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.


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.

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