Fraud Advice

For there to be a meaningful fight against fraud there needs to be a legal system capable of dealing with the cases brought by the prosecution authorities. There is no point beefing up the police fraud squads and giving them resources (which should include adequate funding for forensic accountants) to investigate fraudulent activity if the cases are going to falter at court.

Why would they do that? If a criminal trial is not managed properly and proportionately it will either fail completely leading to a re-trial or an appeal. This happens a lot and is the biggest reason why costs of dealing with criminals in general are so high.

The Legal Services Commission comes under fire a lot – not just from this blog site! The Daily Mail yesterday (2nd February 2009) reported the gross waste of public funds by the LSC. Audits have revealed that they have paid some £25 million too much to criminal defence lawyers over the year. If a public auditor is able to uncover £25 million wasted out of a budget of £2 billion per anum then just think how much a proper fraud investigator would find!

This may sound a bit of a sweeping statement, and is based purely on anecdotal evidence. But do not forget that as a forensic accountant I not only get paid for a lot of my work by the Legal Services Commission but also deal very closely with firms of solicitors and barristers that do also. Yes I do see some barristers getting paid £1 million each year from public funds, but I also struggle myself to receive ordinary market rates for my own work.

Sometimes I must argue my case with an LSC case worker that is questioning a quotation that I have submitted. Having done these sorts of jobs for over 15 years I usually have a good idea of how long they will take and what resources I will need to apply. It is not always easy to translate these ideas into a recipe for my costs and sometimes have to argue whether or not each of 10,000 documents will require 20 or 25 seconds to review! I know that I will need a week and a half or so but putting it into simple science is not always so easy.

Apparently since the 1980s spending by the LSC has multiplied 7 fold. Its not surprising – forget the published inflation figures – in 1983 we bought a house for a price that we would easily have to pay 12 times more for now. That aside, the past decade or so has seen the labour government increase the amount of legislation in place many times. The Proceeds of Crime Act 2002 is only one example of many new laws that were introduced, were lengthy and ill conceived. They have led to substantially more work needed to be done by the Defence solicitors and barristers to prevent miscarriage of justice. I have assisted in some of this and know how much time can be wasted by the Crown.

I would rather be putting the fraudsters away any day, but am happy to present a truly interdependent stance within my Fraud Advisory Services work portfolio and act as expert accounting witness for the defense in white collar crime cases. Because the Crown tends not to prepare financial cases in a safe fashion, often by not utilizing forensic accountants, there is much scope for checking and representing the case by the defense. My work in this area is not intended to get the dguilty off, but ensure that their case is presented at an accurate level of severity so that the courts can award a just sentence. If the LSC continue to be criticized for waste and their budgets cut accordingly, who will be doing the essential fraud defence work to balance the system?

In October 2008 the Attorney General’s Office in the UK established the National Fraud Strategic Authority (NFSA) as a result of its Fraud Review in 2006. Being true to form for government agencies it has already had its first change of name to the National Fraud Authority (NFA)!

The NFA web site does not appear to work and very little information appears to be forthcoming from a Google search. It appears that the National Fraud Reporting Council (NFRC), whose NFRC web site also appears to be inoperative, is still embryonic in its development.

In 2008 the UK government allocated £29 million to put into place the various recommendations resulting in the decision to establish the NFA and NFRC. The City of London Police is to take the lead role in investigating serious and complex fraud and are tasked with helping other police forces with their investigations. They are working with the government to establish the NFRC.

Nothing much seems to be happening at present. News broke in 2009 about the appointment of Bernard Herdan as the full time chief executive of the NFSA (or NFA) to spearhead the coordination of inter organisation efforts against the growing problem of fraud. Herdan’s provenance is as an interim chief executive at the Securities Industry Authority since 2006, prior to that having spent some seven years as an executive director at the Identity and Passport Service. The distinct lack of a broad serious fraud experience does rather smack of this being a political appointment of a crony by Baroness Scotland (the Attorney General).

Although nothing much seemsto be occuring, there are one or two reports attributed to the NFA – National Fraud Authority.

For example in its first Annual Fraud Indicator report the NFA estimates that fraud costs the UK £30 billion per year – almost twice the previous estimates of some £17 billion. They say that the highest sectors of fraud loss are:

• Tax fraud at £15.2 billion
• Consumer scams at £3.5 billion
• Insurance fraud at £2 billion
• Mortgage fraud £1 billion

These figures should be viewed with some suspicion. There have been a number of estimates of the level of fraud in the UK over the past few years, many endorsed by the government. These are usually between around £40 billion and £100 billion. In addition, every fraud survey usually caveats their results saying that they are likely to be on the low side because of the hidden nature of fraud and the fact that much is not reported. The estimates do not include money laundering or hiding the proceeds of other crimes such as drugs, trafficing and extortion.

If the truth be known, the level of fraud as a proportion of the economy is huge but will never be accurately estimated.

Take the mortgage fraud figure of £1 billion for example. I was involved in a mortgage fraud case worth around £100 million. During the course of my investigations I began to understand how great the problem was. There were 100s of other property developers and others undertaking the very same tyoe of business that I was looking at. In fact it seemed to be the case that the way the UK plc was being run was fraudulent! Much of the toxic debt in the UK today results from overvalued properties and freely given loans without due diligence. In the past one to five years the annual level of mortgage fraud was well in excess of £1 billion.

Tax fraud is another example which must be viewed carefully. The level of tax evasion is not widely understood, especially by HMRC. I recall other cases over the past six or so years ago where I investigated a number of different support publishers. These companies pretend to represent good causes and charities and sell expensive advertising space in diaries, wall planners and directories. Many of the companies were closed down by the authorities as a result of the investigations, but likely sprang up immediately afterwards under a different name (phoenix companies).

The common factor between these companies was that they all employed teams of tele sales operatives to sell their advertising space. Every person was employed on a self employed basis and responsible for their own tax. Most never declared any of their commission earnings and many were also on supplementary benefit. I attempted to present my revelations to HMRC. Many of their junior managers were interested and tried to arrange a meeting for me with a senior policy maker – but none were interested. I was told that the UK would have to wait for new legislation. This meant that anybody interested in preventing such whole scale tax loss (as this practice ran much further than just the small sector I was investigating) would need to start lobbying members of parliament! It seemed that HMRC was only interested in applying its duties by the book – not looking to plug an obvious gap.

Much of the tax fraud in the quoted figures comes from Value Added Tax evasion – though if we think that HMRC have solved the carousel fraud problem (missing trader inter community fraud – MTIC fraud) by introducing reverse VAT charges on mobile phones, computer chips and now carbon credits, we are sadly mistaken. A recent investigation that I was involved in revealed that the spiders web of businesses involved in VAT fraud across the UK is huge, and the commodities exploited range through everything that can be traded – I have seen clothing, textiles, furniture, household goods, electronics, books, dvds, food supplements, spectacles, drugs……………..

I do hope that the figures presented by the NFA have not used too much of my tax money! There is a feeling that £29 million of funding would be better spent developing individual economic crime units and fraud squads around the uk. Fraud prevention and fraud detection at the coal face is money better spent than the development of even larger public sector agencies and quangos!  A couple of new well trained financial investigators in each regional police force together with all the supplementary resources and technology required including access to proper experienced forensic accountants – would be money better spent.