Home News BDO calls for enhanced due diligence as reported fraud in UK races towards £800 million mark

BDO calls for enhanced due diligence as reported fraud in UK races towards £800 million mark

by Brian Sims
According to BDO's FraudTrack study, the total value of reported fraud in the UK for the first half of the year was £798 million

According to BDO’s FraudTrack study, the total value of reported fraud in the UK for the first half of the year was £798 million

BDO LLP’s 2015 interim FraudTrack report states that the total value of reported fraud in the UK during the first half of the year was a staggering £798 million. That figure represents a near £80 million rise on the amount calculated for the same period last year. The FraudTrack document is based on all reported fraud cases worth over £50,000 between 1 December 2014 and 31 May this year.

BDO has revealed that the average cost per fraud was £3.27 million, representing a 79% increase on the same period 12 months ago (when the corresponding figure stood at £1.82 million). It’s abundantly clear that fraud remains big business, with many companies and individuals seemingly still not doing enough to protect themselves from members of the criminal fraternity.

Nearly a third (32%, in fact) of the fraud cases reported were committed by employees, costing UK organisations more than £46 million. Running across all sectors from real estate to education and manufacturing, the most common types of fraud include the straight diversion of cash into bank accounts, changing supplier details to those of friends or family members’ bank details and direct payments to self/other bank accounts via either cheques or online payment systems.

Commenting on the report’s findings, Kaley Crossthwaite – partner and head of fraud at BDO – explained: “Our analysis shows a resurgence in reported fraud cases, indicating that people are still not being vigilant enough and need to step back and think about how either they personally or their business is susceptible to fraud.”

Kaley Crossthwaite of BDO

Kaley Crossthwaite of BDO

Crossthwaite went on to state: “When it comes to fraud committed by employees, our experience tells us that the culture existing within a company can have a significant effect on whether fraud is detected, and also in terms of the length of time it takes to detect that fraud. In some cases, this period may be as long as seven years. Detection can often take longer where there’s more than one employee engaging in fraudulent activities at the same time and when they’re all using the ‘light touch’ culture of the host business to conceal their illegal activities.”

According to Crossthwaite, preventing the occurrence of fraud can be as simple a task as putting effective training regimes in place and regularly checking fraud controls. “The tone must be set at the top of the business,” suggested Crossthwaite, “and filter down into the organisation, in turn creating a culture of healthy scepticism.”

Investment and third party fraud

Concentrating on the number of cases reported, BDO reports that employee fraud was followed by investment fraud (23%) such as Ponzi schemes and boiler room scams, third party fraud (including that committed by suppliers and customers) at 20% and non-corporate fraud (16%). Third party fraud (£309 million) and money laundering (£290 million) were the largest reported areas of fraud by value.

Crossthwaite asserted: “The level of investment fraud is the stand-out category. This may be the result of ‘too-good-to-be-true’ investment opportunities, such as those which offer investment opportunities around precious metals, gems and other esoteric products. They turn out to be just that. With the recent pension freedoms, there’s a risk that these illegitimate investment offers will continue and perhaps even increase, eventually luring a new generation of unsuspecting investors with purported market-leading returns.”

When it comes to third party fraud, the majority of cases involve phishing and changing supplier details. However, there are worrying new trends emerging and organisations need to be on the look-out for them. These include the creation of false employees and contractors, generating artificial inflation around costs and customers purchasing non-existent products such as flights, magazines and car insurance.

“Given all of this,” outlined Crossthwaite, “it’s clear that businesses need to be far more thorough in the due diligence procedures carried out, not only on sale and purchase transactions but also in relation to their existing and new suppliers, customers and new recruits. This isn’t only about preventing future losses but also thinking about the long-term damage that can be done to a company in terms of its ability to entice new suppliers and customers, not to mention overall reputation in the marketplace.”

Levels of fraud across sectors

Levels of fraud differ across specific sectors, with the BDO research revealing that the public sector is falling prey to fraud most often. One-in-five (20%) cases of reported fraudulent activity occurred within public administration, accumulating a total value of more than £257 million.

Fraud in the financial services sector was also relatively high with around one-in-seven (16%) cases being committed here, duly equating to a value of £210 million.

However, it’s individuals who remain the key target for the fraudsters. Scams continue to con the general public, accounting for more than a quarter of all reported fraud and totalling £188 million worth of losses.

BDO’s report also reveals that the UK’s capital is a hotspot for fraud with the value of reported cases at £460 million. Following London, Yorkshire (at £166 million) had the second highest figure, whereas East Anglia – with a reported figure of only £242,776 – was the area least affected by fraudulent activity in the first half of the year.

Crossthwaite concluded: “Fraud is prevalent across sectors and represents a significant loss for many organisations and individuals. The increased level of reported fraud could be down to businesses having less time or inclination to deal with claims internally and individuals not being active enough in protecting themselves. The number of fraudsters out there isn’t on the decline. On that basis, extreme caution must be the way forward.”

Preventing fraud: BDO’s Top Five Tips

(1) Ensure you employ the right people: Try, as much as possible, to make certain that fraudsters don’t enter your business in the first place. New employees should be properly scrutinised before being hired

(2) Undertake training: Businesses providing regular fraud training and awareness for all members of staff can often profit from the investment made in both time and resources

(3) Make sure there’s a strategy in place: Larger businesses should have a Fraud Department with a clearly defined strategy detailing controls and procedures designed to prevent fraud before it happens

(4) Be watchful of customers and suppliers: Undertake thorough due diligence procedures before starting any new customer or supplier relationship and regularly review both customer and supplier lists

(5) Set the right tone: Make employees fully aware of exactly what’s expected of them from the top and help ensure the message cascades down through the organisation such that the prevalent culture is one of healthy scepticism


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