Fraud Advice

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!

I recently wrote a post on my earlier blog site (which has unfortunately disappeared along with my older articles into my hosting server’s archives!) commenting on the state of the world economy as we draw towards the end of 2009 and how it will be effecting the level of frauds that are being discovered and investigated.

I concluded that we fraud investigators should be getting very busy as a result of the recession, along with insolvency practitioners and those who give advice on cost cutting and business turnaround.  Whilst there is some general activity increase particularly in London in the UK the great wave of new fraud cases has not yet broken. In fact the work load has been going up and down over recent months  but definitely not flat out or gaining momentum.

The initial worry was that my own portfolio was struggling, but this is not the case. I have been reasonably busy given one or two changes I have been making to my marketing efforts and then there is the increasing competition it seems! A number of recent tenders have been lost on price and this is one area where the recession is biting, in areas of civil investigation. Others are turning to fraud to fill in their shortfall. This is coupled with extreme pressure on public sector spending where certain agencies and regulators outsource their investigation work.

The word on the street from a number of my more frank and well known sources is that it is generally quiet.  From a couple of my insolvency sources it seems that the floodgate of businesses poised to go under is about to burst – whether this is before the end of the year or early next year we can only surmise.  This opinion is supported by a couple of contacts I have in the banking arena. They say that there is a lot of desperation building up (individually as well as for businesses) and the banks are not yet back to a position to assist fully.

Added to this are the reports from some of the economists that even if we are in or near the depths of the recession – it will be a long slow climb out. This will mean the weaker companies will go bust as the market place “cleans” itself up and that yes, frauds will be surfacing. It also means that the drivers for the fraudsters to start committing acts of fraud will be a strong as ever and this in turn means new cases will continue to reflect the present economy well into the next decade.

So my view remains the same. We will start to see a rise in fraud coming to light – as well as businesses going into some form of insolvency procedures – a rise that may well begin soon and keep on going for some time to come!

Just a quick final post for today to hopefully finish checking my blog site formatting!  One of my interests is researching the many scams and cons that abound in the “business opportunity” market place.  For this reason I have set up a web site to consider such business opportunity scams and compare these to business ideas that do work but only if you are prepared to put in hard work on a regular basis.

This web site will be completely separate from my fraud resources web site that is intended to describe the sort of work and fraud cases that I target on a day to day basis.  The trouble with scams and cons is that they tend to impact a large number of individuals or businesses for relatively small amounts of money.  As such their is often an apathy shown by the victims to do anything about their loss.  Who for instance is going to pay a certified fraud examiner several 1000 pound or dollars investigate a loss of a few 100s?  Yet 10,000 scams at £100 adds up to a million.

In my opinion a strong tool against scams or cons is to raise everybodies’ awareness – this is what my new business opportunity web site is about.

One of the areas where I have been involved over recent years is investigating fraud arising out of insolvent estates and organisations.  This is where a bankrupt person or director of an insolvent company has, in preparationn for, or in contemplation of the impending crash hidden or removed assets.  This is theft of course from the creditors of any bankrupt estate and there are provisions within the Insolvency Act 1986 for returning these assets.

This means that whenever I have investigated such a fraud it has been on behalf of an Insolvency Practitioner who has a licence to hold office as for example a trustee in bankruptcy, a receiver or a liquidator.  Acting as a fraud investigator or asset tracer means that I can excercise powers that he is granted under the Act and allow me to recover documents and question directors, employees and suppliers etc in order to determine where the assets have gone and how much could potentially be recovered.

An example of the powers granted by the Act is whereby under S236 the Insolvency Practitioner (or somebody acting on his behalf… i.e. me) has the right to demand information from say a director about a particular payment he authorised just before his company went under.  It may be that the payment was not at arms length to a bone fide supplier, but a preferential payment to a friend.  Under these circumstances this payment can be recovered for the benefit if the disadvantaged creditors of the insolvent company.

Recovering the preferential payment may need a court order, in which case it may be necessary to question the director before a judge (in the High Court) in order to get an order made for repayment.  A tennacious Insolvency Practitioner or his representitive may undertake this questioning in court as this would be cheaper and more efficient that employing a barister!  I have undertaken this task on a couple of occasions and I can assure you that asking the questions before the judge is a whole lot better that being on the receiving end which I usually am as an expert accounting witness specialising in fraud matters!

These investigations have been a little quiet over the past 24 months but I can see the opportunities as a fraud investigator approaching as a result of the current economic downturn.  There are a lot more frauds to surface as a result of the way companies have been run over the past year or two in an attempt avoid collapse as the credit crunch bites.

The term Long Firm Fraud is popular with law enforcement investigators who coined the phrase several years ago when this method of fraudulent trading was at its height.

Typically based in the Midlands organised crime gangs would set up apparently bone fide companies, sometimes hijacking the identity of an existing company to obtain a legitimate trading history and therefore good credit reference – then commence trading with suppliers. 

They would build up trust with the suppliers by initially paying for deliveries but gradually ordering more and more and paying later and later.  Very often a large amount of stock builds up with very little initial trading occurring.

Eventualy the fraudsters would abandon the company.  The stock, well this was sold off cheaply at pound shops, market stalls and the like to quickly liquidate the capital.  The creditors of the abandoned company would of course be left high and dry.

This is a fraud fraught with difficulties for the investigator.  Typically run by Asian gangs based in Birmingham and nearby, the purpetrators opperated with aliases and phoenix companies.  Often tracing the activities that would spring up and dissappear overnight it seemed.

You would think that recently as credit becomes harder to obtain that this type of fraud would not be so popular.  However Long Firm Fraud and fraudulent trading in general is likely to become even more of a problem as we head for the (hopefully) recovery years of this current massive downturn in the economy.

This is because businesses will be eager to build up their trade, offering good terms and even extended credit in an attempt to expand out of the downturn.  If one thing is certain in the field of fraud it is the fact that lessons do not seem to be learned!  Unfortunately people are too trusting, too eager to believe that a deal is going to be beneficial. 

What can be done?  It is the same answer for all frauds.  The regulation of the fraudster by the police, other agencies and private enterprise must receive adequate resources and be seen to be dealing with fraud as it arises.  Too often we read of the likes of the Serious Fraud Office bringing a case to trial after years of investigation.  This is not a criticism of the SFO per se, but the burdensome judicial system within it is forced to work.  The Serious Fraud Office has had to deal with several Long Firm Frauds in the past and has had some excellent results.  However, obtaining credit without the intention of paying, i.e. fraudulent trading, is an offence that will happen time and time again in coming years.

Apologies for three short posts this moring as I am working on the format of the fraud advice blog and experiencing a few problems.

This morning I had scheduled a meeting in Birmingham with a building contractor in connection with a current investigation involving several aliases of the director and a number of phoenix companies that had been set up in succession.

I was up well before dawn at 4.00 am and had walked the dog and had some breakfast and on my way just after five.  I was well on time for my 9.00 am meeting  and had stopped a short distance before the rendezvous at a convenient watering hole to take stock of my notes when I received a call cancelling the meeting!

Fuming over a cup of coffee I have now settled down to write these posts and to start planning a rewrite of my fraud investigation website.

It is hard to believe that I have a physics degree and that I learned all about how computers worked, how to install binary operating language, how to write  a couple of different programming codes and even how the solid state electronics found in micropchips were configured.  Why, because when computers started to become available as desktops I was the biggest cyber luddite to be found.  I was dragged screaming and kicking into the computer age and eventually succumbed to an Amstrad with no hard drive in about 1990.  Well my phisics degree was awarded over 30 years ago!

So now as a fraud investigator I realise that it is important to be familiar with all aspects of cybercrime.  All businesses use computers and it is hard to spend money now without some form of electronic device involved.

Two thirds of UK households use the Internet with online purchasing a massive growth area.  It is not surprising that the threat of cybercrime is on the increase and we fraud investigators need to be ready with the appropriate tools and knowledge to deal with it.

Much of the crime being carried out is the same old frauds simply using the electronic medium of email for communication.  For example the Nigerian 419 scams that solicit bank details or up front payments in advance fee frauds used to be posted out to contact details from telephone directories.  This was a costly (the price of stamps) and time consuming excercise.  Now with a press of the return key any number of 419 letters can be sent to unsuspecting recipients on an email database.

Other frauds being committed via the Internet include identity “phishing”, spyware to extract bank and credit card details and fraudulent selling sites.  Many valueless schemes for getting rich quick are available for the gullable and often greedy customer waste their hard earned savings on.  These selling schemes exploit the vast nature of the Internet – by optimising your web site for a keyword such as “easy money” you will receive 1000s of interested browsers every day.  It is a numbers game.  For every 1000 web site visitors you might get one person to part with their £50 or $100 for a “guaranteed business plan that works”.

Business opportunities that succeed require hard work.  Those that do and those that are merely scams are reviewed in Business Opportunity Market – before paying for that Import Export course it might be worth a quick bit of research!

It is possible to divide asset recovery into a number of different camps depending on the circumstances giving rise to the need for claiming back money or goods that rightfully belong elsewhere. 

The first of these areas include criminal asset recovery or confiscation, from fraudsters and other criminals who benefit from their crime such as drug dealers or those that deal in human trafficking.  Such asset recovery is carried out through the criminal justice system but can also involve civil asset recovery using both the civil and the criminal courts depending on the circumstances.

The next area is the asset tracing and recovery from fraudsters or persons or organisations involved in sharp business practice through the civil courts.  This involves civil litigation through the civil courts.

Last but not least is the recovery of assets from insolvent individuals and organisations.  This is recovery of assets after the fact, attempting to trace assets that should be available to creditors of the insolvent entity.  A fraud investigator investigating such losses must need to be aware of both criminal and civil considerations when dealing with bankruptcies, receiverships and liquidations.  An insolvency will normally be investigated under the provisions contained within the Insolvency Act 1986 which details of numerous criminal offences.

Whatever powers and provisions used to investigate and recover assets, there can be no better outcome to asset recovery than when negotiated settlemement and recovery is achieved.  This means that costly litigation is avoided and a fraudster may well avoid the most serious sanctions if he pays the money back. 

When deciding to investigate a loss due to fraudulent activity with a view to recovering assets an understanding of the likelihood of recovery must be obtained before substantial resources are expended on protracted analysis, interviews and other research.  This is to reduce the risk of the gamble taken as to whether or not an asset recovery action will be successeful.  It is quite easy for legal fees to reach six figures and more when asset freezing injunctions, search orders, financial investigations and legal counsel are employed by lawyers progressing a case.  This is why it is always a good idea to have a fraud response plan in place within any organisation (in addition to a fraud policy) which sets out how to act if a fraud or loss is suspected.  Provisions can be made for an immediate and totally confidential appraisal by a fraud expert in order that the correct decisions can be made at the start and costly mistakes avoided.

The UK and the USA appear to be the biggest targets for the fraudster by far.  This may be as a result of our sociological or demographic characteristics.  One thing is for sure, fraud is a problem that costs our respective economies billions and deserves adequate resources and investment to deal with it.

In the UK there are a number of developments in the pipeline.  The National Fraud Reporting Centre is one that is being developed by the Home Office that will eventually be a repository for data on all frauds that are occurring.  Many other incentives are in the pipeline or are being set up by police forces and other fraud agencies around the country.

However, these public sector fraud regulatory organisations need to do more than managing statistics and setting up fraud awareness sections on their web sites.  They need to respond to all frauds when they occur and be seen to be dealing with them.

The credit fantasy bubble of recent years has now burst, causing the greatest and deepest recession in recorded history and has impacted the UK and USA the most.  The response of both countries by the Labour and Democratic parties has been to throw vast amounts of public money at the problem to shore up the banks and to encourage them to start lending again – i.e. return to the old ways?  The upshot of this huge increase in balance of payments is the admittance, even by the socialist Labour party in the UK, that something must give and that the wastage in public spending must be reduced in order to fund the bail out of the banks.

Socialist governments generally do not see massive spending on the public sector as wastage, but even the Conservatives and Republicans would not argue that sensible funding of serious fraud crime agencies is not frittering of funds.  Therefore it is worrying to see that the Serious Fraud Office in the UK is dropping its overall budget from £50.9 million in 2008/2009 to £44.3 million in 2009/2010.  This is a fall of 13% and despite the common understanding that there will be a rise in the number of cases needing attention, if all the messages of the past century’s similar less severe recessions are to be believed.

A case needs to be presented for increased spending, a more unified approach, public and private partnerships and, yes, even a fuller understanding of the scale of fraud through a joined up National Fraud Reporting Centre.

Mark Jenner is a fraud specialist.  He is a Fellow of the Institute of Chartered Accountants in England and Wales, a Certified Fraud Examiner and has a Masters Degree in Fraud Management.  This article and others can be accessed on his Fraud Advice Web Site.

When investigating fraud, remember where there is a paper document, there is probably an electronic version of it.  There may be more than one, often held by third parties.  Electronic documents often tell you more than paper ones would, for example the date of deletion from a computer may indicate a covering up exercise.

Computer data should always be secured when executing search orders, using forensic techniques that can recover deleted documents, faxes, electronic mails and other data that may prove a case beyond dispute.  This requires specialist knowledge and tools – simply switching on and reviewing what is immediately seen is not forensic analysis, and this approach may destroy evidence or render it inadmissible in a court.

In house IT staff are unlikely to be qualified to process computer evidence and may make serious mistakes that will almost certainly undermine the value of any evidence and may prevent recovery of assets through legal channels.

So when a fraud is suspected the best thing to do is definitely not panic – give a specialist firm a call such as CY4OR or Data Genetics – or call your friendly fraud investigator – all of whom will talk you through the steps you must take (happy to help!).

It is not just computers that need to be considered.  Mobile phones, personal organisers, fax machines and many other devices may also contain evidence important to your case.  If forensic analysis is required of any device, attention to the following is vital:

• Secure electronic evidence quickly to reduce the risk of it being destroyed or changed
• If a computer or device to be investigated is on – do not switch it off!
• If a computer or device to be investigated is off – do not switch it on!
• Disconnect computer from power at socket and seal in a plastic bag
• Gather all disks, CDs, DVDs, tapes, USB memory sticks and other electronic storage devices together to accompany computer
• Gather associated manuals, power cables, external drives and any other external peripheral devices together to accompany computer
• Avoid contact by magnetic media with strong magnetic fields, microwaves, excessive heat, shock or vibration

Of course there are times when a quick examination of the computer will assist with urgent decision making – that will prevent further losses.  Again it is knowing what to do that is important.  This is why all organisations should have a Fraud Response Plan in place so that the right decisions are made by the appointed persons in a timely fashion.