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.

In the UK it is Her Majesty’s Revenue and Customs that investigates tax fraud as part of its regulatory duties. HMRC is a massive organisation that has grown out of the merger of what was termed “the Inland Revenue” and “Customs and Excise”. HMRC is responsible for the overseeing of all forms of tax within the UK including Value Added Tax, Import Duties, Income Tax and Corporation Tax to mention a few.

I think it would be fair to say that millions of offshore companies do not pay tax at all in the UK, or in the USA or in any country for that matter! I read somewhere that a third of companies in the UK do not pay any tax at all and another snippet presented by a leading firm of Chartered Accountants was that in 2006 some 54 billionaires residing in the UK paid their tax at a rate of 0.14%, yet the poorest in our society paid over half their income to the Exchequer – not only in income tax but also the indirect taxes such as VAT and other stealth taxes!

I am willing to bet that most readers will not be asking “where on earth did he get this information from”. However, I will tell you that I have not sourced it properly yet but am willing to bet that it is true – and I think most people would accept the fact that corporate giants and rich individuals who can afford to be domiciled in different jurisdictions pay proportionately less tax than the poor.

However, though most of this imbalance is a result of clever manipulation of the complex tax law by highly paid tax advisors, a very large proprtion is not. It is tax fraud. It is no wonder that HMRC have such a difficult job when many think that withholding tax is not a crime but a business skill!

HMRC do not generally employ external fraud investigators or forensic accountants like me to assist with their enforcement of the UK tax system. However, because their approach is often ill conceived, dogged and bloody minded (possibly because of the scale of the problem they face) it is those on the receiving end that come to me as a forensic accountant for help! If somebody finds themselves wrongly accused of evading tax, it needs a forensic accountant to unpick the financial transactions and demonstrate true levels of income or profits to the satisfaction of HMRC.

A brief example of the problems HMRC can cause is a tax demand they issued regarding the profitability of a financial company a couple of years ago. They calculated that the business had made some £600,000 in profit over about 4 years and wanted about £150,000 in unpaid tax. The business had actually declared £50,000 profits and paid tax on this.

I examined the HMRC calculations and noticed that they had used two different methods to estimate profits. Fine, a very good idea, cover all the bases. The trouble is that they then added the two together, thereby double counting the profit. Then, I discovered 71 separate arithmetical errors in their calculations!

My own estimates gave, as often happens in a forensic investigation, a range of possible values for the profits. I reckoned that they would be between £25,000 and £75,000. It turned out that HMRC dropped their original claim and homed in on my higher value….

HMRC do have a hard job, but fraud investigation in my book needs to be precise and applied with experience, qualification and diligence. Often it is the private sector that has to police the public sector regulators to avoid miscarriage of justice.

I remember back in 2003 when the Proceeds of Crime 2002 legislation and associated Money Laundering Regulations 2003 (both subsequently amended by Serious Organised Crime and Police Act 2005 and Money Laundering Regulations 2007) were coming into force. As an accountant working in the regulated sector and specialising in fraud/asset tracing/money laundering I naturally took an interest in these new developments.

For the first time professionals, namely accountants and lawyers, were placed firmly in the firing line when it came to dealing with crime. It was argued that criminals needed professionals to not only give their exploits a veneer of respectability but also to help them get rid of their criminal earnings – to help launder the money. In fact history has shown that most big time money launderers for organised crime have been lawyers and accountants.

So now we were expected to be the government’s unpaid guardians preventing illegal money transfers – in a way banks and other finacial institutions had already been recruited. I gave lectures around the firm about the penalties for getting it wrong, for tipping clients off or even being in a position of being accused of actually laundering the spoils. One talk was at Northumbria Police’s inaugrual North East Fraud Forum conference held in St James Park,  Newcastle in March 2003. That drew around 300 delegates from all over the country – the general feeling was of uncertainty as to how the developments would affect professionals. I was also one of the few civilians to attend the Association Of Chief Police Officers biennial Fraud Forum later on that year in the Autumn – with a very similar theme of money laundering. Again I remember that the talks discussing professional involvement were a little unclear.

By now we all know that a number of professionals have found themselves in deep water (or prison to be precise) for turning a blind eye to their clients activities – even if they were not involved directly. We have to undertake rigorous checks on our clients – check their passports, utility bills, addresses, company details etc. To “Know Your Client” and to report any “suspicious activities” means that we should be able to prevent the criminals from dealing in financial transactions.

But fraud is as prevalent as ever. The frauds seem to be getting bigger (Maddoff!) and the estimates of its effect on the economy are growing (£100 billion per annum in the UK – 5% of all USA businesses turnover lost to fraud). I do not think that the new legislation and regulations have made any difference to the seriod fraudster and their supporting cast of professionals. They have given the rest of us professionals another layer of regulatory administration to struggle with!

As a forensic accountant specialising in fraud investigation I do two types of work. The first is publicly funded – I am paid by the Police, the Department for Business Innovation and Skills, the Legal Services Commission etc. Publicly funded work is not considered to be regulated and therefore I do not check out my client (KYC) and I am not concerned about reporting and fraud or crime I come across – because it would be pointless reporting to SOCA when I am already working for the Police (for example).

The other type of work is privately funded – i.e. I am investigating (usually fraud) for a private client. Whichever way you look at it, fraud is a crime and therefore not only have I carried out checks on my client (the victim of the fraud) but in all likelyhood I will have to put in a SAR to the Serious and Organised Crime Agency. In practice I will do this and also report to the appropriate police force regional fraud liaison officer to ensure that my client’s business is not surprised by a dawn raid!

It seems that we still have a way to go, probably by way of simplification of the current Act and Guidelines and a more joined up approach between the public and the private sector, before we professionals can be properly effective in assisting the authorities in their fight against fraud and organised crime.

I decided that it was high time that I spent a day working from home and getting all those little jobs done that I have been putting off when working in the office. For one thing there is the little matter of writing a newsletter, updating my contacts list and getting the publication out. Fraud investigations simply do not just appear on the desk out of thin air.

While considering what was newsworthy I decided to review my web marketing efforts for my fraud investigation work. It seems that as a budding author there are so many opportunities to write about your work that it is difficult to know where best to start. Take for instance HubPages. I have written about fraud investigation here and believe it is a good forum for articles directed back to your business marketing site.

So we are back to marketing fraud investigation services using the Internet. If I am successful in doing this I believe that the knowledge picked up will also be an invaluable tool in my cybercrime investigations. The Internet is a unbelievably massive entity, and learning how to navigate properly through it is both an art and a science. Google, Yahoo and many others are familiar faces, representing massive amounts of financial activity – not only within their own businesses but those that interact with them to build their own (including mine). The potential for new and innovative frauds is immense.

Investigating these new frauds will not be easy, it will be daunting. However, armed with the knowledge of how the Internet works, how the various marketing activities are managed and how the financial interaction is organized will allow the basic concepts of “follow the money” to be adhered to in any fraud that needs investigating!

So when it comes to developing my fraud investigation services around the UK and much further afield using the Internet to reach many more victims of fraud that simply don’t want to turn to their usual, often expensive and inexperienced accountants to deal with the problem I will be mixing my circulated newsletters and face to face meetings with my network of contacts with a large measure of on line marketing!

The Ponzi fraud dates back to early last century when Charles Ponzi first brought the idea of using an investors funds to repay investors their interest, thereby seeming to be a successeful business and encouraging new investors, into public knowledge. I am willing to bet that he was not the first to see the potential in dishonestly circulating others’ funds to increase income in an investment fraud that is designed to enrich the perputrators.

Every year we hear of new Ponzi scams that have come to light, perhaps when the schemes begin to crumble when more than just a few investors want their capital back. The biggest recently was the Madhoff affair involving billions of dollars and pounds that had supposedly been invested for lucrative rates of return. But is you check the news archives, fraud blogs and other reports you will see that there are dozens of these scams emerging every year.

Last year I worked on a reasonably large case that had been brought by the Serious Fraud Office in the UK against a couple of businessmen based in the Midlands. This case has been reported in the press and involves around $200 million of investors funds that the authorities say were invested by UK victims who, once the scheme folded, lost their money.

The UK arm of the alleged Ponzi fraud was part of a much larger investment scheme being headed by somebody in the USA – which had already led to a plea bargain situation. Of course pleading guilty gave the UK perpetrators little chance of repreive.  At the time I remember doing a bit of research on Ponzi frauds and being amazed about the number of current cases that were being investigated or being dealt with by the courts!

Now I am faced with yet another case this week where I am asked to look at the professional conduct of an accountant recruited by the opperators of an investment fund. If the fund was a Ponzi, should the professional have known about it and reported under Money Laundering Regulations to the Serious and Organised Crime Agency in the UK? Should he have known that funds he was holding were proceeds of crime?

I am not in a position to report about this at present as it is sub-judicae - however we have what looks like another Ponzi scheme. Effectively we have a large number of ostensibly rich investors looking for a larger return than expected from a bank or other mainstream investment opportunity. Why do people keep on investing in such a way. Promises of several % interest each month abound and it is not easy to see why people do not approach these investment opportunities with more caution. Do people never learn?

The problem is of course, these High Yield Investment opportunities are indeed based on a shred of truth. There is a backbone of legitimacy behind the very idea that you can find investment opportunities offering higher returns than the recognised sources. It is this very element of secrecy and intrigue I believe that encourages the unwary to fall for the scams! Whereas there might have been, and some say still are, high yielding returns to be made for massive investments used effectively as global hedge funds by a number of altruistic and very rich organisations and individuals – these are likely to spawn glamourous tales of rich pickings to be had when they do not exist anymore.

Remember, the UK and USA have injected trillions into the economy over the last year or so – have you ever wondered how much back room/under the table dealing has gone on around these incomprehensible figures?

The trouble is that if the climate is ripe for such massive movements of money then the fraudsters see the opportunity to start weaving their spells again! What a setting for even more Ponzi scams to be generated.

My work as a fraud investigator and expert accounting witness will undoubtably involve more Ponzi frauds over the coming years and months. In the meantime I will report my current findings on my scambusting business opportunity blog site as soon as I am able to name and shame!

I was reflecting on the direction that my fraud investigation case portfolio would be taking over the coming few years – part of the anticipation many of us have about the fall out from the global economic downturn that is currently facing us. I think that my focus will be largely on frauds arising from companies that have gone bust. This is the time when the inner workings of a fraud are exposed, and thefts and defalcations would often simply carry on as long as a company is healthy. I have investigated many businesses that have been abused by the fraudster for many years, have passed through their annual audits with flying colours only to become exposed due to an unfortunate incident such as defaulting creditors or litigation that causes them to nosedive. A recession can crystalise such problems of course.

Do not be deceived into thinking that the recovery will protect those frauds that are currently taking place!

Commentators are split between those that say that the “green shoots of recovery” are showing and those that say we are bouncing along the bottom of the recession still.
In a way they are both right! The recovery from what is accepted to be, for the UK at least, the deepest recession (in 100 years?) will be complex. Just because houses are selling and yes, some green shoots are showing, it doesn’t mean that the throwback from the irresponsible credit problems of recent years will be swiftly cleared up.
Insolvencies are increasing and practitioners, in London at least, are busy. However, the floodgates have not yet broken and we don’t yet have a tidal wave of administrations, receiverships and liquidations revealing a vast array of fraudulent activity. I think that it is still to come though, with reports saying that many businesses are teetering on the brink. Just because we are making progress with mending the economy does not mean that the problems are over for many.
The ease with which many companies are phoenixed using the “pre pack” administration tool is open to abuse. The regulators are wise to it and look closely at obvious examples. This is clearly an area where fraud will come to light in the coming months and years – and the process will be examined in more detail in my latest research article on my Fraud Advisory Website.
Read my regular investigators diary blog for further fraud developments resulting from the Global Credit Crunch!