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.

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.