Company Insiders Unmasked As Biggest Fraud Perpetrators

The extent of fraud perpetrated by management and employees has been exposed after a rapid decline in fraud super cases coming to court during the first six months of 2012, according to KPMG.

Hitesh Patel, UK Forensic partner, KPMG, said: “The extent and impact of fraud perpetrated from within businesses has historically been masked by a handful of exceptionally large cases coming to court, but the fall in such ‘super’ cases now shines a spotlight on the chronic and pernicious threat to businesses in these austere times.”

Although UK fraud dropped by £726m between January and June 2012 to £374m, (from £1.1bn during the same period of 2011), the number of cases being prosecuted has remained fairly steady increasing from 131 cases in 2011 to 136 in 2012. The data found that fraud committed from within organisations by both management and employees now makes up 61% of the value of all cases included in KPMG’s Fraud Barometer.

2011 saw a number of large frauds perpetrated by professional criminals against the public purse coming before the Courts, including very high value “missing trader” VAT fraud. There are no such equivalent cases in the first half of 2012; with Government strategy to combat such scams appearing to have paid handsome dividends.

Minding their own business

The largest group of perpetrators of fraud (by value) is now management – who make up 55% of cases included in the Barometer. The level of fraud by this group has remained stubbornly stable at £206m (across 34 cases), and serves as a warning sign against complacency for business.

One case involved a former head of counter-fraud operations at a bank, who undertook procurement fraud to the tune of £2.4m for personal benefit. The irony of the case will not be lost on many, but it highlights an underlying point that fraud can happen in places where one might least expect it and be perpetrated by those expected to be the most trustworthy.

The motivation in such cases comes in different forms and whilst the tough economic climate remains a catalyst, recent cases have also been driven by a desire to maintain and even extend lavish lifestyles.

Hitesh commented: “The value lost through management fraud shows graphically that businesses need to ensure controls are more than simply trust where senior members of staff are concerned; an effective anti-fraud regime applies to all, not just to more junior staff.”

Employees seizing the opportunity

The value of fraud perpetrated by employees is also on the rise, increasing 10% when compared to the same period in 2011 to £21 million (31 cases). These are costs that can have a devastating impact as businesses struggle to keep afloat in the current climate.

The continuing economic turbulence is keeping the pressure on businesses to cut costs in order to maintain earnings and survive. This ultra- competitive environment, in which operations are increasingly streamlined, offers clear opportunities for employees to commit fraud if oversight and controls are also cut.

This is illustrated by the case of an assistant accountant who took to making weekly transfers to her personal account having inherited additional responsibilities following the removal of two directors and a financial controller. It was only upon appointing a new financial controller 11 months later that the deception, by this point totalling £105,000, was detected.

Hitesh commented: “The pressure to cut costs remains very real in the current environment but companies would do well to set any potential savings from structural and operational changes against the risk of material losses to fraud. Reduced controls present an attractive opportunity for opportunistic fraud by employees who may be experiencing personal and professional financial stress.”

On top of the threat of traditional ‘hand in the till’ fraud, businesses must also remain alert to other less apparent acts driven towards achieving growth at any cost including bribery and corruption or price fixing, which can have serious regulatory implications.

Cyberspace – the new battleground?

Growth of the online economy driven in part through diversification of access channels, convenience and ease of access offers new opportunities to fraudsters Whilst people have had good IT security practice drummed into them over the last few years in relation to PC usage, awareness of the potential dangers posed by mobile phone apps has arguably not caught up.

A recent case involved the use of a mobile payments app to skim the credit cards of unsuspecting customers and defraud them of over £1m. Small businesses had used the app, which appeared to be perfectly legitimate, to accept payments from their customers. The fraud was only detected after customers started to notice unauthorised payments on their cards.

Larger and more complex frauds may still be hiding under the surface. In any event, as payment apps and similar technologies become ever more commonplace, the potential for these frauds will increase and consumers should be vigilant.

Additionally, the mobile IT revolution has seen a huge increase in the amount of personal data posted by users. The threat posed here was well illustrated over the last six months in one particular case: a hacker set up an online retail site to sell the credit card details of over 340,000 individuals, stolen from online databases, to the highest bidders (who were often professional criminals). The resulting losses to financial institutions were reported to be upwards of £26.9 million.

Building the corporate defences – fighting fraud

The increase in the level of fraud hitting the private sector demonstrates the importance of ensuring that companies have mechanisms to prevent fraud and detect misconduct effectively by taking a less reactive, and a more proactive stance.

  • Establish a strong anti-fraud zero tolerance culture – starting from the top through repeated education and awareness
  • Fully assess where in the business operations there are vulnerabilities to fraud and impropriety
  • Arm yourself with greater detection mechanisms including whistleblowing lines, integrity risk. reviews, and fraud analytics of the wealth of data that sits within an organisation
  • Develop a robust response plan to incidents of suspected and actual fraud.

Christian Harris is editor and publisher of BCW. Christian has over 20 years' publishing experience and in that time has contributed to most major IT magazines and Web sites in the UK. He launched BCW in 2009 as he felt there was a need for honest and personal commentary on a wide range of business computing issues. Christian has a BA (Hons) in Publishing from the London College of Communication.