I read with some concern an article in this Sunday’s papers about the plans of City of London Police Economic Crime Unit for the coming year. Detective Chief Superintendent Stephen Head is on record saying ‘…as with the drugs trade, there is little point picking up a lot of small fry while the big operators get off free…I want to concentrate on maybe five very big fraudsters in place of 20 smaller ones…’

I agree that the big fraudsters should be targetted a lot more than they are. The whole concept of fraud is that it is a hidden crime and many organised criminals are currently getting away with various fraud scams big time. Yes, a lot of them get caught eventually, most having run for between three and five years. An awful lot of damage is being done to our economy in that time, which can ill afford it in the current climate. There are many fraudsters that do not get caught – or worse still, the authorities are unable to act fully or effectively, such is the complexity of the scam being perpetrated.

But there is a huge raft of smaller frauds taking place. Fraud is endemic in our society of high taxes and consumer excesses. If you thought that the ‘under table’ economy was restricted to third world countries or other less advanced administrations, you were wrong. Our society is as corrupt as any other, just that we are more circumspect.

Systematic tax evasion occurs, where workers are encouraged to claim benefits and not pay tax by their employers so that the wages bill can be less. These are the sort of companies that trade for a year or two, closing down and then starting up under a new name and very likely leaving a few unpaid bills behind them. These are the businesses that steer clear of any professional help, from lawyers and accountants who have a legal obligations to shop them to the authorities that overides any professional duty of confidentiality. In this way the Anti Money Laundering Regulations are missing a large proportion of the illegitimate cash that is being circulated and tax that is being avoided.

Add to this the wide ranging stress and hardship that is caused by the smaller frauds that come to light. Old people are duped out of their savings by an unscrupulous carer, small businesses go to the wall when the bookkeeper embezzles the funds needed for next month’s wage bill and individuals risk their dwindling pension funds in an attempt to provide for their families future. The fraudster does not care about the hardship he or she is causing, and for every ‘big fraudster’ systematically skimming millions, there are a thousand con men and scam merchants earning much less but nevertheless causing immense harm to innocent people.

If the City of London is upping the size of the frauds it targets, I hope this is not the pattern around the country. Already the small fraud is too easy to commit, and the chances of the local police investigating are remote. Not only do they not have the resources to investigate, they also lack the will because their performance is measured by dealing with more ‘serious’ crime like murder, rape, burgelary and social nuisance. I agree that these are areas that need continued attention, but should rank alongside fraud when bidding for funding from central government.

Instead of attempting to budget a limited sum of money, and cutting back on fraud, attempts should be made to discover how much money would be needed to establish a comprehensive fraud resource and then worry about funding it! I know that if this resource was established, the level of asset recovery of criminal proceeds of crime would escalate substantially and not only provide self sustaining funding for economic crime units, but also contribute to compensating the victims of fraud for their losses! I just hope that there will continue to be funding for at least some work for forensic accountants - forensic accounting is the only efficient way to unpick the financial records behind some of the more complex frauds that are detected.

The first decade of this millennium has been characterised by quite a lot of substantial frauds when you pause to look back. We have seen massive accounting scandals in the form of Enron and Parmalat – who would have thought that a top tier accountancy practice could collapse as a result of such a scandal as Enron?

The decade has seen a massive raft of VAT frauds in the “Carousel” merry go round of Missing Trader Inter Community mobile phone and computer chip scams. Coming years may see this fraud extend to all forms of products, even including the trading of carbon credits!

The scale of the Ponzi investment frauds that started emerging in the latter part of the decade only reflect a business model that seems to have been flourishing for three quarters of a century since Charles Ponzifirst gave his name to such an obvious swindle. There will be more of this in the newspapers for years to come as I believe the culture of the Ponzi style fraud is ingrained in the financial systems around the world. A lot of it is sustained in the same way as the global economy is sustained – the illusion of a bottomless bucket of credit.

And throughout recent years we have seen the authorities try to get tough with the organized criminals by confiscating their assets. What has happened is that the career criminals have enough money to hide behind and the onerous asset seizure is routinely applied to those who fail to cover their tracks or are stupid enough to neglect filing even token tax returns!

So where will we be in the coming 10 years or so? I think the fraud regulators may start to form some sort of cohesive group but how far will they get? Given the public sector wastage of the past 12 years or so I suspect that the limited funding available as a result of propping up the banks will not go far.

Speaking of funding we are still awaiting effects of the public spending cutbacks on the forensic accounting profession. Will criminal fraud and money laundering trials become shallow bun fights without the financial issues being fully aired by competent accountants?

My own views are that there will be ample scope for the efficient fraud operator to assist private clients if they are efficient, hard working and not greedy for fees. A hard task perhaps? I do not think that the individual or small business who has been “ripped off” is properly catered for. Losing £10,000 or even £100,000 does not seem to excite the authorities these days, but they will spend tens of £millions on the big frauds.

By managing fraud cases on behalf of groups of individuals who have lost out to systematic sharp businesses or outright fraudsters - it may be possible to persuade those agencies with the powers available to them to get involved.

There is a definite rise in the incidence of employment fraud during a recession, though this will often only come to light in the months and even years following an economic downturn. Some employment fraud however will be discovered during the downturn, as hard pressed companies take a closer look at their finances and discover losses might have been taking place.

Recessionary pressure affects employers as well as employees. Cutbacks have to be made and it is often the case that a company is in constant review of its finances, looking for ways to survive let alone grow and make profits. There will be constant talk of “tightening of belts” and likely rumours of redundancies – even if these do not actually take place. This has a knock on effect on the employees, many of whom will start to feel insecure in their jobs.

This leads to one of the drivers of employment fraud due to economic downturn. There is a decreased loyalty shown to the employer because of the real or imagined layoffs. This can result in some seeing the opportunity for compensation in the form of helping themselves fraudulently! This tendancy is even more marked if there have been reductions in pay levels or even cuts in overtime opportunity.

The second cause of employee fraud during an economic downturn is the financial hardship experienced by the employees families generally. Even if the employee is secure in his own position, a family member might have lost their own job and household income is reduced. It might even be perceived pressure from the need to save more in case of much greater hardship in the future.

The third clear driver in the increase in employee fraud during a recession comes from the cost cutting excercises that an employer might be taking. Very often non essential positions are cut. These tend to be the middle management levels, not the productive workers and not those in ultimate charge. The trouble is that this is the layer of management that effectively controls fraud within a business. It is the layer of supervision, the division of duties and monitoring that creates a secure financial system. Remove some or all of this and large windows of opportunity for the fraudster can appear. It often happens that internal audit and dedicated fraud prevention functions are seen as non essential and down sized accordingly.

With an increase in employee fraud and a reduced capability to deal with it, when a fraud does occur a company might find itself in the position of having to call in specialist fraud investigators. The cost of employing a fraud investigator in a recession is an added burden in trying to out ride the downturn.

Recent news has been announced of the embezzlement of toy giant Toys R Us by a dull and uninspiring employee – accountant Mr Hopes. He has stolen some £3.7 million by issuing fraudulent invoices to the company and arranging for payment to be made (into bank accounts that he controlled).

Mr Hopes will spend several years in jail and lose every penny he has ( and probably do extra time in jail as a result of a harsh confiscation order against him). So it has not been worth his while – but consider he was only caught because he lavished his proceeds of crime on prostitutes who then flaunted their wealth. Suspicious police investigated and it wasn’t long before the money trail let to Mr Hopes.

I reckon he might have got away with it. He had been taking sums up to around £300,000 for three years. His activities had escaped three years of internal and external audits. If he had squirreled his money away and retired he could be living in some sun soaked land in the life of luxury?

Maybe not – but the lesson again must be how easy it is for the fraudster to escape for significant lengths of time before being caught, just because of the complacency of the organisation. Mr Hopes had been an employee for 23 years. There is no doubt that the organisation’s trust in him allowed him to escape detection for so long. It is breathtaking that Toys R Us, which has 1,500 stores in 33 countries world wide, did not have a more robust system in place to prevent fraud and also to detect fraud.

I have offered anti-fraud services for many years but it is the area of business that sees the least instructions every year. Why is this? There are clearly many organisations that do not have adequate fraud protection, from the smallest to the largest business. Frauds in these are what keep me in work! Yet, as Toys R Us will learn, it would have been far, far cheaper to spend a little on its fraud prevention program than it will end up spending on investigating the fraud, tracing the assets and recovering what little may be left of the losses and probably going over the top in its now ongoing efforts to prevent fraud happening again!

Further details of this fraud can be found on my forensic investigation web site.

I was thinking about the different types of fraud that I have investigated over the years and I realised that Charity Fraud was one of the main subjects cropping up again and again. It seems that charities are prone to the attack of the fraudster. This might be for two different reasons:

1. The fraudster exploits the good nature of the donor who finds it hard to say “no” when asked to provide funds.

2. Within an otherwise good intentioned charity there is a lot of money flowing in and the promoters get greedy and start taking more and more for themselves.

The first charity fraud method is a business or company that is set up with the sole intention  of making money for the benefit of the owners. This can be a charity publishing scam – support publishing companies they are often called. There are some of these that operate legitimately. A charity will approach them and commission a fund raising booklet or other publication. The support publishers will then attempt to raise advertising revenue for the charity usually using tele-sales methods. Out of all the money raised the support publisher will take its agreed fees. By law, the publication will state which charity it is supporting and how much of the money raised has gone to the charity.

This is an attempt to prevent those support publishers that use charities’ or other good causes’ names in vain, with no intention of passing any of the money raised over. In addition they will only produce enough of the publication to make the advertisers think the booklet is for real.

Charity frauds are big business. It may only be a small part of charitable activity, however this is a massive business in itself. Dealing with charities fraud must be by educating people to be more cautious. Warn them to say no if they are not sure and not to blindly give to every approach simply out of good heart. It is better to say “no…sorry” and give the money to a known and regularly supported cause than to waste money enriching the fraudster.

Another problem concerning charities is their alleged connections in some cases to terrorist activities. Terror networks are developing around the globe and often use charities as means for raising funds or for cover of their terrible business. Only relativelysmall amounts of money are involved compared to purely money making scams which makes it a lot harder for the authorities to police them.

Having spend the best part of two days writing my latest newsletter, printing it, wrestling with getting a colour header (and failing), signing it and stuffing around 750 into envelopes with a covering letter, I did not feel like spending the last hour or two of today, the first day of December, doing any proper work! Actually I did have help with my mailshot so I shouldn’t grumble too much.

Writing the newsletter always makes me take stock of some of the current issues that affect us forensic accountants. This time I noticed that professional negligence of accountants and lawyers have been figuring rather a lot recently through a number of cases that I have been doing recently.

When looking at accountants’ obligations these days it is easy to see why they fall foul of the regulators’ interest from time to time. An accountant is the very veneer every organised criminal needs to assist with laundering his proceeds of crime! Criminal Proceeds and Money Laundering are of course very big now – especially since the Proceeds of Crime Act 2002. Some say it has draconian provisions – that allow an errant accountant to face up to 14 years in jail if they are found guilty of assisting in the laundering of the proceeds of crime.

This may seem harsh, a professional should have client confidentiallity surely? No, not so, the professionals must act as gatekeepers in the authorities’ fight against crime. Even a lawyer cannot claim legal priviledge if trying to conceal money laundering from the authorities.

Accountants are firmly within the regulated sector, as far as Anti Money Laundering Guidelines go. This means that they must carry out KYC – know your client – checks. Also, if they come across something untoward in their client’s records they must make a suspicious activity report (SAR). So accountancy is a regulated activity. However, much of forensic accounting is not!

If I provide expert witness services to the police, I hardly need to verify that they are the authorities that they say they are. I mean – meetings are held at the police station….! If I work for the defence, I hardly need to report the details of the fraud to the authorities who are already investigating it. In fact, the Money Laundering Regulations do say that publicly funded work is not a regulated activity.

But, if I should be asked to investigate for a private client I will most definately need to have regard to the KYC and SAR requirements like my normal accounting coleagues.

Back to work after a week off and my thoughts again turn to marketing my business. I am about to send out a newsletter in connection with my fraud expert witness work and have been musing about the current state of the investigation industry. While I am comfortably occupied with work, perhaps now is the time to develop the business and grow – when all others are pulling in their belts?

I listened with interest this morning as the newsreadergave a daily update on the worsening economic crisis in Dubai and the likelihood that there will be support on a selective basis by neighboring Emirate Abu Dhabi.

Hopefully Dubai will ride its crisis and emerge as strong and prosperous as ever. I do however think that they will probably become more aware of the risk of fraud and the effects it can have on various parts of their business and financial infrastructure as the months go past. This is because I recall a conversation I had last year with a couple of members of the board of Dubai Holdings, the Dubai Royal Family owned umbrella company controlling many £100 billions of assets not only in the Gulf but worlwide also.

I was being interviewed for potential services I could provide to them but recall being mystefied as to what was wanted from me. I did not know if they wanted me to look at a specific problem, advise them on their global fraud risks or trouble shoot one or more of their subsidiaries. I remember thinking that there would be no way forward when I was asked the question “…what will you do when you have finished investigating any fraud we might have…?”

Phew…a multi billion global conglomerate and I should entertain the idea of even finishing mapping fraud risk on my own…!

My very respected and able business minded interviewers were only falling into the trap many financiers and businessmen have encountered over recent years. Fraud is an insiduous and complex beast – it entwines itself into any organisation that fails to consider that it is a threat - in such a way that it is only when a massive loss comes to light that any notice is taken. My old supervisor at the (then) DTI used to call this a “banana skin”. She meant of course that it was when a business slipped and fell flat on its back – they don’t happen often but when they do…

Any business or entity or even economy is greatly at risk in this current poor economic climate. The pressures on idividuals, groups of people or even governments to committ fraud is stronger. Fraudulent trading is going to be rife and we are going to see a lot more high street names other than Borders giving up the ghost as the Christmas trading period does not answer all the problems. Many commentators say that we are only just beginning to enter the trough of this recession!

My advice is that it is never too late to review your business, to fix any hemoerages of cash due to fraud and to secure the future security of the bsuiness. Doing so may allow you to ride the coming storm – unless we really are seeing the “green shoots of recovery” which I doubt.

Although I have strayed off my subject of this post – being the right time to build a fraud investigation practice – my point is clear. Over coming months the level of distressed businesses finding that matters are worse than they feared due to fraud will increase – the floodgates of fraud have not opened yet and there will be much work to do.

I thought that an article in the Sunday papers about the Serious Fraud Office this week would be a welcome read. However as I read down the first colmun the old cynicism crept in! The piece was an interview with a senior staff member Phillippa Williamson.

It was not the human angle that annoyed me, but the alarm bells began to ring when I noticed that prior to the SFO she was working for HMRC in charge of tax credits and child benefits. Reading down I was reminded that her current boss, Richard Alderman was also a former colleague at Revenue & Customs.

I have often noticed the various positions being advertsied – head of Asset Recovery Agency, Head of this, deputy for that – and in each case I have considered (for a very brief moment) applying. I have occasionally taken a passing interest in those that get the jobs. The Curriculum Vitae usual gives a history of public sector posts a little like Ms Williamson.

It upsets me a little to think that my industry’s flagship fraud regulator is just like any other politically driven organisation. I do not believe that politics and results go hand in hand very often and the regular accusations of cronyism by the press are well founded it seems.

Fraud is an insidious problem in the UK. Yes, I am just looking at the UK today, but no doubt many other countries will have the same problem. We are getting a Fraud Reporting Center so that we can begin to know really how much fraud costs us every year. We might be merging the SFO with the Financial Services Authority (particularly likely as the Conservatives are advocating this move). There was talk about a merger of the SFO with the Serious and Organized Crime Agency a while back.

There is plenty of talk, it seems that all parties recognize the threat of fraud, in the same way as they know there are too many vehicles on the road and that the railways ought to be developed properly. It is one thing knowing, setting up inquiries, having expensive working parties report the problem. What we need is direct action to stop fraud becoming further entrenched into our way of life. I hesitate offer more quasi political advice but perhaps the country needs its own “fraud policy”? I and others are always preaching to companies that they need one – it would go a long way to deter the fraudster and perhaps remove the need for the self gratifying public relations exercises that the SFO feels that it needs to promote in the form of reported interviews with its old schoolboy (or girl) network of staff!

Our criminal justice system has grown up over centuries as our society has progressed and is thought to be fair. Others criticise us, saying perhaps we are too soft on criminals. However, being magnanimous is probably better than being ruled by autocrats and tyrants. Better than having a hand chopped off for stealing. Better than being shot in the back of the head for actively opposing a regime.

The criminal justice system provides a balanced approach to dealing with crime. We believe in someone being innocent until proven guilty – the right to be heard by your peer – these are the mainstay of our whole modern way of thinking and has served us well on more occasions than it has failed. A very important element of this system is the right of criminals to present a case to defend themselves – the right to be heard. This is fundamental.

Criminal defence in the UK (or criminal defense in the USA) does mean that the whole judicial system is somewhat adversarial. We feel that the actions of the regulators and prosecutors must be tempered by a criminal defense system to ensure that they do not ride roughshod unfairly over the criminals, some who may well not be guilty, or as guilty, as their accusers say.  We must make sure that the system is properly managed, adequately funded and reaches the results that everybody wants – to punish and deter the criminals and to recognize when a person is not guilty or perhaps not as guilty as the indictments suggest.

The application of the Proceeds of Crime Act 2002 in the UK can provide an example of potential problems arising if the criminal defence team is not able to challenge the prosecution’s position. If somebody has been convicted of a crime they will have to serve a sentence proportionate to that crime – maybe in jail. But with POCA it is necessary to make sure that crime does not pay – so no longer can a person rob a bank, do time in jail only to be released a rich man! The conviction is now followed by confiscation proceedings. This is intended to stop crime paying – to take away the wealth of the lifestyle criminals.

However, the provisions within POCA allow for the possibility that somebody who steals only a modest amount may still be presumed to have a criminal life style. The Crown will apply for confiscation of everything the criminal owns – plus what he has assumed to have received – for several years previously. Obviously this needs to be challenged as the assumptions can be sweeping and need not be underpinned by evidence. It is up to the criminal defense team to show assets have been paid for with legitimate funds and that are receipts over the preceeding years are not from crime.

Sometime it is difficult to find adequate accounting evidence to show this, even by using forensic accountants, and a person is ordered to pay back more than he stole, more than even he possesses. If he is unable to do this he is in default and may be given substantial additional custodial time! This is why sufficient funding for the criminal defence team, including for a forensic accountant to do a full and detailed response to the Prosecution’s case, is essential if justice is to be done.