One of the most common questions asked of employment lawyers is how to safely sack an employee or director who is suspected of being on the take.  It is a question that often cascades down to forensic accountants who are asked to provide financial evidence for the frauds or assist with tracing and recovering the money.  Often, such fraud specialists will be asked to assist with the disciplinary process and also with providing a pivot for the subsequent civil or criminal action.

One thing that generally becomes obvious when asked to help out is that an organisation seems to be very indignant that a trusted member of the business could turn out to be a thief.  However, nearly always the problem has been created by the business itself, usually because no heed has been taken whatsoever to the risk of fraud.

There is a commonly recounted saying that only 10% of the population are criminally minded, but that only a similar amount of 10% are truly law abiding.  The rest of the population 80% are usually good unless motive and opportunity are put in their way.

Motive and opportunity – the most significant drivers of fraud – far more important than having a criminal mindset in the first place.  To see how this works – take a pretty common situation where a financial director uses his director’s current account (correctly) to record any personal spending.  At the end of the financial year he raises a bonus large enough after tax to clear the current account.

This is a pretty common occurrence and many business owners do the same. But what if the finance director is the person who is trusted with all the accounting function and the other directors, often not so financially astute, leave the money side to him?  If the bonus is not authorised then this is effectively theft.

The finance director may argue that he has posted similar bonuses to the other directors’ accounts – and shows them their accounts in credit. But this is a paper accounting figure and the business may not be able to afford to pay the sums owing to the other directors – yet the finance directo has had the benefit of the expenditure throughout the year.

If the company policy does not have controls to prevent the above, it is possible that the finance director will escape sanction and it will be hard to dismiss him.  It is important where one person is given overall control of a finacial function that there are some controls in place to make the person answerable. For instance, there will be limits to spending (cheque writing, credit card payments, bank mandates etc) without second or even third director approval. There will be a regular publication of directors’ current accounts and any payments or bonuses over and above contractually agreed amount must have general (and minuted) board approval.

In my work as a forensic accountant I see too many instances where a couple of business owners or directors suddenly realise that a fellow director has overstepped the trust they have been given. They want his blood but in fact in many cases they have simply given him too much opportunity and when motive arises – and being short of money can arise very easily for all manner of reasons – it is only human nature for the vast majority of people to succumb to the temptation!

Identity theft is a subject that is raised and discussed at many fraud forums and similarly reported in an increasing number of news articles. It is not just the cloning of identities followed by fraudulently obtaining goods or services on credit cards that results from identity thefts. Some very complex frauds are built on false identities and credibility stolen from others.

A report in this week’s Financial Mail in the Mail on Sunday illustrates how such fraud might be working. It involves a potential boiler room fraud which involves the selling of bogus or worthless shares in business ventures by high pressure salesmen. Credibility to their product is provided by details of another real and likely more successful venture whose details can be checked in the public domain.

In this case it appears that an oil company is touting for investment in its two “proven” oilfields. Its web site gives details of a director that are the same as those of another company Petroneft Resources who also has oil fields in Lineyoye and Tungolskye, names that are curiously similar to those quoted for the other bogus oil company. The bogus oil company cannot be contacted and its address details given are false. Petroneft, which is based in Ireland and is clearly a bone fide company, was astounded to find that there is another company that appears to be advertising the same assets as it owns.

Petroneft has reported this instance of credibility hijacking to the Irish Financial Regulator, Financial Services Authority and City of London Police. The FSA say that incidents of identity theft and associated unauthorised sale of investments in typical “boiler room frauds” has increased dramatically over recent months. In the last three months alone it has received 29 such reports.

It does seem that even with the current economic climate that there is plenty of money that investors are seeking to find homes for. This may be a case of moving funds around in an increasingly competitive market or there being more money available for investment. Whatever the case, people with money and those responsible for others’ are still investing in bogus schemes at an alarming rates. Ponzi frauds and other advance fee scams are still being reported and the current flavour it seems is the boiler room threat.

Financially astute persons (i.e. those with money or investing it for others) should not be easily caught by these scams. There is a level of fraud prevention due diliegence that can be carried out that does not involve much effort but will uncover, or at least throw up some red flags, most of the bogus investment opportunities. It is no good relying on company searches in a climate where identities are so easily hijacked. Drilling down into an individual’s or organisation’s identity is essential, to uncover all of the public information available and checking or cross referencing this wherever possible. When investing several £100,000 or millions, surely it is worth checking to see if a director is who he says he is and lives at his stated registered address? For a few pounds this, and many other details, can be so easily verified.

Mark Jenner is a forensic accountant specialising in fraud investigation and fraud prevention.

For some time there has been a general feeling held by public and private sector fraud practitioners that the issue of fraud in the UK was not treated as seriously as it should. Campaigns by bodies such as the Association of Chief Police Officers (“ACPO”), the highly successful regional fraud fora and many others, have gradually raised both the public and the Government’s  awareness of the serious threat that fraud is to individuals, organisations and the economy as a whole. As a result the Government commissioned a 2006 Fraud Review following which in 2008 the Attorney General’s office ring fenced a budget of £29 million to establish a National Strategic Fraud Authority (“NSFA”). Somewhere along the line the new body changed its name to the National Fraud Authority (“NFA”) with a dedicated website at: http://www.attorneygeneral.gov.uk/nfa

There has been little news in the ensuing period concerning the NFA’s activities. Appointments of interim and permanent chief executives were well advertised as with all political posts. One of the first outputs seems to be a survey of the level of fraud in the UK that was published in January 2010. It was this survey that announced that fraud cost the UK some £30.2 billion per year that reminded me of the NFA’s existence and made me wonder what they were currently doing to help deal with the problem of fraud.

It does seem that one of the Authority’s tasks is to roll out details of the progress that they are making together with the general anti-fraud message at various relevant gatherings around the UK. These include speaking slots at the different Fraud Fora events that are held around the country. Therefore it was with much interest that the North West Fraud Forum’s annual conference was attended on 11 February 2010 at the DeVere Whites Hotel in Bolton.

Two out of three talks during the morning session were related to the NFA. However, the very first talk was on a different subject – an interesting piece by Lancashire MP Rosie Cooper, who related a personal experience of identity theft fraud. The talk highlighted the weak and ineffective response the authorities  have historically made to reports of such fraud and Rosie and the audience (which included over 100 respected public and private sector fraud practitioners from around the UK) eagerly awaited the NFA’s report as to how their new thrust would help frustrated victims of fraud like Rosie.

Unfortunately the NFA’s chief executive Dr Bernard Herdan could not make the conference and a last minute substitute of his colleague Cordia Lewis was made. Cordia was an Australian librarian with an MBA. She began her talk be reiterating private sector fraud statistics that had been compiled by the leading accountancy firm KPMG.

Her speech included details of the NFA’s intention to compile a regular Annual Fraud Indicator and an update of the newly established fraud reporting functions of “Action Fraud” for individuals and SMEs or the “National Fraud Intelligence Bureau” for larger organisations and fraud regulators.

Her message was - that if Rosie had experienced identity fraud now she would be able to report the matter to Action Fraud. However, this caused a storm of response from the audience with questions along the line of “do we stop reporting fraud to the police?” and “is this not another level of beaurocracy being inserted into the system?”

The next speaker had a recent example of how the reporting process worked.  Detective Superintendent Steve Clarke of the City of London Police headed up one of this squad’s six fraud groups and which was also the lead force in the coordinating the efforts of the NFA. He also headed up the NFA’s National Fraud Intelligence Bureau – the reporting point for major frauds. Steve related the case of Focus Clothing which the City of London is now investigating. This case which has been in the news resulted from over 50 calls to the NFA’s fraud helpline from individuals who had not received goods they had bought online from Focus.

It does seem that there is a lot of talk and good intentions from the NFA but certainly the audience at the North West Fraud Forum were not convinced that reporting a fraud to them would result in any more action than if the fraud was reported to the police or other front line fraud regulator. I discussed the matter with a solicitor, a government company inspector and a private sector fraud investigator all on my table at the conference. Together with my own views as a forensic accountant specialising in fraud matters, the consensus was that the £29 million would be better spent on funding more dedicated fraud squad officers in the various regional police forces!  Only time will tell.

By: Mark Jenner – Forensic Accountant

According to the Federation of Small Businesses (FSB) some 20% of all crime takes place on business premises. When you think of all the theft, murder, drugs and the like, this is an awful lot of crime!

The reason of course is that businesses are the target for all forms of fraud – employee fraud, creditor fraud, supplier fraud, Internet fraud…the list can go on. You should not wait until your business becomes a victim as it inevitably will at some point, do something about it now.

Apart from the obvious security issues for your assets, you need to put together a fraud reduction strategy that will help protect your business from various types of fraud, phishing, pharming, identity theft plus hacking and virus threats to your IT systems.

Your data needs protecting also. Even apparently simple information such as your customer lists are valuable and you do not want your employees giving it to your competitors. The data can also be lost through burglary and criminal damage to your premises. Think of the effort that would be required trying to recreate this information.

Remember to vet your employees when recruiting. You want trustworthy workers who will not put your business and assets at risk. Resumes very often contain falsehoods, and at best exaggerations. Make sure you take up references, check periods of employment and question what an applicant was doing in a “gap” period. Perhaps they were doing time at Her Majesty’s pleasure for fraud! Yes fraudulent employees do commit the same crimes time and time again, moving from one complacent employer to another.

Complacency is the name of the game when it comes to fraud risk. Although it does not always pay to be overly oppressive in your anti-fraud policy and cause resentment and even fear amongst your staff, a tightly controlled work place will undoubtedly prevent the fraudster striking or at least make him think twice before having a go.

Mark Jenner is a forensic accountant and fraud expert advising companies on cost effective ways of preventing fraud.

Responses are beginning to be drafted to the Legal Service Commission’s consultation paper on expert witness fees.  Bodies representing experts are busy collating what are probably replies that are so obvious that it would be foolish to think that the LSC had not already thought about them - but stranger things do happen all the time!

The general feeling is that if the fees are capped in an effort to shave 20% from the £100 million plus that is paid annually to publicly funded expert witnesses, the supply of expert witnesses willing to undertake publicly funded cases will reduce.  This would in turn reduce access to justice for defendants.

I do not understand why the expert witnesses must lose 20% – the lions share of funding cuts (when £100 million is only 0.5% of the Legal Aid annual budget).

Speaking as a forensic accountant we are always considered to be expensive.  Our hourly rates are around £40 to £250 (I am exlcuding the top tier of 10 largest firms of accountants) which includes all levels of staff.  A composite rate of around £150 would not be remarkable.  The proposals indicate that this composite rate will be more than halved, with a maximum hourly rate for a senior expert witness being £100.  I have examined these rates in detail (carrying out a year of part time academic research in 2006) and in my dissertation for my Masters Degree in Fraud Management concluded that forensic accountant’s rates were similar or less than the average cost of putting police officers on the beat or employing Criminal Prosecution Services case workers.

The LSC enjoys a discount of some 20% on average of the rates paid to expert witnesses undertaking privately funded work – because the LSC holds a monopoly and is able to reduce market rates.

There are many ways that the LSC could reduce its spend without impacting on the essential service provided by experts to the criminal justice system (I will save for a future post the reasons why the spend on experts should be increased!).  A couple of these are:

1. Introduce an initial outline “investigative” report that is used by parties to negotiate – reduce the need for full blown forensic reports.  (My Masters research indicated that this could be an independant “joint” report though this would not be received well by criminal defence lawyers).

2. Early involvement of the expert can save money in the long run – this is one of my hobby horses.  Very often I am instructed at the last minute by a desperate party clutching at straws and not really needed.

3. Better instructions to experts – very often the lawyers are just going through the motions – dotting the “i”s.  They do not know what they want and are hoping for a silver bullet (smoking gun?).  In these cases an early joint report would assist.

For my part the funding situation is one set to cause changes in the criminal fraud defence market place and therefor will be revisited in my diary blog many more times in the future!

Mark Jenner