Mark Jenner & Co Limited – Forensic Accounting Services

A couple of years into running my own forensic accountancy practice and business is brisk.  There was always the worry that as sole practitioner expert, the lack of peer support would mean difficulties arising when case deadlines clashed.  However, such are the vagaries of the court system that even when reporting deadlines are tight, I am invariably finished working months before that matter eventually comes to court.

I have found it easy to balance half a dozen or more current cases and when two, three or, on one occasion, five potential hearing dates clashed during the same week, I learned not to become unduly worried.  In the last example all five cases were put forward.

Investigating fraud is not confined to running after the likes of multi billion International Ponzi thieves like Bernard Madhoff and Allen Stanford.  As a forensic accountant focusing on fraud (including all financial aspects of crime), I could be examining the records of an insolvent company for misplaced assets, following up directors’ allegations of stolen money or analyzing bank statements and accounting records in a criminal fraud prosecution.

Currently I am tracing potential hidden assets in acrimonious divorce proceedings as well as assisting with the defence in an extradition case against a businessman alleged to have committed wide-ranging fraud.  These are two very high profile cases and illustrate the diversity of the different types of fraud investigation that I am asked to carry out, and illustrates why the forensic accountant must have an extremely flexible approach to the work that he does.  He, or she, must continually draw on a combination of legal, financial and interpersonal skills in order to provide the highest quality of a service that can have a material influence on a person’s livelihood, worldly goods and indeed their freedom.

A fraud expert must first and foremost be a financial expert, understanding the interaction between vast quantities of bank statements, accounting records and financial instruments.  This will involve some form of accountancy training at the very least.  But interview techniques, evidence gathering and handling, data interrogation and understanding the interaction of different legal arguments, case law and business regulations as well as an ability to conduct efficient and effective technical research is also needed.

According to the Association of Fraud Examiners, observing the responses of the defendant in interview enhances the quality of any investigation.  The advice is that this insight should be used along with a thorough understanding of the business and financial framework surrounding the particular case to support the more detailed aspects of the financial investigation.

This is fine in principle.  However, I fund the luxury of having unrestricted access to the various witnesses, suspects or defendants, and the time to fully examine the surrounding business environment, including the appropriate regulatory framework, to be seldom available.  Those paying the bill often do not see such peripheral work to be necessary.  In practice, I often find myself at the edge of a case, with specific instructions to undertake inquiries into discrete areas.  In fact, I often propose this myself, as a way to sell cost effective services to the vast majority of my clients who do not have unrestricted budgets.

When this happens, does this mean that I feel less attached to the work that I do and does it mean that the quality of my service is reduced in any way?

A lot of my work results in a report or giving evidence as an expert witness. In this case there is a strong argument for being detached from the work that is carried out.  This is particularly important if the task is to reduce an over zealous criminal benefit figure on behalf of a convicted drug smuggler. On the other hand, I may be asked to defend somebody who is being wrongly targeted by an insolvency practitioner to repay monies a bankrupt estate might not be entitled to. There is a chance that feeling anger towards a drug dealer or being sorry for an unfortunate businessman might influence an otherwise impartial report.

A criticism against the fraud regulators such as the police investigators is that they are very partisan in their approach.  They will judge the outcome at the outset and form opinions that are swayed by their inquiries.

I must not judge what is right or wrong – nor must I determine what is the correct level of penalty to pay.  To be of any use, my work must remain objective and therefore, in most cases no it does not matter that I become a little detached from the case that I am dealing with.

As for the quality of the service provided, I accept that I would prefer to interview all the parties involved and consider all aspects of the case as well as, for example, the basic instructions to quantify the losses that have occurred.  However, where it is necessary to have this additional insight in order to properly approach any matter I will include the need and its associated cost up front when quoting for the job.  Essentially there are occasions where simply analyzing the accounting records in a fraud investigation is not enough, and responses and nuances from interviewing suspects in conjunction with perhaps a knowledge of their working habits will provide a more robust understanding of the way events occurred.

There is no doubt, when the opportunity to conduct a full investigation, including determining which avenues to follow and following a trail of evidence to an unknown conclusion, that the adrenalin flows and the full spectrum of a forensic accountant’s skills are tested as they will all be essential for ensuring the quality of the work provides the outcome that is required.

Mark Jenner BSc MA FCA CFE

Qualifications

BSc Physics at Birmingham University.

FCA Fellow of the Institute of Chartered Accountants in England and Wales.

CFE Certified Member of the Association of Certified Fraud Examiners.

MA Post Graduate Masters Degree in Fraud Investigation Management at Teesside University.

MEWI Member of the Institute of Expert Witnesses

General Skills

• Fraud Investigation
• Asset Tracing & Recovery
• Business Crime
• Regulatory Assistance
• Forensic Investigation & Litigation Support

Profile

Mark has over 17 years experience in forensic accounting and being instructed as an expert, including investigating and reporting in cases of false accounting, trading while insolvent, money laundering, employee theft, transfer of business to “phoenix” companies, provision of expert accounting assistance in criminal fraud and prosecuting/defending counter claims in civil fraud and commercial litigation.  He is an asset tracing and recovery specialist in cases of insolvency, matrimonial dispute and general fraud.

Mark has a Master’s degree in Fraud Investigation Management having completed several years of specialised fraud research covering such areas as detection and control of corporate fraud and establishing the positive benefits of using forensic investigation specialists in major fraud trials.

Experience and Skills

Mark qualified as a Chartered Accountant with Ernst & Young in 1992, following a number of years in general management in the UK and Europe.

He combined his commercial experience and financial training by specialising in corporate development, insolvency and business reorganisation.  After a three year period of general forensic work Mark began focusing solely on fraud related assignments in 1997.

Forensic Experience

Mark’s work has included:

• Investigations for various police forces and other fraud regulators.
• Conducting inquiries on behalf of Companies Investigation Branch under authorities granted through Sections 447 and 453 of the Companies Act 1985.
• Asset tracing and recovery within corporate insolvencies, bankruptcies and civil frauds.  Investigating under Insolvency Act 1986, conducting public examinations in Court under Sections 236 and 366.
• Insurance and banking investigations.
• Commercial dispute resolution.
• Professional negligence cases in matters involving fraud or corruption.
• White collar crime cases and confiscation proceedings, acting on behalf of the prosecuting authorities and defendants.
• Mark regularly attends at Court and at meetings of experts, and is often appointed joint criminal defence accounting expert for several defendants.  He also provides professional training to Solicitors and Barristers.

Selected projects

Mark’s career highlights have included:

• A number of investigations for the Department of Trade and Industry leading to the successful winding up of over twenty companies found to be operating fraudulently or not in the public interest.
• Investigation into £45 million Hawala style banking operation.  Expert report resulted in HMRC dropping claim for unpaid tax.
• Managed major account reconstruction project for Serious Fraud Office involving several thousand man hours of work.
• Secured multi million £GB repayment from a company on behalf of Association of British Insurers following systematic defrauding by employees of customers of leading national motor industry support company.
• Acting as expert for defence in confiscation matter managed to assist securing reasonable order by Judge of around £600,000 following initial claim by Crown for £30 million.

These days confiscation cases seem to outnumber the predicate fraud cases that Mark Jenner & Co assists with.  They are self funding for the authorities who will not be cutting back on this area – even if they are forced to make financial cutbacks elsewhere.  According to the CPS, targets for confiscations will increase to some £1 billion – revenue which will be split between those with a vested interest – e.g. the police, CPS and the courts.

HOW CAN MARK JENNER & CO HELP?

To address the balance, the defence must be prepared for more POCA cases and high quality forensic accounting services should form a key part of the team.  More cases being brought may threaten the quality of the Crown’s financial statements and the defence must be ready to counter with their own financial expertise.

If the pressure on public funding continues to increase this will mean additional challenges for all parties of the defence team.  As forensic accountants specialising in fraud matters we are finding that confiscation and money laundering assignments seem to be filling much of our time.  In order to maintain the very high quality of response required and continue to be a valuable and readily available part of the defence team we are continuing to develop our approach to confiscations with funding constraints in mind.  Mark Jenner & Co was established to work within the increasing constraints of public funding while providing a very high proportion (sometimes all) of the work being undertaken by the expert – to provide defence responses that are robust and can be supported when it boils down to the inevitable negotiations between prosecution and criminal defence teams.

Our approach to confiscations

The recent legislation has never been crystal clear and its application seems to be evolving all the time. Such a dynamic framework means that a measured application of common sense very often prevails in many courts.  The prosecution seem to be getting more consistent with the preparation of their S16 statements latterly but even they admit they still adopt a rather “scattergun” approach.  This allows us to work through the underlying assumptions supporting the components of the benefit figure together with the amounts themselves with somewhat more finesse resulting in a critique that addresses a number of areas:

Arithmetical accuracy

Identifying arithmetic errors will result in the Crown making adjustments without much comment – but major blunders can result in cases being substantially watered down or dropped.

Double counting

As a result of the Crown’s rather blunt approach there is often substantial double and even triple counting that goes unnoticed in its financial cases resulting in benefit figures that are overstated.  This can result from a failure to identify inter-bank account transactions or reversals or, more alarmingly, failing to include all records that can be used to identify sources of funds and so eliminate unknown receipts within the benefit figure.

Legitimate sources of income

If the Crown is assuming a criminal lifestyle then the defence must prove the legitimacy of any funds that have been received.  This often requires tracing income through many different sets of bank account statements and recreating business activity from often incomplete accounting records.

False Assumptions

Every fraud is different introducing novel issues and different approaches are required. However, confiscations generally follow similar themes – components of benefit and realisable assets.  Our experience with generally recurring issues means we approach each case with a high level of efficiency that allows us to continue to undertake this work on a highly competitive basis.

For example we may question how much merit there was in our focusing on the defendant being a minor beneficiary in a fraud by directing our work to the business of others.  In R – v – May joint and several liability was decided for co-conspirators.  Instead, we might ask if it would be better if there was any way the financial activity of the defendant could be presented as simply being courier or custodian activities, as decided in R – v – Allpress?

Our view of these and other issues is that an application of common sense is required based on a general understanding of confiscation rulings.  We find counsel often appreciates our financial input early on to assist with his legal strategy.

We assisted in a confiscation following the case of a landlord who had built up a size-able property portfolio worth some £25 million.  He was caught assisting the illegal entry of asylum seekers into the UK and obtaining around £200,000 benefit on their behalf, which he kept towards their food and keep.  As a pillar of the local community, he immediately pleaded guilty and was sentenced to around 4 years in prison.

Then came the confiscation.  Of course the Crown wanted the whole £25 million for lifestyle offences.  Our report took the view that the defendant’s benefit was based on the £200,000 from particular criminal conduct and that the isolated illegality did not represent a criminal lifestyle. The Crown continued to press for lifestyle sanctions and began to introduce the idea of tax evasion – getting their own expert accountant to attempt to quantify how much tax had been evaded over some 30 years.

Eventually the lifestyle assumptions were quashed, but the prosecution argued that because illegal funds had been paid into the bank and mixed with several millions of other transactions – all funds had become tainted.  I recall the Judge’s response – “so you are saying if I stole £1 on Monday – then won £1 million on the lottery the next day and put both sums in the bank – I would lose the lot?” Prosecution counsel muttered “yes my lord” .   However, the Judge made a confiscation order equal to the sum we had proposed, commenting on our common sense approach in his summing up.  Following the recent decision in R – v – Waya the issues surrounding proportionality and the use of mixed funds have become much clearer.

Getting the benefit as low as possible

The benefit order stays with a defendant for the rest of his life, yet we have seen defence teams more focused on doing a deal with the Crown in relation to the realisable assets figure.  We aim to reduce the benefit figure as far as possible and even where a bigger figure than the agreed settlement remains, try to leave areas of doubt or disagreement within our reports should there be further recoveries pursued in the future.

Applying a bigger proportion of expert time

We prefer to increase our efficiency through the utilisation of our extensive confiscation experience rather than reducing the amount of input by the expert delegating large proportions of any assignment to junior staff.

By Mark Jenner BSc MA CFE FCA– Mark has been a forensic accountant for over 16 years specialising in fraud and money laundering 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.

Mark can be contacted at: mail@mark-jenner.com

How do you choose a forensic accountant? Many people think that one forensic accountant is the same as any other - some think that the more you pay the better service you will get. As with all other professional services this is of course very far from the truth, as there are many different forensic accountants on the market, all with vastly different experience and expertise. It does pay dividends to find one that has the particular skills that your case needs.

You might require an expert accountant to understand and present a particularly complex piece of business or accounting activity. You might want a financial investigator to delve into complex and interlinked potentially fraudulent transactions. You might want a minority shareholding in your family company valued or you might want an independent critique of a financial statement prepared for a white collar criminal case.

Choosing the wrong forensic accountant would be like asking a plumber to carry out an electrical installation. Just because they are both tradesmen does not mean they carry out similar jobs. This obvious point can be carried further – a plumber will re-plaster an area of wall where he has been carrying out some pipework. He will carry out a neat job undertaking this other “trade” in order to finish off his own speciality work. However, you would not ask him to re-plaster your whole house – he could not do it as well or as efficiently as a full time plasterer!

Many forensic accountants are appointed by lawyers. Here the accountant may be chosen for the larger firm that he represents. However, even here care must be taken – all practitioners within an accounting firm or specialist forensic accounting practice do not possess the same skills. When choosing a forensic accountant, the individual expert must be considered apart from the overall expertise of his firm because, if it comes down to a court appearance, it is the expert that will appear in the witness box.

So what should you be looking out for when choosing your forensic accountant?

Experience

As discussed above, the particular experience and skills must match the needs of your case. The areas where you might need forensic assistance are numerous, and you should check that your chosen expert regularly undertakes similar cases successfully. These might include business valuation, estimating loss of profits, checking tax assessments, investigating fraud, considering professional accountant’s negligence, defending white collar crime cases and confiscations. In addition there are many, very specialised circumstances where you might want particular industry experience, such as experience valuing a construction business. Another example would be determining negligence of a lawyer’s practice in terms of fulfilling its accounting responsibilities for the Law Society.

Credibility

A forensic accountant’s work will often result in giving evidence as an expert witness at a trial. An expert accounting witness must be credible – so that weight can be given to his opinion in court. He will be asked questions by opposing counsel that are designed to reveal any flaws in his abilities that would give rise to doubt over the credibility of his expert evidence. Of course relevant experience in the particular subject area is important, but also being a practitioner in a certain area of accountancy and not just a full time expert witness is also important. Giving evidence in white collar crime cases on behalf of the defence is much more credible to the court if the expert witness is also a fraud investigator as well.

As well as relevant experience, training and qualifications provide substantial force to an expert’s credibility. The expert accountant will be a Fellow of his relevant accounting institute, likely educated to post graduate levels at university and be a member of relevant professional bodies and forums. Examples of his writing skills and expertise in the subject areas he specialises in will be evidenced in articles in the press and journals, and even in books published on the subject area.

Court Appearance

An important aspect of suitability, if a forensic accountant is to effectively give evidence in the witness box, is whether or not he has been in this position before. Experience in this area is important. But this is an area where caution is needed. Some forensic accountants are seldom called to give evidence – for example if they work on very large criminal frauds where the findings of the prosecution and defence are often argued out of court until some level of agreement is reached. However, most good forensic accountants will be able to demonstrate some competence giving oral evidence in court.

Cost

Not all forensic accountants cost the same! If you choose a forensic accountant from one of the larger accountancy practices you will be employing somebody that might cost you in the region of £500 or more per hour. A lot of the work will be delegated to more junior staff and so this rate might fall quite considerably overall. It is still expensive, but your work will be backed by the brand and quality assurances that large firms can give.

If you choose a forensic accountant from a small firm of accountants you might obtain services at £100 per hour or even less. Contained within these two price ranges are hundreds of different forensic accountants, some good ones charging very little and some very poor ones charging a lot. You may have a budget that will constrain your choice, but as far as possible the costs should be the last consideration. It is most important that you choose an expert accountant to carry out your forensic accounting work that is suitable for your case. He or she must:

1. Be experienced and comfortable dealing with the various aspects of your case – this means that they will not take on your case until they have thoroughly familiarised themselves with all aspects of it, and have ascertained that they are acting well within their expertise.

2. Have a curriculum vitae that will impress the reader – this means that work experience, qualifications and professional interest all indicate a high level of competence in the relevant areas.

3. Whether from a large or a small firm, or a specialised niche practitioner – the forensic accountant should appear highly professional in their approach. Costs will reflect the business infrastructure they utilise but in all cases will be higher than the general costs of accountants – owing to the very specialised nature of the work.

4. Finally – and for some most importantly – is the expert someone you can work closely with? If you are employing the forensic accountant for your own dispute or problem you will be working closely and airing your personal issues. It helps if your chosen forensic accountant is approachable and tactful. Even if you are employing an expert on behalf of your client or your company – you must still work closely with them and it helps if you can get on well - working as a team.

The cases listed below represent the following areas of forensic accounting work carried out by Mark Jenner & Co:

CRIMINAL DEFENCE EXPERT WITNESS – Forensic accountancy and litigation support services for white collar criminal defence lawyers and their clients.

PROCEEDS OF CRIME & CONFISCATIONS – Expert analysis of the Crown’s S16 reports with the production of a defence expert forensic accountant report.

MONEY LAUNDERING – Expert accounting reports on money laundering indictments and advice on implementing money laundering regulations for organisations.

FRAUD INVESTIGATION – All aspects of fraud investigation, from managing major corporate fraud investigations to seeking asset recoveries or means for safe dismissal of errant employees in smaller frauds.

INSOLVENCY ASSET RECOVERY & ASSET TRACING – Tracing assets in civil fraud and helping victims of fraud to recover losses. Assisting Insolvency Practitioners recovering assets on behalf of creditors that have been taken by directors and bankrupts prior to insolvency.

FRAUD REGULATORY ASSISTANCE – Experienced in helping Police forces present their financial case to the Courts. Expert accounting assistance to the major fraud regulators including the Serious Fraud Office and the Department for Business Innovation and Skills.

FRAUD PREVENTION & FRAUD RISK ADVICE – The most cost effective way to deal with fraud is to prevent it happening and a few simple precautions can reduce the risk of fraud substantially.

A Selection of Recent Assignments

Below is a selection of cases from the portfolio of work where Mark Jenner has acted as accounting expert witness, specialist fraud investigator or fraud case controller:

• 2012 – Investigated losses due to employee fraud within a prestige Land Rover dealership.
  
• 2012 – Reconstructed income and expenditure accounts of person accused by HMRC of evading substantial tax over 10 years.
  
• 2012 – Assisted in confiscation proceedings against father of a person convicted of trafficking drugs.
  
• 2012 – Assisted night club doorman unreasonably entrapped by police to supply drugs in confiscation proceedings.
  
• 2012 – Three separate confiscation proceedings against individuals caught growing cannabis plants.
  
• 2012 – Assisted when victim of identity theft gang was accused of receiving the stolen funds.
  
• 2012 – Assisted with unsupported claim by insolvency practitioner against directors of failed property company.
• 2012 – Asset tracing in high profile divorce case where disclosed assets fall short of publicly advertised wealth.
• 2012 – Extradition proceedings against a high profile businessman taking blame for authorities’ incompetence.
• 2011 – Businessman accused of supporting a widespread drug trafficking gang by laundering money.
• 2011 – Couple accused of tampering with electrical supply and stealing electricity from the grid.
• 2011 – Post Office employee accused of stealing £30,000 while Postmaster remained uncharged.
  
• 2011 – Higher education providers accused of establishing a “Visa” shop to aid illegal immigration.
• 2011 – Smuggler accused of running adult media distribution company to cover up drug importation.
• 2011 – Support publishing companies pretending to support good causes.
• 2011 – A former career sportsman who invested in loan sharking without a licence.
• 2011 – Car dealers who upset Trading Standards by “clocking” vehicles – the Crown wanted £3 million but took £45 thousand.
• 2011 – £10 million of fraudulent claims for income tax self assessment repayments from HMRC.
• 2011 – A individual who obtained housing benefit on a property – while buying other properties with false mortgage applications.
• 2011 – A man who stole £10,000 but faced a benefit of £half million.
• 2011 – A gangster groupie who pleaded to drug dealing – was able to walk away with half his assets!
• 2010 – Criminal defence forensic accountant in confiscation proceedings involving £35 million benefit assessment. Asset tracing and business reconstruction exercise involving multiple businesses and both local and offshore jurisdictions.
• 2010 – Joint report for two defendants in drug trafficking confiscation proceedings. Presentation of business activities and reduction of benefit assessed due to double counting and inclusion of legitimate receipts.
• 2010 – Allegations of drug trafficking. Forensic work for the defence team showed that defendant did not have a criminal life style and this aspect of the case was dropped in response to my report;
• 2010 – Regulatory Investigation under S447 & S453 of the Companies Act 1985 (as amended) on behalf of Companies Investigation Branch of the Insolvency Service – into corporate collapse and allegations of Insolvency Act offences;
• 2010 – Confiscation hearing against defendant convicted of money laundering for a gang of organised criminals involved in drug trafficking and VAT fraud. Benefit assessed at over £10,000,000 but the forensic report prepared on behalf of the defence was able to show 60% of this either inappropriately included or double counting;
• 2010- Fraud Investigation examining allegations by disadvantaged shareholder of fraudulent trading, asset stripping and diversion of trade prior to a pre-pack administration resulting in phoenix follow on company;
• 2010- Forensic Accountant’s report for Humberside Economic Crime Unit tracing financial activities of a nursing home manger accused of stealing funds from a resident – a number of similar forensic reports have been prepared for police forces around the UK including Northumbria, Cleveland, Merseyside, North Yorkshire and Humberside forces – this case concluded with oral evidence being presented in Grimsby Crwon Court;
• 2010 – Expert accounting witness report for defence in a case involving alleged negligence by a professional accountant and money laundering in relation to a large Ponzi style fraud being committed by a group of organised fraudsters;
• 2009 – Acted for lead defendant in a major prosecution brought by the Serious Fraud Office (SFO) alleging serial asset stripping using the “Whitewash Procedure”;
• 2009 – Regulatory Investigation (S447) into asset stripping by a shadow director of a series of insolvent companies;
• 2009 – Expert Report for the defence in a case of profiteering from running a brothel;
• 2009 - Regulatory Investigation (S447) into Companies Act offences by director of a series of insolvent companies;
• 2009 – Expert Report for the defence in a case of money laundering brought by the police against a money transmission bureau;
• 2009 – Asset tracing exercise undertaken for the defence team in a major prosecution following the 2006 Securitas robbery of £53,000,000;
• 2008 – Expert Report for the defence in a major West Yorkshire Police case against a group of business men involved in a variety of activities including hand car wash businesses, restaurants, property dealing and various offshore financial activities.
• 2008 – Confiscation proceedings brought by Thames Valley Police under the Criminal Justice Act 1988 of £25,000,000 of Defendant’s assets – matter concluded with evidence successfully being given in Reading Crown Court.  Included tracing exercise involving contact with financial institutions in Pakistan;
• 2008 – Money laundering allegations brought by HMRC – defendant accused of laundering money by way of a gambling habit over a number of years – matter concluded with evidence being successfully given in Birmingham Crown Court;
• 2008 – Tracing exercise involved funds derived from Europe and the Middle East;
• 2008 – Allegations brought by Post Office of theft of around £50,000 against a Sub Post Master;
• 2007- Allegations of unpaid tax and NIC and other money laundering indictments by NCS and HMRC relating to £45,000,000 funds moving through (and being transferred between) numerous Defendant’s bank accounts connected to a “Hawala” money transmission business.  Tracing exercise involved explaining assets moving through Dubai and Hong Kong including contact with institutions in these locations;
• 2007 – Regulatory Investigation (S447) into £100 million turnover property group.
• 2007 – Forensic Report for the defence in a case brought by the DTI against an accountant accused of assisting fraudsters strip assets from company acquisitions using the “Whitewash” procedures.
• 2006- Confiscation following London Underground corruption trial leading to attendance at Guildford Crown Court for ongoing assistance in reducing level of benefit being sought;
• 2006 – Regulatory Investigation (S447) into £35 million turnover trading group involved in VAT fraud (Missing Trader Inter Community MTIC or “Carousel Fraud”).
• 2006 – Fraudulent trading indictments brought by the SFO against directors of a computer company involving “ fresh air” invoicing, cheque cross firing and transactions amounting to around £25,000,000, being funds circulating between connected companies;
• 2006 – “Long firm” UK based fraud where £600,000 credit was allegedly obtained illegally from international suppliers;
• 2006 – Fraudulent trading indictments by DTI (now BIS) where £500,000 was allegedly obtained by factoring fictitious debts using cross firing techniques.

Other recent instructions (2006 – 2011)

• Specialising in a number of fraud investigations to assist smaller businesses and individuals where losses can often be relatively small and not seen as a priority for the fraud regulators or are too small to merit expensive legal assistance pursuing recovery through the civil courts.

• A number of enquiries are carried out each year on behalf of Insolvency Practitioners where fraud has been discovered or is suspected and involve asset tracing and recovery exercises carried out in situations where directors or bankrupts have hidden assets.  Recovery work has included dealing with banks and other institutions in Europe, USA, Middle East, Russia and Asia.

• A range of criminal fraud defence and confiscation work as expert accounting witness is undertaken each year for criminal defence solicitors on behalf of defendants in criminal matters – ranging from small employee thefts of a few £1,000s to multi-million frauds investigated and prosecuted by the SFO.

• Around 30 authorities since 2004 granted for enquiries carried out under Section 447 and 453 of the Companies Act 1985 as external investigator for the DTI (now BERR/BIS)

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 attempting to obtain business loans and 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. The Defendant may argue that he was simply seeking tax relief by exploiting timing differences in respect of any payments received, and that he was planning to pay the money back next fiscal year!

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.

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.

Confiscation Proceedings and POCA indictments within fraud cases impact a large proportion of the work carried out at Mark Jenner & Co. We see case after case involving anything from a few £1000 being stolen from the DWP to confiscations following major organised attempts to defraud government agencies of £millions.  However, in all cases the initial amount of benefit and hopeful level of realisable assets figure usually bear no relation to the severity of the crime committed, and in most cases after lengthy and expensive proceedings the Crown accepts much more modest terms…

There is no doubt of the commitment of the present Conservative and previous Labour Governments to the Proceeds of Crime Act 2002 and its intended use to cripple organised and career criminals. Criminal lifestyle (no obvious income) cannot always be linked easily to a specific offence – however the recent legislation moves the burden of proving innocence firmly over to the criminals. It has been applied in the field now for a number of years and is becoming a routine process in many cases.

Sometime the process is so routine that prosecutors do not bother to prepare a comprehensive Section 16 Statement, using the freedom they have to make certain assumptions to the extreme! However, this does often lead to a robust defence that can result in more lenient orders for sums being confiscated.

The Section 16 Statements are statements of information that provide the reasons, but not necessarily all the evidence, for applying criminal lifestyle assumptions to the source of a defendant’s assets. The Statement will set out the level of criminal benefit based both on the specific crimes that have been committed and also on the assumptions that other activities are also criminal (i.e. the defendant has a criminal lifestyle). The Statement may also indicate the assets that the defendant owns to satisfy any confiscation order and even give an indication, again not necessarily with evidence, of any assets thought to be hidden away.

With such a broad remit for indicating what is benefit and what may be available as realisable assets to satisfy the order it is clear that the prosecutors are simply setting out some of the information they have in relation to the defendant. This is on the basis that they are hopefully covering the level of the actual criminal activity and challenging the defendant to explain everything else. In effect they are often seeking to do just enough to ensure that the defendant loses all he currently owns.

This approach does happen in practice. Unfortunately, although it may deliver draconian but deserved justice for some, it creates a somewhat unfair situation for some other defendants. For example take the case where a defendant has been convicted of trafficking drugs, has not kept details of any financial transactions and in all likelihood has not paid any tax on any legitimate work he has been undertaking as a cover for his drug dealing. If only one or two of the defendant’s bank accounts are analyzed and demonstrate adequate transactions to ensure the ensuing confiscation order is large enough, then the defendant will lose everything and no doubt the prosecution (and indeed the rest of us as well) will accept that justice has been served.

However, compare the last case to another, where a businessman has been caught defrauding his employer by substantially inflating his corporate expense account for a number of months running, by several £1000s. He is caught, convicted and must serve a prison sentence as punishment for theft. Of course he will also have to pay back the money through subsequent confiscation proceedings. If he is technically deemed to have a criminal lifestyle because he has stolen more than £5,000 over a six month period, the prosecutor will have the opportunity to throw the book at him, preparing a Section 16 Statement that will seek recovery of not only the money that he stole, but everything he owns and has ever transacted – going back 6 years from the time of arrest or charge. When all the receipts into the bank accounts over 6 years are totted up, this “benefit from general criminal conduct” can reach huge sums. The scale of such an assumed level of benefit, if awarded against the defendant as a confiscation order, can never be paid back. The unfortunate defendant would have to serve a default sentence having more years added to his original penalty.

Of course it is possible to defend such a situation. The defendant’s legal team would realise that whereas it would be necessary to repay the level of money stolen, it would be somewhat unfair to have to repay income earned legitimately over recent years. This is what an uncontested confiscation order would involve in such a case. Therefore, the defence must show to a civil standard of proof that his income (other than the actual proceeds of crime) was from legitimate sources.

This is where the defence forensic accountant would be called in. He will examine the Section 16 Statement together with all the defendant’s financial evidence (such as bank statements, business records etc) and demonstrate the legitimate nature of the income. This usually means that he must go further than the prosecutor because he will need to undertake a comprehensive review of everything – it is up to the defence to demonstrate the legitimacy of income or assets. To do this may mean examining accounts that the prosecutor has not bothered with, to show the source of all transfers for example.

The big problem arises because the public funding of such cases is under threat. The public sector is having its budgets cut drastically by the Government in an attempt to redress the fiscal measures put in place to counter the pressure on banks over the past year or so. As an example the Legal Services Commission is losing a big part of its annual operating budget. It is reducing its spend on expert witnesses, including the forensic accountants, by a disproportionately large amount – 20% was initially swiped of the annual bill with promises of even more cuts. This is around £20 million less being spent on defence experts in the coming year.

The mechanics for doing this were proposed in a consultation paper regarding levels of experts’ fees. It is proposed that a forensic accountant would be paid between £47 to £100 per hour with the upper rate unlikely to be ever paid. For those that think that £100 per hour is a lot, remember this is the total cost – out of which must be paid pension, sickness, disbursements and the high cost of running a business. To put the rate into comparison, my work for my Masters Degree in Fraud Management showed that the average cost of a forensic accountant and of a police officer or member of the Court (clerk/manager etc) or of the Criminal Prosecution Service were broadly comparable. In fact the real cost of putting an officer on the beat is a lot more than £100 per hour, let alone the cost of a detective in an economic crime unit.

If a well trained and experienced forensic accountant were to be paid £100 (assuming he or she can achieve this top rate) then they would be unable to remain in even a small firm of accountants as they would be unable to earn enough to fund their firm’s overheads. There is evidence that the Legal Services Commission sees the solution as forcing the forensic accounting services into the hands of retired practitioners and “one man bands” who can survive (albeit barely) on the rates that are proposed. In a previous consultation paper several years ago this very outcome was mooted as the way forward. At that time all that came out of the consultation perhaps was more determination by the public sector funding body to restrict and delay payments for experts.

The most recent news is that from 3 October 2011 a new payment framework for expert witnesses is to be implemented by the LSC. A London based firm may charge between £50 – £144 for its forensic staff:

£50 – general staff

£80 – accountant

£108 – manager

£144 – partner

The regional firms are not much different – being allowed rates of between £50 and £135.  At the end of the day, the payments will depend on the competitive tendering nature of the assignation of cases – but composite average rates of £100 seem to be what the LSC are expecting to pay experts on all but the biggest of cases.

Mark Jenner & Co provides specialist forensic accounting services to criminal defence lawyers throughout the UK.