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The Fraud Threat In Perspective

When I was developing my specialist fraud service within the large accountancy firms, I was excited about the possibility of rolling out a dedicated fraud prevention product for large businesses and organizations so that they could protect themselves from massive losses to the fraudsters.

Nobody seems to realize how much fraud threat and financial crime exists in the world. It is a hidden crime and therefore can only be counted when discovered. The authorities try to estimate its impact (more of a guess), but generally most people are not aware of its potential scale. In its latest Annual Fraud Indicator, the National Crime Agency puts losses to the UK economy at £190 billion, mostly to the private sector.

In other articles I have written how only 0.1% of this is recovered in the criminal courts when fraudsters are brought to book, though this statistic will be increased by civil asset recovery. Nevertheless, it is true to say that most of the fraud losses are just that – losses! It would be easy to imagine that business leaders would be anxious to learn whether or not their organizations were vulnerable to fraud and want to put in place controls to prevent it concurring.

Yet the threat of fraud continues to be treated complacently and the two comments that will stick in my mind when conducting interviews for my post-graduate research into fraud prevention were:

  • “We pay our staff well so nobody is going to commit fraud in our organization” (Finance Director of major UK listed construction company)
  • “You can purchase a lot of fidelity insurance for the price of a fraud prevention review” (Big 4 Accountancy Firm Audit Partner)

These two comments illustrate the widespread complacency of the fraud threat that is held by leading players, and why the fraudster pretty much has a free reign. I accept that many businesses do pay heed to the need for preventing fraud, especially public sector organizations that have a legal obligation to protect the public purse, but the focus on preventing losses needs to be increased. If a company is prepared to spend several % of its turnover on marketing, why is it so hard to spend a much smaller proportion for its fraud control? On this level the fraud prevention business should be worth billions…but would be self funding and paying for itself several times over!

Most of my time as a forensic accountant is spent examining fraud after it has occurred. Sometimes I may have to explain how the fraud took place and how it could be prevented in the future. Such work may well reveal new areas of vulnerability – but generally my work is reactive.

The Fraud Threat And The Global Money Transfer Framework

One of the biggest threats to global economies is the quantity of criminal money being laundered. Organized International Money Laundering is responsible for moving many hundred billions, probably trillions, of pounds, dollars and euros etc from where the crimes are committed to other havens around the world. Having undertaken many cases involving “Hawala Money Transfer” over recent years I have become aware of the huge volume of cash that is being transferred out of the UK economy using this method – or using this method as a cover for straight forward illegal money transfers.

Fraudsters Target The Legitimate Transfer Market

Hawala is an overused term usually applied to a more informal money transfer system when compared to that offered by high street banks. It is meant to be regulated in exactly the same way as normal banking is – yet the fraudsters easily find ways of adapting it for their uses in preference to using Barclays or Lloyds. Hawala institutions are obliged to be scrutinized by the authorities in an attempt to prevent fraud (this time not generally as potential victims but as possible perpetrators). One of the biggest problems with a rogue Hawala trader is when they fabricate fictitious customer identities to explain the large amounts of cash they are in receipt of. The authorities sometimes discover this fact when they investigate a money laundering suspect, but never consider this probability when conducting routine compliance audits. Thus a large scale money laundering operation can go undetected unless it otherwise becomes the target of a full blown police or HMRC criminal investigation. I have seen this happen in a number of cases where I have been asked to provide forensic accounting services – the evidence shows that the Hawala agent has been checked by HMRC year on year and simply reprimanded for failing to tick a number of regulatory boxes – but the transfer business is eventually found to be connected to a wider organized criminal gang assisting with moving £100s of millions abroad.

So, complacency in anticipating the fraud threat and complacency in actively looking for it are problems found everywhere. I have often said that the fraudster spends all his time thinking about how to trick us out of our hard-earned money and how not to get caught. We only think about fraud when it happens to us! In this increasingly sophisticated electronic age we need to be ensuring that we are always anticipating the unwanted attention of the crooks.

The clear message must be that fraud is an increasing threat globally. Crooks work internationally, making it harder for the authorities to investigate and therefore many massive frauds result in permanent losses.