We will never know the full extent of City fraud

ACCORDING to accountancy network BDO’s recent Fraudtrack survey, there was more than £2bn of reported fraud in 2009, a 76 per cent increase on the previous year.

The chief motivator for fraud is – perhaps unsurprisingly – greed and a desire for a lavish lifestyle. Other possible motivators, such as debt, marital problems, drugs, alcohol, gambling, ill-health, depression, need or terrorism barely register. But while the motives have been the case since the start of time, the types of fraud have changed. In 2005, the amounts of tax fraud and employee fraud were high, with tax fraud continuing to increase in 2006 and 2007. Management fraud increased, so that by 2008 it, together with third party and employee fraud, made up 60 per cent of all fraud.

Of course, it would hardly be surprising to hear that fraud is on the increase. Recessions bring with them bonus-caps, salary reductions and increased taxation, all of which might tempt some people to top up their income by any means possible. Equally unsurprising is that the south-east is the area where most fraud takes place. This is where there is opportunity to commit large scale fraud, and those with the skills to carry it out.
There seems to be no end in sight, either: BDO predicts that reported fraud could eventually reach £5bn a year.
So are London and the south-east doomed to ever spiralling fraud on an unprecedented, unassailable scale? Not necessarily. The picture painted by the Fraudtrack survey may not be all it appears. Reported fraud has steadily increased but this may be due, in part at least, to the improved detection and reporting of fraud.

A significant proportion of fraud is detected not by the police, but by companies and organisations. Many have strengthened internal controls aimed at uncovering fraud at an early stage, but setting up periodic internal compliance audits, employee whistleblowing hotlines, or by boosting compliance personnel and improving fraud awareness training.

The Proceeds of Crime Act 2002 requires regulated businesses to disclose suspected money laundering, which may well have been a catalyst for organisations to beef up their internal security and compliance. The hope – if it can be put like that – is that high levels of fraud have always existed but gone largely undetected. Only now, as organisations have become more sophisticated in detecting it, are the true levels being revealed.

One final cautionary note, however: even this high level of fraud may only be a small amount of what is uncovered – even when a business detects fraud, it may decide not to report it to the police. Fiduciary duties mean that a company may prioritise recovering the loss (and pursuing the matter by a civil action) over pursuing a criminal investigation.

In addition, the organisation may not wish to have the public exposure of a criminal prosecution and the possible damage to its reputation and shareholder interests. There is a fine balancing here between self interest and public interest. Unless the scales were to tip towards the public interest all of the time, the full scale of fraud will never be known.

Dan Hyde is a consultant specialising in white collar Crime at Cubism Law