UK: On The Trail Of The Missing Millions: Fraud Continues to Soar

Last Updated: 7 February 2008
Article by Misha Nateghi

In January 2007 KPMG reported1 that "Fraud continues to soar in 2006". Then in July 2007 BDO Stoy Hayward issued their fourth Annual "Fraudtrack Report"2, stating that "Reported fraud is up almost 40 per cent by value to £1.37 billion... Reported fraud in the UK has increased in value by 314 per cent (from £313 million) since 2003." Perhaps the most startling statistic is that 40% of fraud (equivalent to some £350m) is committed by individuals at management level within companies. The UK authorities have been subjected to fierce criticism by their US counterparts that they are simply not tough enough on white-collar crime, and subsequently the Government, Regulators and Businesses in the UK are now firmly focused on tackling financial crime. Misha Nateghi and Lara de Quincey report on some key legal and regulatory developments intended to combat fraud.

Fraud Review3

The Final Report on the Fraud Review (initiated in May 2004) was published in July 2006, and identified wide-ranging proposals for reform. The original mandate for investigation was how fraud is dealt with in the UK, with the aim of simplifying the law in this area, reducing the amount of fraud and the damage it causes. Some of the key proposals for reform include:

  1. An extension of the Crown Court's punitive powers to wind up companies, award compensation and disqualify, prohibit or restrict offenders from engaging in professional or commercial activities;
  2. Stiffer sentences – the maximum sentence has been increased to 10 years4, and consideration is being given to a further increase up to 14 years for serious or repeated fraud offences;
  3. The establishment of a Financial Courts jurisdiction in the High Court and identifying expert Judges;
  4. The introduction of a formal plea bargaining system for cases dealt with by the Serious Fraud Office ("SFO"), the Fraud Prosecution Service, and serious and complex fraud cases brought by other prosecuting authorities; and
  5. Making fraud an official priority under the UK's National Policing Plan.

The Fraud Act 2006

Prior to the Fraud Act 2006 becoming effective on 15 January 2007, there was no single criminal legal definition of fraud in English law. Fraudulent behaviour could encompass offences under the Theft Act, forgery, counterfeiting, false accounting, insider dealing, and a variety of offences under the Financial Services and Markets Act/Companies Act/Insolvency Acts/Cartel/Anti-Trust Legislation. The Fraud Act 2006 creates a single offence of fraud, which can be committed in 3 different ways:

  1. False Representation (Section 2)
  2. Failing to Disclose Information (Section 3)
  3. Abuse of position (Section 4)

In each case, the dishonest act must be committed with the intent to either:

  1. Make a gain; or
  2. Cause loss to another or to expose another to a risk of loss.

The key point is that a gain does not actually have to be made, as was previously required under the law. The "gain" or "loss" extends to money or other property, whether temporary or permanent, and the definition of property is real or personal, including intangible property.

Section 12 deals with the liability of company officers and provides that if directors, managers, secretaries or other similar officers of the company are party to the commission of an offence, he/she can be charged and prosecuted, as well as the corporation.

Serious Crime Bill

The Serious Crime Bill was only introduced to the House of Lords on 16 January 2007, and is intended to introduce serious crime prevention orders, create new offences of encouraging or assisting another person to commit an offence, and to combat fraud through greater information sharing between the public and private sectors. A second reading was held in June 2007, but this piece of legislation still has some way to go before being passed as law.

Regulators get tough !

On 16 March 2006, Capita Financial Administrators Limited ("Capita") was fined by the FSA for a lack of anti-fraud controls and systems, and failure to establish client identities and accounts. The FSA has not previously taken enforcement action against a firm for this type of controls and systems failure, which involved the purchase and repurchase of investments by Capita's own staff, and fraudulent payment requests, which alone amounted to over £1million. Almost a year later, on 14 February 2007, Nationwide was fined £980,000 by the FSA for failing to have effective systems and controls to manage information security risks, which exposed its customers to the risk of financial crime.

In the interim, on 22 January 2007, the FSA unveiled its Financial Crime and Intelligence Division to concentrate on identifying, assessing and managing criminal threats to the UK's financial sector. It is, however, the potential for insider dealing/market abuse where regulators have really tried to get tough, albeit extremely difficult to successfully prosecute.

In March 2007, the FSA fined a city analyst £52,500 for market misconduct/"front-running"/tipping off. Earlier this year, the FSA commenced a review of announcements made by FTSE 350 companies pre-takeover, and found that there was evidence of insider trading or some level of "informed trading" ahead of approximately 29% of takeover announcements, and 22% of company trading statements. During its investigation the FSA looked at the role of all those involved in takeover deals, including investment bankers, lawyers, PR consultants and printers, to understand where information leakage could occur. The difficulty is proving insider dealing, and often the only evidence is circumstantial.

This will not, however, prevent the FSA imposing fines on investment banks that are complacent about the risks of insider trading, and which fail to have adequate systems and controls in place to prevent the leaking of price sensitive information.

The latest crimewaves .....

While the legislators and regulators attempt to strengthen their artillery to fight financial crime, the techniques employed to commit fraud have become much more sophisticated, with the continuing rise of internet and email scams. In the US, the Internet Fraud Complaints Centre was set up in 2000, as a joint project between the FBI and National White Collar Crime Centre. During the first 6 months of its operation, it recorded more than 37.5 million hits on its website and received more than 20,000 complaints from the public. Of those, 5,273 were internet fraud related.

Another hot topic in the US, which is being reported to have affected as many as 90,000 UK investors is "pumping and dumping" ie. artificially inflating a securities price through promotional hype, creating an artificial demand and triggering a dramatic increase in share price, ("pumping"), and then selling, ("dumping"), at an artificially inflated price. It is estimated that 100 million spam messages making false claims and flouting these stocks are emailed every week. On 8 March 2007 US Regulators suspended trading in 35 companies which had been guilty of this practice. There are also various other techniques eg. "hacking" and "share tipping", and big losses continue to be suffered from online banking scams. "Web Fraud" is estimated to cost close to £150million in the UK alone, through online banking and stolen credit cards used on the internet.5

The UK property boom has also showed signs of slowing down, and combined with the sub-prime "crisis" in the US, mortgage fraud claims appear to be resurfacing. There are reported to be a rising number of claims relating to sub-sales, back-to-back transactions, deliberate over-valuing of properties and transactions involving identity fraud.

A clean sheet for the future?

There is no doubt fraud is rising and the way in which fraud is committed is undoubtedly difficult to trace and prosecute. In October 2006, Margaret Cole of the FSA admitted that the UK's efforts to convict white collar crime were failing, and the SFO, as the body empowered to prosecute complex and high value frauds, has had an extremely poor record when it comes to securing convictions. Historically, the US has been far more rigorous in its approach to tackling the problem, and the FSA and the SFO have been looking closely at the US models in order to strive towards securing more prosecutions in high profile fraud investigations - we await the results. From a risk management view, it is important that businesses play their part and take steps to ensure both fraud prevention and detection systems and controls are in place to protect them from becoming the victims of crime.

Footnotes

1 KPMG Fraud Barometer released 29 January 2007

2 BDO Stoy Hayward Fraudtrack Report July 2007

3 Fraud Review Final Report July 2006

4 The Fraud Act 2006, section 1(3)(b).

5 The Financial Times dated 10 August 2007

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.