Fraud Advisory Services

The incidence of mortgage fraud appears to be increasing. Much of it has been coming to light as a result of the down turn in the property market that accompanied the current general economic down turn or “credit crunch”. When property values reduce to below the level of the mortgage that has been advanced on it the lenders begin to sit up and take note.

One of the pivotal areas within the whole property business is the conveyance process. This is where two firms of solicitors will represent the seller and the buyer respectively and ensure that money is transferred properly in return for the title to the property.

Most people look to pay as little as possible for the speediest conveyance possible. 99 times out of a 100 this probably works well enough. However, property law is complex and when things go wrong they are usually the unusual issues that many swift sale transactions would overlook. This is why for larger more expensive properties, even though the process is essentially the same, the conveyance fee is higher because of the higher risk of losing more money.

The buyer’s solicitor will take receipt of mortgage funds and documents that the sale process relies upon, such as valuations and certificates of building regulation compliance. The solicitor manages the whole process and is uniquely positioned to be able to vet the process for fraud. Indeed, all solicitors have an obligation to “know your client” for the purposes of anti money laundering regulations 2007 and to report any suspicious financial activity they come across.

A typical mortgage fraud will involve a property company either selling in its own right or acting as agents for property holding companies. They will inflate the property prices based upon the rental incomes that they say can be obtained from the properties. There is no law to stop them doing this. If a glossy brochure says that a three bedroom student flat costs £250,000 and allege that each room can earn £90 per week – then this indicates a return on investment of 5.6%. This would be an acceptable return in the property business (there is no standard as it varies from region to region, property to property). However, it does rely on the landlord letting all three rooms out for 52 weeks of the year and achieving the required £90 rent.

If the property was sold as bricks and mortar at an auction it might sell for £150,000. However, the valuation provided by the surveyor to the mortgage company will be based on the rental income and possibly on similar properties that the same development company has been selling nearby. When property prices were increasing this practice can be overlooked. When prices are plumetting and people try to realise their assets the overvaluation is discovered.

The conveyance process should spot this practice. The valuation used for the mortgage, arranged by the property company, should not be relied upon and any solicitor worth his or her salt will say that an independant valuation should be carried out. Any savvy potential investor will want to get a feel for property values in the area that they are buying anyway.

Where a problem arises is when the property sales take place in London with a lot of glossy marketing hype and the properties being sold are, for example, in the North of England. During the early 2000s there was a surprising amount of spare capital and credit available (as everybody has now come to realise) and individuals were mopping up buy to lets on 100% mortgages without even visiting them first. It is hard to believe but everybody was riding the wave of success and were blind to the possibility of a property crash.

In some cases solicitors were being appointed by the property developers on behalf of the buyers. They were happy to take the business, 100s of transactions a year at £600 per time. The trouble is that they were not looking for overvaluations, turning a blind eye to the gifted deposits (thus facilitating 100% mortgages). In short, a few conveyance firms were a party to the mortgage fraud. Developers, solicitors and surveyors conspired in what was much more than sharp business practice to ensure that by the time that the property values crashed in about 2007/08, many buyers lost their investments and went deeply into negative equity. The mortgage companies that were involved in the property company that I investigated lost on average £63,000 on each and every property where they advanced loans (there were several 100s of properties in this one case) thus they felt the impact of a very large multi million £ mortgage fraud!

Firms were shutting down in 2009 ahead of their October PII renewal (the Law Gazette)

Many conveyance firms have felt the pinch as a result of the greed of a few. All firms must have professional indemnity insurance in place that covers them for fraud amongst other things. Such is the increased incidence in mortgage fraud that these firms have faced severe hikes in their PII cover. For example one firm reported an increase of 550% to £110,000, some 25% of turnover! Some firms have been shutting their doors to conveying business and some have even gone into administration to avoid paying the bill when due.

The Labour government has been criticised widely for the huge raft of legislation it has introduced in its 12 or so years of reign. Much of it has been lengthy and often arguably unnecessary. The burden of regulation on any business trying to struggle through the current down turn has increased and is significant.

However, there must be credit in the attempts being made to improve the anti-fraud and white collar crime framework within the UK. The Proceeds of Crime Act 2002 introduced what some say are draconian powers of confiscation for the authorities to use. Draconian they may be but that is fair enough when they are used against the ones they were designed for – the organised criminals with the obvious trappings of unearned income. There can be some criticism when the letter of the law is used to attempt to obtain large sums from petty criminals with default sentences when they can’t be paid.

One bit of legislation that makes you wonder who is actually writing these laws is the Fraud Act 2006. I know that many of the regulatory authorities that I work with are a bit dubious about this Act. Those police officers and prosecuting lawyers tell me that they were happy with the Theft Acts and the Common Law offence of conspiracy to defraud. The Fraud Act was meant to codify these and other areas - and it may be that using it will require a few more years of testing through the courts.

I did note in the Fraud Act that some Companies Act style amendments were contained within it, whereby the prohibition on directors loans, quasi loans, credit transactions and related transactions had been abolished and replaced by a requirement for shareholder approval. Breaches are no longer criminal offences and the de minimis level for needing shareholder approval has increased from £5,000 to £10,000.

My first impression is that this will lead to a huge increase of petty frauds in the £5 to £10,000 range.

New legislation, Fraud Reporting Centres and Strategic Fraud Authorities are fine and to be admired. However, it is no substitute for investment at the sharp end. We need stronger regional police economic crime units who all have access to fraud investigation and experienced forensic accounting resources. This is really where a public and private sector liaison would work, and was one of the ideas behind the various regional fraud fora that have been established around the UK.

If a person is defrauded he or she must present a clear cut case to the authorities. It is no good shouting “fraud” – it needs investigating and presenting clearly. Of course this is a hurdle that many victims fall at and the fraudster escapes to ply his trade again somewhere else. Those that do investigate, even employ their own forensic accountants to build a financial case to present to the authorities, can be equally at a disadvantage if they get the investigation wrong.

Say for instance a company decides to investigate a £9,000 director loan that is thought to be defalcation by the director. The director is not committing a crime under the Fraud Act - the matter will likely be civil. Therefore the police will not be interested and it will be hard to recover such unauthorised borrowing. There are still difficulties with more substantial “borrowings”. Say £50,000 is missing and this time it is fraud. The culprit is not presenting a defence of taking the money as a loan – he is simply denying the matter.

Any accusations made during an investigation will not help, the director may simply leave citing constructive dismissal and the business may end up paying out as much and more than it had already lost in compensation awarded by an employment tribunal.

The point is that if the police are to enlist the help of the private sector in the fight against fraud, funded by the victims, then they should have sufficient resources employed to monitor and assist with the private sector enquiries. This will enable them to be carried out properly and in a way that will result in a successful prosecution for the authorities, civil asset recovery for the victims and/or justified and successful confiscation proceedings that will help to fund both the authorities and the out of pocket victim.

A newsletter for fraud practitioners

The New Year has got off to a flying start with a number of new cases waiting for me on my return from what must have been the coldest holiday on record – I spent the first few days of 2010 in New York!  Suffice to say it was not much warmer on my return and unfortunately my current work load does not include the prospect of a visit to Dubai or the Cayman Islands.

However things are warming up in the expert witness side of my work with a number of trial dates in the diary between now and Easter.  It does seem that contrary to recent thought that experts are seldom called to give evidence in fraud trials the reverse now seems normal.  The reason always given for steering the expert away from the witness box was because of the complex nature of the crime and therefore perhaps the potential for tying the judge, jury and even the expert himself, in knots!

Accountants in the firing line – who said we were boring?

Lawyers, police and even teachers get their own TV soap dramas but accountants never seem to feature – that is other than the occasional cameo appearance and the subject of yet another boring accountant joke!  However, we number crunchers can get into some scrapes, as recent news headlines will confirm.  There is the case of the ex-KPMG trainee who made £25,000 false expense claims from his employers to fund an online gambling habit.  His punishment was a severe reprimand from the ICAEW and a 12 month exclusion from this professional body.  Seems fairly mild when compared to another accountant who is currently facing charges of money laundering and conspiracy to defraud £millions via a Ponzi scheme. He was the crooks accountant and apparently failed to spot the suspicious activity of his clients.  He could face four years or more in jail for making a few pounds in what he thought were legitimate professional fees.

Vantis, the UK listed national accountancy firm are in serious cash flow difficulties (according to their auditors Ernst & Young) which appears to be as a result of involvement with the liquidation of assets relating to the multibillion dollar fraud masterminded by the American financier Allen Stanford. The US authorities have frozen the assets which means that Vantis is unable to be paid for its services.

I can’t believe that a capable scriptwriter could not come up with something to rival “The Bill” with all these frauds going on!

The Government is as much use as a chocolate fireguard…

When it comes to scaling up the fight on fraud the response by the Government is unlikely to make much impact. £29 million was earmarked as a budget in 2008 for developing a cohesive UK approach to the problem of fraud.  So far we see the advent of the National Fraud Strategic Authority (NFSA) which, true to form for a publicly funded organisation, has already its first name change to the National Fraud Authority (NFA).  But more to the point, what is it doing to bring together the police fraud squads, private sector fraud resources and other fraud regulators to become an effective front against the perceived easy pickings that fraud seems to be? At least the Attorney General’s office has updated its links from “NFSA” (which had stopped working) to “NFA” on its web site now and we can all see the program of work they are embarking upon. Or can we?

The stated purpose is to “…draw together the counter-fraud community…” This implies public sector fraud prevention bodies and does not mean more trained police fraud squad operatives with access to investigation resources.  Reading further the NFA website suddenly admits that “…we are not solely responsible for putting the NFS (National Fraud Strategy) into practice…” I worry that we have another government quango spending our money and very little will get done.  I suppose time will tell.

All fraud news is bad news?

It seems that we always complain about the fraud framework, whether it be fraud prevention by the authorities, prosecution, or defending white collar business crime. It is the nature of the business…it is a big problem.

Fraud causes so much trouble and strife for millions of people that it is no wonder that the few real anti-fraud regulatory forces we do have guarding us become a little over-zealous in trying to put the culprits behind bars.  This in itself creates a real need for a robust criminal defence industry in order to balance the adversarial system that results.  If the police generally do not use forensic accountants to present their frauds, the defence certainly needs them to temper the allegations in many cases.  The general consensus is that the Legal Services Commission’s proposals to shave 20% from the expert witness budget available to the defence teams is going to result in fewer capable experts being available in the future.  Access to justice may well be denied for some – one thing is for sure, LSC will no longer be funding expensive city centre offices – which may not be a bad thing?

Balancing quality with profits has always been difficult for us professionals, who have relied upon a wave of business expansion to be able to carve an acceptable slice of remuneration for themselves.  Now that we are trundling along the bottom of a downturn, regardless of the miniscule percent of recovery alleged for the recent quarter – there is even more need for investment in the fraud sector.  Then we might see a little less talk of co-ordination of fraud resources and a lot more actual investigation, prosecution and prevention of fraud.

By Mark Jenner – Mark has been a forensic accountant for over 15 years specialising in fraud for most of that time. He heads up a dedicated fraud advisory service line focusing on expert witness assignments and fraud investigation. Regularly attending court to give oral evidence, his portfolio includes criminal fraud prosecutions, proceeds of crime and money laundering offences, corporate enquiries (including insolvency investigations) and asset tracing assignments.

Use of an expert witness in civil litigation

A long raging argument over proportionality of expert witness costs has resulted in a fundamental review of the rules and procedures governing the costs of civil litigation. Lord Justice Jackson was appointed by the Master of Rolls in 2008 to carry out this review culminating in his 555 page report on 14 January 2010. This contained just two proposals of interest to expert witnesses

One change proposed is to alter Civil Procedure Rule 35 so that any party wanting to bring an expert witness to the matter should provide to the court an estimate of the cost of doing so.

The second change is a proposal to introduce the Australian practice of concurrent expert evidence known Down Under as “hot tubbing”

With hot tubbing, two expert accounting witnesses for example would be sworn in at the same time and would attend a discussion chaired by the Judge. The agenda would be fixed by a joint statement from the two experts from an earlier meeting of experts held under CPR 35.12 which would record the matters upon which the experts still disagreed. The discussion could be attended by counsel from either party who can ask questions as would the Judge who would steer the meeting.

Another system of expert evidence management is being currently proposed by the Law Commission whereby the evidence is tested pre-trial in order not to waste the time of a full court.

The hot tubbing should allow the evidence to be explored in advance of any full blown hearing but its success will be down to the skills of the Judge – running the risk that the latter may well secretly favour one party or another. However, it is unlikely that the hot tubbing will save any money! By the time the experts are ready to come to the discussion “in the tub” they will have expended all their time and effort in preparing their reports. Although there may be many ways in which expert evidence can be better used to reduce the cost of litigation, the Jackson report does not address them.

Ways to reduce the costs of litigation (relevant to expert accounting witnesses)

These methods are applicable to an expert witness or a forensic accountant operating under civil procedure rules as well as criminal procedure rules and relate to private funded experts and those paid by the Legal Services Commission:

• All reports written under civil or criminal procedure rules are done so as if they were to be placed before the court – irrespective of whether this happens or not. Costs would be saved by the introduction of advisory statements that could assist understanding.
• Staged instructions would allow for just the required amount of input to be obtained from the experts up and until a matter perhaps settles, without the need for a full report and a court hearing.
• If experts were involved earlier there is much opportunity for saving, as opposed to expensive and rushed last minute instructions. Expert work can avoid unnecessary avenues of investigation.
• Wasted court dates are expensive and could be avoided by proper court funding and management.
• By choosing the “cheapest” forensic accountant (a favorite ploy of the Legal Services Commission) very rarely is best value obtained.
• Expert instructions are often vague leaving the expert to decide what should be done. Sometimes this can produce valuable input into a case but more often leads to inefficient and uninformed work.
• Late payments of experts has been considered as one of the major forces inflating experts’ fees – it is not helpful and leads to an aggressive stance on occasion by the expert witness. It is not acceptable for public funders in particular (LSC) to withhold funds to ensure their budget spending patterns are maintained.

When compiling the list of top ten Christmas scams for people to watch out for, the ones targeting relaxed people at home and in a festive mood spring to mind. However, if many of the population are more vulnerable at this time this does not mean that they should be complacent at others. All these frauds are operated throughout the year, it is just that at Christmas many seem to let their guard down and are more trusting.

Top ten scams

1. Sale of counterfeit goods – with millions on the look out for presents, the chance of a bargain buy is attractive. This is the time when counterfeiters have a field day. Rushed purchases and trying to beat the other shoppers means that less care is taken and sometimes the obvious overlooked. Do not buy from anybody other than a reputable purchaser.

2. Following on from number (1) above is the fraudulent on line auctions. My wife greeted me the other evening with the news that she had found the Mulberry handbag she was looking for on eBay. It was priced at £100 – could I believe her luck? Well the bag retails for about £800 in the Mulberry stores and you just might get £50 off in a high street retailer such as House of Fraser or John Lewis. Fortunately she saw sense and did not buy. The bag was either counterfeit or would simply not turn up.

3. Credit and Debit card fraud. With the increased use of plastic to smooth the Christmas buying out, less attention is placed on the transactions we make when our statements arrive. The fraudsters are more active during these busy periods, stealing your details and spending at your expense. Make sure you spot any discrepancies so that you can quickly begin to sort the matter out with your card provider. Otherwise you may be liable for continued fraudulent use for some time!

4. Fraudulent lottery wins. It is the festive season when a lot of poorer people feel the pinch. Especially the elderly are highly delighted when they receive notification of a lottery win that they did not know they had entered. The only trouble is that because it is a lottery situated abroad they have to pay some money upfront as a highly plausible “foreign transfer tax” to release the money.

5. Identity theft leading to fraudulent money transfers, purchases and loans is more prevalent during the period of increased transactions for presents that are occuring. You may overlook your normal diligent approach to throwing out personal details with your rubbish or the way your credit card is handled as you are visiting restaurants, bars and clubs more frequently at this time of year. The crooks know this and step up their activity.

6. Fake emails bring good returns for the “phishers” at this time of year. Many people take a break and therefore Internet activity goes up.

7. Loan scams are a problem over the Christmas break as many people find the expected spend at this time too much, especially those that are suffering as a result of the economic downturn. The opportunity of a small loan to tide you over the break is attractive but make sure you know what you are signing up to! Many of these short tem loans have an extortionatly high level of interest applied, which becomes crippling if a payment is late. Stick to conventional and regulated borrowing rather than a pay day loan or borrowing from disreputable sources.

8. Premium rate phone line scams always seem to increase the volume of trade they do at this time of year as a result of more people being on holiday and more being receptive to a bit of sweet talking over the phone. Do not let your guard down - and if a caller asks you to key in a response do not comply – you will simply be opening your account to them!

9. Rogue door step sellers also like to find people at home. Some of these may be genuine tradesmen but most door to door callers must be treated as potential fraudsters. Be carefull not to let people into your home unecessarily. If they seem to want to come in when you are not interested they may just want to case your house for a later theft.

10. A particular favourite at this time of the year is the slimming or miracle weight loss solution. In fact any health product always does well at this time of year as we are very concious of the over indulgence we we have committed. Do not fall for the false promises and only buy goods that you want for the right reasons. Remember  – the best cure is moderate eating of the correct foods and plenty of excercise. There is no miracle solution!

Phishing is a form of identity theft. It involves the fraudsters sending large numbers of spam emails out to unsuspecting Internet surfers. The email appears to be from a reputable source such as a high street bank. The logos being used and often the email address look genuine and many recipients consider the emails to be from who the say they are.

However, the emails use copies of the banks’ corporate letterhead. The email addresses are cloaked using sophisticated software or are so close to the real addrees that they are often accepted. For example the fradulent email could be something like: hbsc.com – at first glance you would think it came from HSBC! Please note that the example used is actually a legitimate site, simply used to show how easy a transcribed letter can fool the recipient – I am unable to disclose any real examples for obvious security reasons.

Once the unwary recipient clicks on the link on the email he or she is directed to a web site that looks to all intents and purposes like a legitimate bank web site. Invariably a request will be made to log in with security details. If you should do this you will find that your bank account is emptied right up to the overdraft limit very quickly!

I receive phishing emails from crooks that pretend to be banks that I do not even bank with – they are simply emailing as many contacts as they can in the hope that some will no doubt bank with the current bogus named bank and hopefully comply with the requests.

• It is importnat to note that no bank will ever ask by email for you to confirm your security details.

Although a number of years ago now, I was victim of a phishing email. This shows how easy it is if even a fraud investigator can be tricked into believing that an email is genuine! I was selling some bits and pieces on eBay at the time and having quite a lot of fun buying and selling items. One day I received an email telling me that I was now eligible to get “power seller status”. This was very believeable, I knew all about this acolade which gave you more credibility when selling items and I had been quite busy lately. I clicked on the link and was immediately asked to confirm my user name and password. At this stage I was not suspicious as eBay is continually asking for you to do this when you surf around their web site.

However, once I had entered these details I was taken to a web page, that still looked like an official eBay page, that asked me to enter all my personal details that eBay allready had, including my bank or credit card details! At this point I immediately logged out.

I did not think any more about this as I thought I had escaped in the nick of time! However, a few days later I received another email from eBay, telling me that they were investigating a fraud associated with my account. I went to my account and noted that there was a Harley Davidson for sale at around $3,500! Shortly afterwards my account was taken down and I could not access it again. After a further few days I received another email from eBay telling me that they had resolved the fraud, that my account had been hijacked and that I must now sign in and create a new password.

Hats off to eBay, they sorted the problem and returned some listing fees of around $40 that had hit my account for the fake sale of a motor bike. The fraudster had phished my identity to use my 100% good seller reputation to try to sell some $3500 of fresh air to an unsuspecting buyer.

I am pretty hot on phishing emails now!

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!

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. Just about every fraud or money laundering activity will need interaction with a bank somewhere along the line. Cash is very difficult to spend in any large quantities but checks and debit/credit cards 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 could occur by a third party enlisting a member of staff to obtain information of customers accounts. Identity theft and identity fraud are key areas where losses can occur. But id theft and embezzlement is not the prime 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. Legitimate looking accounting entries were recorded in the UK, France or Germany or wherever 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 conducted by worth of mouth. The word ‘Hawala’ means ‘trust’.

Hawala banking is traditionally used for ex patriot Asians to send money back to their families 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 organization 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 realize that a leading bank such as Lloyds or Barclays might pay $100s and even $1000s to secure a new customer!