As a forensic accountant who has focused on fraud for over twenty years, I am often asked to suggest appropriate fraud prevention measures to a client.
My fraud prevention services tend to be provided after I have conducted a fraud review or examination following some problem or another that has been discovered. Very often the activities of a member of staff or a former director are being questioned. Perhaps some money has gone missing and the amount needs to be quantified or the destination of the stolen funds traced.
Very rarely am I asked to advise on fraud prevention measures before a fraud has taken place. Yet there are a great many simple steps that can be taken that reduce the risk of fraud substantially, which many businesses still ignore. These can range from insisting on passwords for computer access to having dual signing authority for cheques. An organisation’s attitude to fraud is one of the biggest controls that can potentially prevent a great deal of fraud from happening in the first place. In contrast, it is complacency to fraud that will allow it to happen.
One of the big areas of current interest for fraud is money laundering, particularly since the proceeds of Crime Act in 2002 and the associated Anti Money Laundering Regulations framework that ensued were enacted. We see a lot of money laundering cases, and a lot of these involve money transmission through Hawala and Similar Service Providers.
Money laundering often involves disposing of large quantities of street cash, the money received for fraud, drugs or other crimes and which needs to be put back into circulation without the authorities being able to trace its source. You cant just pay in a bag of £100,000 into a bank without alerting the authorities. So the criminals use a method known as “smurfing” whereby they travel around lots of bank branches depositing small innocuous amounts in each one until they have disposed of the full amount.
Smurfing can be effective, but if the recipient bank account is investigated it is obvious that a huge amount of cash has been deposited and the bank account owner will be deemed to be laundering money. So the criminals use a variation of this method known as “cuckoo smurfing”. Cuckoo smurfing is where a foreign money launderer will have access to customers wishing to send sums of money to the UK, often through the Hawala network. Agents in the UK will take receipt of criminal funds, knowingly or unwittingly, and pay them into the expecting recipients accounts in the UK. The recipients will see the funds they were expecting from abroad as deposits in their accounts. The criminals will be left holding all the legitimate money deposited abroad. The street cash has effectively been laundered.
If you are a business that exports goods and services, you may pay little heed as to how your invoices are settled. You will see the funds deposited in your bank account and then likely release the goods for shipment abroad. However, it is very popular for foreign buyers to use the Hawala style banking methods to pay their bills. Some Hawala agents will make bank transfers to your account, but others will deposit cash. They may even deposit the cash in smaller amounts, to reduce the suspicions of the bank clerks. As a business suddenly “handling” large amounts of cash you have effectively become a regulated entity under the anti- money laundering regulations, therefore you have a duty to report suspicious transactions – to HMRC or the National Crime Agency! Ignoring this could potentially open you up to allegations of aiding and abetting money laundering.
The investigating authorities normally recognize innocent parties in cuckoo smurfing activity, but if you were to regularly receive large amounts of cash turning a blind eye then their understanding may change.
This is one area of fraud prevention that you definitely want to acknowledge before any criminal banking activity is connected to your business.