Home News BDO FraudTrack: “Total value of reported fraud hits five-year high at £2 billion”

BDO FraudTrack: “Total value of reported fraud hits five-year high at £2 billion”

by Brian Sims

The total value of reported fraud in 2016 hit a five-year high, increasing by 31.5% to reach a level of £2 billion. Despite this hike outlined in the latest BDO FraudTrack analysis, which examines reported fraud cases in the UK valued at over £50,000, the number of reported cases fell slightly (504 in 2016 compared to 519 cases last year). This means the average value of fraud rose 35.4% to a five-year high of £3.9 million.

Public administration was the industry sector with the highest level of reported fraud, accounting for £1.4 billion of the UK total. This has risen 204.7% from the £450.9 million reported in 2015, due in large part to a single £1 billion VAT ‘carousel fraud’ case involving a woman from York. The volume of fraud in public administration also rose, climbing from 114 cases in 2015 to 150 cases last year.

With the public and regulatory spotlight continuing to scrutinise financial services ever more closely, both the volume and value of reported fraud in the sector fell during 2016. The value of reported fraud in financial services fell by more than 62%, from £567.2 million in 2015 to £214.9 million in 2016. The volume of reported fraud also fell, dropping from 70 cases in 2015 to 58 cases last year.

Within the sector, money laundering showed the biggest decrease in the value of fraud, falling from £201.6 million in 2015 to £98.9 million in 2016. The volume of cases, however, rose from 15 to 20.

A key case involved a man arrested by the City of London Police on suspicion of money laundering. The arrest was made following the investigation of a UK bank account thought to be linked to an organised crime ring. Police discovered £30 million worth of banker’s drafts during a raid on a home in the Welsh valleys in what is thought to be the biggest money seizure ever made by UK law enforcement.

Public and regulatory scrutiny

Mortgage fraud and third party fraud also showed a significant year-on-year decline both in terms of value and volume. Mortgage fraud fell from £151.1 million in 2015 (13 cases) to £54.8 million in 2016 (four cases), while third party fraud fell from £209.7 million in 2015 (26 cases) to £47.6 million last year (17 cases).

Kaley Crossthwaite, partner and head of fraud at BDO, commented: “It’s extremely encouraging to see that the public and regulatory scrutiny within the financial services market is starting to gain some traction in reducing the volume and value of reported fraud. In particular, we’ve witnessed a marked decrease in the level of insurance fraud as firms in the sector adopt ever more stringent systems and controls to address fraud.”

Crossthwaite continued: “Fraud in public administration shows a significant spike, due in large part to a £1 billion single VAT ‘carousel’ tax scam. Even stripping this out, the sector still shows a sharp increase in the volume of reported fraud, most of which involves various types of tax fraud. As was the case with last year, the numbers have been skewed slightly due to a small number of very large cases. Removing these anomalies would show an apparent fall in both volume and value year-on-year. However, this would not give us the full picture. Many high value and complex fraud cases continue to be dealt with outside of the judicial system as companies prefer to handle these situations privately and so avoid reputational damage to the business. Our experience would suggest that, in real terms, both volume and value continue to rise despite efforts made by companies to strengthen their processes.”

Looking at fraud geographically, London and the South East and the West Midlands remain the biggest ‘hotspots’ for fraud in the UK despite a significant fall in the value of fraud compared to last year. This excludes Yorkshire, where volume rose by 388.1% to £1.02 billion due to the aforementioned £1 billion VAT fraud.

Volume perspective

From a volume perspective, London and the South East continues to be the biggest contributor of fraud in the UK, with 159 reported cases (31.6% of all cases) followed by the North West with 73 reported cases (14.5% of all cases) and the West Midlands with 53 cases (10.5% of all cases).

The biggest case in London involved a £79.5 million Ponzi-style scheme operated by three men who claimed their electrical wholesale business had won a contract to supply electricals to the London Olympic Village. Their victims were persuaded to invest hundreds of thousands of pounds to meet urgent orders then paid seemingly high returns before being asked to “roll over” their investments for two months.

Crossthwaite explained: “Looking beyond the anomaly of the £1 billion VAT fraud, the good news is that the value of fraud has fallen in many key areas and sectors. Unfortunately, volumes continue to remain high at over 500 cases per annum suggesting that, while people are picking up on frauds before they spiral too far out of control, there’s still plenty of fraud going on out there.”

In conclusion, Crossthwaite told Risk UK: “Sadly, the findings of this research are just the tip of the iceberg. Many frauds continue to pass by undetected. In many instances, even when they’re picked up, corporates prefer to resolve the situation privately in order to avoid the public scrutiny that inevitably results from going to court. Our advice has always been, and continues to be, to ensure that businesses implement strict systems and controls to ensure that no one individual has unfettered access or responsibility over company accounts and that all systems and controls are tested on a regular basis.”

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