given.  He too is looking towards bankruptcy after struggling for 18 months or so trying to keep his head above water and hopefully obtain some redress from the developers.

These are extreme examples, but there are thousands of other hopeful landlords in similar situations around the UK.  How can this have been allowed to happen?  The starting point is the glitzy brochures offering the opportunity to become property millionaires.  They told how it was possible to use borrowings to gear up investments and take advantage of a rising property market.  This was common knowledge to the person with a shred of common sense.

However, the developers then packaged their properties, whether refurbished units, new build or even off plan investments, making the purchase extremely easy for the customer, who only has to sign the back of a mortgage application form.  The mortgages were arranged in-house and the services of a friendly solicitor were used to convey the transactions on behalf of the customer.  Thus for example a customer obtains a six bedroom property for £300,000.  Although the customer will have paid perhaps a £2,000 reservation fee, the £45,000 deposit was gifted to him.  He is left with a mortgage of £255,000 and the company has promised to manage the rental of the six bedrooms to local students.  More than that, the developers have guaranteed the rental income from the property for one year.

Where does it all go wrong?  The luckier customer will have 12 months of rental income flowing in.  The unlucky one will have to fight for the regular payments and supplement the “guaranteed” income themselves while waiting for the developers to stump up the promised revenue.  But even for the luckier ones, when the 12 months is over and the realisation of having to service a massive mortgage sets in, they begin to take an interest in the investment.  The property is visited, often for the first time, to be found empty, devoid of tennants and in a poor state of repair.  The customer will generally wonder what he has spent £300,000 on and will have his property valued by an independent surveyor.  Now he will see that his property will be worth say between £150,000 and £200,000.  He can’t sell it to cover the mortgage and he can’t keep it because the rental income is insufficient.

The developer has valued the property as a “business” estimating rental income of £65 per room per week and assigning a rate of return of say 6.5%.  The rate of return is too low perhaps but who is to say what should be used.  The room rate is high for a property in poor state situated too far from the university, but is a rate that some students will be paying elsewhere therefore seemed “feasible” at the time.  One of the bedrooms in the property is a box room that can fit a single bed and nothing else.  As a consequence it is impossible to let, but was one of the 6 bedrooms used to initially value the property none the less.  In fact, the bricks and mortar valuation taken subsequently usually reflects the letting potential of the property much more accurately in practice.

So how can such a large mortgage be obtained?  The mortgage lenders rely on the valuation being realistic and presume that the customer has shown his commitment by paying the 15% deposit.  The mortgage form simply shows that £45,000 has been provided “from the applicant’s own funds”.  Therefore in not disclosing the gifted deposit, the customer has committed a fraud on the lender.

But surely the customer’s solicitor would point this out?  After all, they handle the deposit and lenders principal on behalf of the customer for payment to the developer.  Not at all, the solicitor is hardly independent, receiving hundreds of similar instructions each year referred to them by the developer.  Indeed, they even take receipt of the gifted deposit from the developer, returning it to them with the balance of the transaction received from the lender, ostensibly to give the impression that the customer did own the deposit funds.  The solicitor will say that they are receiving the deposit funds from the developer “who was holding them on behalf of the customer”, but in reality the customer is obtaining property that is overvalued even after being discounted by the deposit sum by obtaining a 100% mortgage from an apparently unsuspecting lender.

The response of the lenders is to sue the surveyors and solicitors for professional negligence and to repossess the undervalued properties from the defaulting customers.  The particular property developer that I was investigating meanwhile is investing its substantial profits from buy-to let into prime “business to business” city centre developments and presenting a respectable veneer to the outside world.  Many of these property developers come in similar guises or variants of the theme, and then they go leaving bankrupted individuals in their wake.  Some are closed down by the Department of Trade and Industry (now the Department for Business Innovation and Skills – and some, like the developer in the example above, even peak the interest of the Serious Fraud Office.  However what is needed is tighter control over the ease with which individuals were able to obtain massive amounts of credit, a reflection perhaps of today’s society.  This has come too late for many with the squeeze of the “credit crunch”.  Now a tangible deposit is required for such investment, with closer scrutiny by the lenders – sometimes as much as 45% or more!

In the UK, the interpretation of the Proceeds of Crime Act 2002 when using asset confiscation as a weapon in the criminal regulators’ arsenal of sanctions will continue to develop and solidify over time.  However, in recent years it seems that the courts, lawyers and regulators alike struggle to understand the spirit of the law.  On one hand the prosecutors seem to be applying the “lifestyle” assumptions with complete abandon whereas the court, while certainly not ignoring the law, on occasions comes up with common sense judgements when enforcing what many commentators have labelled as “Draconian” legislation.

What is criminal benefit and how much might be realised during confiscation is commonly disputed and was a notable issue in the recent R – v – May appeal during 2008.  The judge had originally reduced an individual’s benefit by the amount of monies recovered elsewhere in a fraudulent matter.  It was subsequently ruled that he had erred in doing this as he had been confusing realisable assets with benefit.

What is clear after this decision is that the benefit obtained from money laundering for the purpose of the Proceeds of Crime framework is not the profit (or commission earned) of carrying out the crime but the sum of the criminal property dealt with.  This means that if you facilitate the laundering of a million pounds for a friend for a £10,000 fee, your benefit will be assessed at the level of one million pounds.

The quantum of recovery can therefore be much more than the incentive earned by doing the crime!  This can also be the case if a person is deemed to have a criminal lifestyle.  Then it is not just the value of the particular criminal conduct that has taken place that becomes the benefit, but everything owned currently together with the value of all assets owned and monies transacted during the previous six years.  So in theory if you fail to pay a few parking tickets you stand to lose your house, car and life savings.

It is up to a defendant to prove that all monies passing through his bank account do not represent the proceeds of criminal activity.  This means that all income must be verified.  This is easy for an average employee whose main income will be a salary through the PAYE system with perhaps an occasional injection of funds from an identifiable source such as parental gift or lottery win.  It is not so easy for the person who has lived as a wheeler and dealer, often paying little or no tax and certainly keeping only minimal accounting records.  Explaining receipts into a bank account can be difficult and the Prosecution will always assume these to be benefit.  Furthermore, when assessing realisable assets all payments out of a bank account will be deemed to be dispersal of criminal proceeds as “hidden assets”.  Identifying these, which are often simply innocent household outgoings, can be difficult without a proper document paper trail.

When investigating fraud, remember where there is a paper document, there is probably an electronic version of it.  There may be more than one, often held by third parties.  Electronic documents often tell you more than paper ones would, for example the date of deletion from a computer may indicate a covering up exercise.

Computer data should always be secured when executing search orders, using forensic techniques that can recover deleted documents, faxes, emails and other data that may prove a case beyond dispute.  This requires specialist knowledge and tools – simply switching on and reviewing what is immediately seen is not forensic analysis, and this approach may destroy evidence or render it inadmissible in a court.

In house IT staff are unlikely to be qualified to process computer evidence and may make serious mistakes that will almost certainly undermine the value of any evidence and may prevent recovery of assets through legal channels.

It is not just computers that need to be considered.  Mobile phones, personal organisers, fax machines and many other devices may also contain evidence important to your case.  If forensic analysis is required of any device, attention to the following is vital:

• Secure electronic evidence quickly to reduce the risk of it being destroyed or changed
• If a computer or device to be investigated is on – do not switch it off!
• If a computer or device to be investigated is off – do not switch it on!
• Disconnect computer from power at socket and seal in a plastic bag
• Gather all disks, CDs, DVDs, tapes, USB memory sticks and other electronic storage devices together to accompany computer
• Gather associated manuals, power cables, external drives and any other external peripheral devices together to accompany computer
• Avoid contact by magnetic media with strong magnetic fields, microwaves, excessive heat, shock or vibration.

The physical recovery of data that can then be analysed is very important. Next comes the equally hard part – making sense of what you have safely gathered for evidential purposes. This is where data mining techniques come in and the need for the ability to deal with often vast amounts of data, ensuring that the data is complete and that there is an audit trail supporting any results that you find.

Our preference for data analysis when the volume is anything more than you would find in a small business is to use IDEA for Windows. This software allows us to collate even more data than you can fit on an Excel spreadsheet, therefore it is useful for dealing with bespoke accounting record software found in major banks, insurance companies and major corporate entities, as well as being user friendly enough for use analysing smaller concerns’ accounting records.

I have provided expert accounting advice to a number of police forces around the UK including Humberside Police, Northumbria Police, Cleveland Police, North Yorkshire Police and Merseyside Police forces.

I pride myself in being able to provide fixed price expert accounting input and investigation assistance within forces’ limited available budgets. I am also happy to provide free of charge training sessions to officers in forensic accounting or other accountancy subjects.

I am always on the end of the phone for general accounting queries, and if I do not immediately know the answer I undertake to soon find the information you need.

Visit any police web site and you will find the contact details for reporting a crime. This includes fraud. The first port of call should be the police because it is their responsibility to investigate crime, making a case for its prosecution through the courts.

The reality

The police are the first to admit they are under resourced when it comes to fraud! Their targets for “more important” crime must come first – rape, murder, burglary, unsocial behaviour etc….

There are moves to strengthen the effectiveness of the police in dealing with fraud throughout the UK – the establishment of the National Fraud Reporting Centre and the training of dedicated financial investigators for example.

However, the police cannot investigate and fully deal with every fraud reported to them.

The solution

You must present the police with a complete report of the fraud supported by facts, figures and evidence. Given a fraud clearly presented in this way, they are much easier able to employ their scarce resources in dealing with your problem. But take care!

The police may often ask you for fuller information, or a more clearly presented case, before they will act.  However, you must take care when investigating the problem yourself in order to do this. Things you must consider are:

• The way in which you deal with staff – do not leave yourself open to employment claims by treating them inappropriately!

• Obtaining evidence – do not compromise any criminal investigation by inappropriate evidence handling! For example, simply turning a suspect employee’s computer on “for a quick look” could render it inadmissible as evidence later on.

Remember – the police are not allowed to simply go round to the suspect’s house and threaten for the money back – neither are you!

A fraud can be uncovered in a number of different ways. A good example is by a whistleblower who who might inform his managers that a colleague has been fraudulently stealing from the company. Such a corporate fraud will need to be investigated in order to prevent further losses, find out how it happened in the first place and to try to recover where possible any losses that have occurred.

A specialist fraud investigator is needed for such a task and it is very common for the victim company to enlist the assistance of a qualified forensic accountant. Such a person will be accredited to investigate a fraud and may be a Chartered Accountant or a Certified Fraud Examiner with possibly other qualifications together with years of experience dealing with such cases.

Every fraud is different. There are different characteristics to be found between bank fraud, supplier fraud and mortgage fraud. Even within these categories there are many possibilities because the fraudster is very resourceful in seeking out new and different weaknesses in a business.

The investigator will approach the corporate fraud by first determining what the organisation wants to achieve. This might be only to get the money back or it might want to make an example of the fraudster as a lesson to others. If it only wants to get its money back it may not want law enforcement involved as this might disrupt its business or cause its reputation to be damaged. For example a bank might not want the general public to know that it had allowed a fraudster to work in its midst.

The forensic accountant or certified fraud examiner will want to agree the desired outcome of the matter with management and develop an investigation strategy based upon the organisation’s own fraud response plan. It may be possible to interview the whistleblower early on to get a quick “heads up” into what was going wrong before beginning a detailed analysis of the accounting records, interviewing staff and making other enquiries often outside the organisation.

For the actual mechanics of the investigation the forensic accountant will most likely want to follow the trail of the stolen money. “Follow the money” will be the primary goal in such a forensic audit as this will provide not only a chance of getting the money back, but also evidence of why and how the fraud took place.