Mark Jenner & Co – Forensic Accounting Services

The various forms of taxation are components making up a very complex area involving extensive legislation and case law. Its complexity makes it very much a specialist subject within both the legal and accountancy professions. Investigating tax fraud is an even more specialist subject within the field.

Such complexity and variation means that it is no wonder that problems continually arise with the interpretation of the relevant statutes or case precedents. The lay clients, the tax payers, often do not appreciate the wide ranging issues and interconnection between income tax, corporation tax, inheritance tax, VAT, capital gains tax, stamp duty, land duty, import duty and national insurance contributions. Add to that any international tax or offshore issues and it is easy to see how the complexity arises.

With the rise in wealth globally together with the interconnectivity of businesses and individuals wherever they live or work, there has been a corresponding growth in the quasi legal tax avoidance industry. Tax minimising schemes are continually being challenged by the tax authorities and new ones established in their place.

Not all challenges by the authorities are valid, and where evasion is being alleged in an otherwise legal scheme, expert assistance in tax fraud resolution is required. HMRC often make sweeping assumptions that assume great rafts of profit have been made. Forensic accountancy is needed to investigate the alleged fraud, unpick the assumptions and present a clear and accurate case for the defendant.

This forensic assistance is especially necessary in the arena of civil confiscation orders that are increasingly being sought by HMRC as a way to claw back tax that they believe ought to have been paid. The Proceeds of Crime Act 2002 has given robust (some say draconian) powers to the authorities to make assumptions about anybody’s income, that it has not been legitimately earned and must be delivered up as either proceeds of crime or alternatively the tax element on it plus penalties and interest (which equate to the principal in any case). The onus is on the tax payer (or non-payer) to prove that his income is legitimate and mitigate his tax burden by demonstrating true levels of profit. This needs the expert and independent approach of a forensic accountant.

Confiscation, tax evasion/avoidance and money laundering are increasingly forming the bulk of work for those forensic accountants who specialise in fraud. It is just as well as the crimes, civil confiscations and indeed defence of inappropriate allegations of tax avoidance are all linked by similar Anti Money Laundering legislation and guidelines that the authorities are wheeling out regularly in their attempt to beat the big time fraudsters.

The trouble is that in practice often it is the case that the big career criminals have made adequate provision for their wealth and they protect themselves with their money. The authorities appear to be throwing the book at the smaller criminals and misguided or accidental transgressors while the organised criminals are smiling all the way to their offshore banks!

This state of affairs is worrying and one in which the forensic accountant can assist. So long as a client’s funds are not frozen or public funding for defendants is still available, the fraud specialists are able to mitigate the authorities’ approach in cases where they may be inappropriate or somewhat heavy handed. 

It is possible to challenge estimates of profit and business valuations carried out by HMRC as well as identifying the appropriate accounting treatment to adopt in relation to contentious areas of expenditure and provisions.

During a recession you would think that investors would be more careful with their money. Is it the lure of high interest rates when conventional financial services products offer such a low return that encourages otherwise astute people to invest their wealth with fraudsters – or is it possibly greed that blinkers them to the risks involved investing in off beat ventures?

Every week brings reports in the press of new scams, that are either coming to light, are being investigated or the villains are being prosecuted. For every big investment fraud that is reported, there are likely to be around 10 smaller ones that are not. And for every fraud that is discovered, there are 100s that continue unseen. It is a big problem, and as public spending is cut back, cash for fraud resources is dwindling from its already meagre level.

A smaller Ponzi style investment reported in the dying days of 2010 is the case of Mr Christian Orpin. This is a prime example of a somebody operating on a small enough scale to avoid too much attention from the authorities and which allows him to continue to develop and ply his quest for easy money even after being brought to book.

Orpin operated a business called PDS High Wycombe, offering an investment scheme called Premier Projects. This was an investment vehicle offering between £150 and £200 return per month for a £5,000 investment. This is at least an annual yield of about 36% – far more than the percent or two available from the banks and other mainstream institutions. You would think that the: ’…if its too good to be true…’ mantra would kick in. But no, Orpin was able to gather some £10 million from investors.

This is of course an illegal investment scheme and the Financial Services Authority has obtained orders from the High Court blocking this investment business. Of course the FSA were not prepared to carry out any real investigation, and it was left to Companies Investigation Branch of the Department for Business Innovation and Skills to carry out a probe that resulted in Orpin becoming bankrupt and being disqualified as a director until 2016. It is unlikely that Orpin’s bankruptcy trustee will recover more than 60% of the investors funds, probably much less.

Job done? No – now Orpin is trading as Phoenix Debt Solutions according to a Daily Mail report – with the consent of an Office of Fair Trading’s consumer credit licence! He does not need to trade in his own name to get this accreditation and therefore avoids the constraints of his bankrupcy. As his business is unincorporated, his director disqualification is meaningless.

It does appear incredulous that somebody can be investigated and banned by one regulator but approved by another. However, this as been a criticism of the UK fraud regulation industry for a long time. I have undertaken forensic investigations on behalf of Companies Investigation Branch myself, and apart from the main scam I have uncovered systematic tax avoidance by whole work forces.

Do you think that I was able to get HMRC to take an interest in the tax they were missing out on? It is a retoric question…and the business, though closed down by us, continues to trade from the same premises in a different name.

It appears that the toy retailer Toys R Us is the latest big business to demonstrate how easy it is for the fraudster to attack if simple anti fraud prevention methods are not observed. Embezzlement master Paul Hopes stole some £3.7 million from the toy giant in 14 sums ranging from £101,000 to £350,000 at a time.

Over a period of around three years beginning in 2005, Hopes raised fictitious invoices for Far East toy suppliers so that he was able to arrange payment into accounts that he controlled. Yes it was as simple as that! He was a company accountant of some 23 years and the company had complete trust in him. They did not expect him to be a fraudster and therefore clearly allowed him to override any semblance of controls that should have prevented the theft.

Hopes wife of 36 years did not suspect anything. She has been devastated by the revelation that her dull dependable husband had stolen money from his employers to fund a lavish lifestyle including prostitutes and high living in the City.

Hopes will probably spend up to 8 years in jail and have a criminal confiscation of assets order made against hime that will wipe out everything he owns. In addition, Toys R Us is now attempting to recover any money that hasn’t been spent through civil asset recovery. This will mean targeting the family home and assets that Hopes may have transferred to his unsuspecting wife.

The American company has more than 1,500 stores in 33 different countries, with its New York outlet being the biggest toy shop in the world. It is surprising that such a large organisation did not have the basic anti fraud controls in place to stop this simplest of thefts! How much would it cost to implement a system of supervision and review, account vetting and credit limit monitoring? The cost of implementing and regularly reviewing such a system would be a lot less than the final bill to Toys R Us for this escapade. It was not even the company’s systems that discovered the fraud, which merrily escaped both the internal and external auditors for three years running. It was the attention drawn by one of the prostitutes used by Hopes and lavished expensive gifts upon that acted as a whistle blower on the embezzlement.

There is a mature and capable anti-fraud industry that is underutilised by corporations world wide. For a reasonable sum, experts in fraud protection and fraud detection can review systems of the smallest to the largest companies. However, it appears that these concerns would rather spend 10 times the amount investigating even larger losses when the fraudster strikes.

Most fraud experts, myself as a forensic accountant specialising in fraud included, will provide initial advice free of charge that could save you huge amounts in the long run – even if we hope to get your business!

Most fraud cases investigated by Mark Jenner & Co involve some interaction with a bank. It may be simply through the examination of bank statements for an account used to launder proceeds of crime or it might be an investment scam used to steal large sums of money from high value clients in a Ponzi scam involving the offshore banking system. The banks are very skeleton of the financial system worldwide and are seen as both prime tools and targets of the fraudster.

Banks have always been the target of criminals for their very nature is to hold large amounts of money. However, in the 21st century we are not as concerned about bank robbers or bullion heists as about the risk of fraud. It is not that physical bank robberies do not happen, it is just that the robbers almost always get caught and fraud is increasingly seen as a much less risky option. Just about every fraud or money laundering activity will need interaction with a bank somewhere along the line. Stolen cash is very difficult to spend in large quantities but cheques and credit cards can afford the lavish lifestyles the criminals seek.

Within the bank there is the problem of embezzlement by the staff. Key members of staff are in a position to know the inner workings of the accounting controls put in place to prevent fraud by corrupt members of staff. Corruption can, and often does occur by a third party bribing a member of staff to obtain information concerning customers’ accounts. Identity theft and identity fraud are key areas where losses can occur. But id theft and embezzlement is not the only area of concern in the area of bank fraud.

The need for interaction by the criminals with banks to facilitate their spending of their proceeds of crime gives rise to the issue of anti money laundering controls that every bank must have in place. The bank is effectively tasked with acting as a whistle blower for law enforcement, reporting any suspicious customers or transactions that take place.

Criminals, fraudsters and even terrorists are finding it ever harder to use banks to move their money around the globe. Anti Money Laundering Regulations place restrictions on the ease with which money once was moved. The criminals often turn to fringe banks away from the high street to transact their proceeds of crime in an attempt to escape the gaze of the authorities. Corruption in second tier banks is well reported in the press. For example the Bank of Curacao was closed down at one stage as most of its customers were found to be involved in VAT fraud activities. Companies based in Europe would trade with each other, but the financial transactions were conducted remotely in Curacao. The bulk of the money never left the country, exchanging hands many times as the fraudsters conducted deals with each other. In one case where Mark Jenner & Co was involved, the only clue that a company was conducting fraudulent deals worth £millions on a regular basis was a single transaction in their UK based bank account showing a small payment of a modest sum settling a local expense in Curacao.  This was a slip by the crooks as legitimate looking accounting entries were normally recorded in the UK, France or Germany or wherever the management of the business was physically taking place.

Other fringe banking systems prone to the attention of the fraudster or money launderer are the money transfer systems that operate world wide. The Hawala banking system is notorious for not leaving any audit trail – transactions between countries at opposite ends of the world are conducted by worth of mouth. The word ‘Hawala’ means ‘trust’.

Hawala banking is traditionally used for ex patriot Asians residing in the West to send money back to their families, for example in Pakistan and India. It uses the transfer of ‘value’ or exchange of debt as one means for moving wealth. Other more formal systems such as Western Union will transfer small sums of cash in the same way, for a price. Both Hawala Banking and some of the transfer businesses such as Western Union have been associated with fraud and money laundering in recent years.

However, a number of more respectable money exchange systems are operating legitimately and taking more and more trade from the large high street banks. PayPal and the Revolution Money Exchange have been carving a growing slice of financial activity in recent years. The allegations of a Revolution Money Exchange Scam reported in 2008 was unfounded and this major USA bank backed organisation is probably less prone to bank fraud and corruption than most leading high street banks. Indeed it was probably because the Revolution Money Exchange was paying $25 to new clients opening an account and $10 for each referral brought in that cries of fraud and scam were made. Yet people do not realise that a leading bank such as Lloyds or Barclays might pay $100s and even $1000s to secure a new customer!

There appears to be a greater risk of charity fraud than corporate fraud. The reason for this is potentially because the culture within a charity is profoundly different to that within a company. A charity is a good cause, it does not have the same drive to make profits as a business. Yes, it does want to raise money, but the control over doing so very often lacks commercial awareness and leads to charity frauds.

Charity fraud can therefore arise because the organisation concentrates on raising money, and ignores the staff member who sees an easy way to steal money from the unsuspecting good cause. It can also arise because the fraudster can see the inherent inability for decent people to say “no” when asked to contribute to a good cause.

The latter form of charity fraud is the most prevalent, whereby an individual or group of individuals set out to defraud the donors of funds to the charity. There have been many serious fraud cases in recent years where somebody, often a man and his wife or other family members, set up a charity initially to serve a good purpose. Then they see how easy the money is raised and even easier for them to spend unchecked. As their lifestyle increases in luxury, so do their “business expenses” taken from the charity funds. I remember dealing with one such case where a couple travelled to Florida regularly under the pretence of arranging “once in a lifetime” holidays for terminally ill children. In reality they were spending their time on holiday and were even arranging the purchase of a holiday home for themselves – all using charity funds.

Charity frauds or, more appropriately charity scams, are often perpetrated by support publishers. These are publishing businesses set up as get rich quick schemes by unscrupulous fraudsters who do not mind using the names of charities or other good causes in vain to get people to part with their money. A telesales operation, support publishing companies are often run from a home office, or even in a couple of cases from the con man’s bedroom. The opening call to unsuspecting small businesses and sole traders might take the following line:

“Hello, we wondered if you would be interested in advertising in the Good Cause Charity’s Child Safety Booklet? This is a sound commercial platform for your business as we will be distributing 20,000 copies in your post code area and you will be helping in the worthy cause of Child Safety being run by the Good Cause Charity. We can do you a half page advert for only £250 today…”

Sometimes the caller will say “Thank you for advertising last year in…(some good cause publication)…this year we are running…(a different campaign)…” The unsuspecting customer cannot remember advertising last year but decides that if another member of staff did it last year it must be fine to repeat the exercise now. It is very difficult for somebody to decline such a request.

Sometimes there is a publication and sometimes money does go to a charity. However, under the Charities Act any publication must clearly say which charities are supported and how much of the funds raised goes to each charity. In practice these support publishing scams only circulate the publication to each advertiser (to satisfy the people funding the adverts that the publication is real) and little if any of the funds raised goes to the good cause! The money pays the staff and overheads and often keeps the company directors in a very luxurious lifestyle.

Charity frauds such as these are prevalent in the UK. No sooner do the authorities close one down but another one opens. The business is easy to run and telesales operatives work on one for a while, realise that it is an easy way to make money, then set up on their own. There is a pool of operatives based primarily in the North West of England that support these charity fraud scams, moving from one to the other as they close down and start up again.

The lesson to be learned is to be a little more cautious when making a donation to a charity. Make a point in selecting only those charities you are happy to give to and try to politely explain this to hopeful approaches. At least state categorically that no donations will be agreed to unless detailed paperwork is sent through the post. Then at least you can check to see if the charity is bone fide and that it does endorse the booklet (or diary or wall planner etc) that is being published.

Investigating a charity fraud is no different than investigating any other form of fraud. One of the key characteristics that I have found it a good idea to look out for charity principals taking cash from the revenue without paying tax. This is often facilitated by adding fictitious employees to their staff lists. This scam is aided by the fact that many such organisations are set up to collect donations or advertising money using telesales operatives, often employed on a self employed basis. It is easy to add a name to the list of operatives and take the cash for yourself!

Tax evasion as described above is more common than people realise. There is a vast “black economy” operating behind the scenes within the UK, USA and all other countries where you least expect it. Read more about this within my Tax Fraud articles.

Prevention is better than cure – would seem to make sense in the case of fraud as it is in the case of your health. Fraud can cause a company to lose a great deal of money, or worse collapse completely. A company collapse due to fraud can be avoided by putting in a few measures that would greatly reduce the risk of fraud can cost far less than this.

The first step to take is for a company to accept that it is at risk from fraud and the attention of the fraudster. Many organisations fail to even accept this, then are surprised to find a black hole in their finances of several £100,000s. They do not believe that any of their trusted staff could be a fraudster. Accepting that fraud is a very real risk is the first stage – deciding that fraud is not acceptable is the next.

A company must tell all its staff, and often customers and suppliers as well, that it does not tollerate fraud. This is the fraud policy. It can be set out in a document which is circulated to all staff. Big corporations will publish a glossy booklet, a small business can photocopy a simple typed page. The important point is to communicate that fraud is not accepted and if discovered, action will be taken. This in itself can have the effect of greatly reducing the risk of fraud happening.

The next critical step in preventing fraud is to ensure that any previous complacency does not creep back in. This means that all systems are reviewed on a regular basis for weaknesses to fraud. Auditors often review accounting controls once a year at the annual audit – this is not enough nor is it frequent enough. Accounting controls designed to keep a financial reporting system working well are not designed for preventing the determined fraudster. For example a control that requires two signatures on a document can easily be circumvented by collusion.

By understanding how an accounting control can be circumvented efficient measures can be introduced to ensure that the risk of this happening is low, and if it should, it will be discovered sooner rather than later. This takes a different mindset to that of an auditor, that of a fraud expert, such as a forensic accountant or fraud investigator is of course ideal.

Organised criminals such as fraudsters, drug dealers and people traffickers all deal in large amounts of criminal proceeds. They need some way to manage this money, so they can spend it without the authorities seeing that it is proceeds of crime. They need to clean the money – to launder it. Money laundering is the biggest financial crime there is, because it encompasses all the other crimes.

The money laundering of criminal proceeds is not easy, as most countries have enacted severe legislation (some say draconian) in an attempt to stop the proceeds of crime benefiting the criminals. In the UK the Proceeds of Crime Act 2002 was the beginning of the big thrust against the organsised criminal in an attempt to hit him where it hurst most – in the pocket. The Act and associated Money Laundering Regulations have brought in a raft of measures that include the appointment of professionals such as lawyers and accountants to act as gatekeepers between their potentially criminal clients and the law enforcement agencies.

Now professionals have a legal obligation to firstly ensure that their clients are legitimate individuals or organisations and secondly to report any suspicions they may have, that proceeds of crime may be being transferred. This means that they have to do detailed checks on their clients before accepting work from them, to make sure they are who they say they are, and also to educate all staff to know what to do if they should come across a suspicious transaction that might need reporting to the authorities.

Previously the criminals would recruit professionals in order to give them a veneer of respectability. Lawyers would be asked to set up corporations that would be used to layer the criminal proceeds in different cities or even countries. Accountants would prepare accounts that absorbed proceeds of crime within legitimate accounts. Bankers had already been targeted by the authorities in the fight against money laundering and have similar obligations to fulfil.

Professional negligence is now a major crime. A lawyer or accountant found to be assisting in the laundering of money can face up to 14 years in jail and would no doubt face swinging asset confiscation proceedings as a matter of course. It is not possible to claim client confidentiallity either. Even a lawyer, who is normally able to claim legal priviledge in communications with criminal clients, cannot turn a blind eye from reporting money laundering of the proceeds of crime to the appropriate authorities.

The Proceeds of Crime Act 2002 is often used as the relevant legislation in cases of professional negligence. It is difficult for an accountant to say that he thought criminal funds were legitimate, when as a financial expert he ought to have known something was amiss. The Fraud Act 2006 could also be used, as dealing with client’s ilegitimate funds could easily fulfil its definitions of fraud:

The professional must seek to protect himself and his staff by taking all appropriate measures, appointing a Money Laundering Reporting Officer (MLRO), ensuring Know Your Client Checks (KYC) are undertaken per the Anti Money Laundering Regulations, educating all staff and ensuring that appropriate action is taken when suspicious activities are discovered (SAR). There is now no excuse for inadvertant mistakes.