Fraud is on the rise: how to spot it, how to stop it

Fraud is a problem, never more so during times of economic hardship where temptation and need are great. And it can happen anywhere, to anyone, and relate to anything. Frauds can be, for example, perpetrated against employers by staff, against companies by malevolent actors, and it can be used to scam buyers into purchased non-genuine products.

In fact it’s often said that there are two types of business – those that have suffered fraud and those that have still to discover that they’ve suffered fraud.

But in terms of the selling of non-genuine parts, airlines have also been caught up, sometimes in relation to critical components. Most recently, in December 2023, the UK’s Serious Fraud Office made arrests over parts that led to the grounding of hundreds of aircraft.

The automotive sector hasn’t been exempted from this problem either. In fact, the UK Intellectual Property Office issued guidance back in 2018 warning consumers of the serious dangers of purchasing counterfeit car parts.

More recently, in February 2024, CAT reported on Amazon’s Counterfeit Crimes Unit and BMW Group’s winning of a joint civil lawsuit against four Spanish fraudsters who attempted to sell counterfeit BMW parts and accessories in the UK.

Statistics

The tip of the iceberg

So, with this in mind, it won’t be surprising to know that according to KPMG’s Fraud Barometer: Half Year Highlights 2022, fraud is on the rise. It found that the total value of alleged fraud reaching UK Crown Courts in H1 2022 was £532.6m, an increase of 288 percent compared to £137.4m in H1 2021; and that fraud cases against financial institutions was the highest by value at £305.2m in H1 2022, a jump of 4,333 percent compared with the same period in 2021.

Of course, this is just the tip of the iceberg as the total amount of actual fraud is certain to be substantially greater and includes not only fraud against employers which Statista reckoned to be at 5638 offences in 2021/22, but also frauds not reported. In fact, the Social Market Foundation believes that fraud is now the most common crime in England and Wales and costs the UK economy £137bn each year (as of 2022).

And the worry is that not all businesses fully comprehend that they can run aground, not just because of economic conditions, but also because they have been defrauded. And given the economic situation we’re now facing this is just the beginning.

So, where does fraud occur and what should firms do about it?

Third party problems

Fraud perpetrated by third parties, such as suppliers and customers, is a real problem. BDO’s FraudTrack 2022 reckoned that this type of fraud is worth around £6bn.

Examples include suppliers under delivering goods and perhaps over charging for the pleasure of that under delivery too. Customers can defraud suppliers when they see weak systems – claiming under deliveries of stock when in fact the delivery was correct, withholding payment for ‘disputed invoices’ and simply disappearing without paying are very common.

Some investigators have given a ‘triple whammy’ warning – management stealing from their companies, suppliers ripping off customers and regulatory bodies breathing down business’s necks. This warning is now becoming the reality and it will continue to get worse in economically challenged times.

Blowing the whistle…

Many investigations are started by a whistle blowing letter within a business or organisation. 99 times out of 100, there is always something wrong at a business that has received a whistle blowing letter, yet they often cause management squirming and indecision. The advice is clear – management should always look into any claims made and investigate. The whistle blower may not actually be correct but there is usually something amiss.

…but making less noise

Paradoxically, whistle blowing may fall during a downturn and the reason is simple: Employees will not want to rock the boat in a precarious employment situation. Stories about redundancies will become more common and many people are just thankful of having a job. Why would they want to cause trouble by whistle blowing? More likely, they will put their heads down, work hard and be thankful they can still pay their rising mortgage.

Getting tough

There has been noticeable increase in custodial sentences for those fraudsters who have been caught and put through the criminal justice system. According to Stuart Miller Solicitors, the maximum sentence is 10 years for fraud, but if it involves money or property (confidence fraud) and is over £500,000, then a sentence of 7 years or less would typically be given. For those crimes where the value of the fraud committed is below £100,000 but over £20,000, a sentence of four years is typical.

The motives for fraudsters rarely change year on year – greed and the want for a lavish lifestyle give rise to nearly two thirds of all fraud. The paying of debts and gambling problems make up the other usual suspects in terms of motive. Where potential fraudsters are motivated by debt or gambling, the fraud that they are most likely to commit is employee theft and cash fraud.

The demographic of a fraudster is all too familiar year on year. Statista believes that worldwide, approximately 20 percent of all fraudsters were between the ages of 36 and 40 years old in 2020 and 2021. Similarly high were the numbers of fraudsters between the ages 41 to 46.

Reduce the chance of fraud

So, what can firms do to protect themselves from fraud?

Motive

1 – Be wary of false accounting. Particular attention should be paid to relationships between staff, suppliers and customers, with management looking at year-end sales behaviour and the post year end issue of credit notes or refunds.

2 – Review bonus structures. Fraudsters rationalise to themselves that their performance is worthy of reward. Ensure that the bonus structure is fair, transparent and aligned to the behaviours the firm wishes to reinforce.

Opportunity

3 – Consider remote locations. There is often a link between fraud and the distance from head office. For example, within a London based organisation a small, seemingly profitable, location elsewhere will often get less management attention and therefore the opportunity to commit fraud increases.

4 – Conduct zero based budgeting. Organisations should pick an area of their business, for example marketing, and embark on a “zero based budgeting” exercise – a method of budgeting in which all expenses must be justified for each new period – rather than relying wholly on trends against prior years.

5 – Pay attention to areas where there is no physical product. Any area of the business that has no physical product – services for example, or cyclical maintenance and advertising, are often more susceptible to procurement fraud.

6 – Assess IT vulnerability. Fraudsters use widely available tools, such as keystroke loggers, to obtain sensitive data like PINs and passwords. Appropriate administrative controls and passwords, prevention of unauthorised software installation, restrictions on USB ports and other measures can reduce the fraud risks.

Indicator

7 – Don’t neglect over-performance. If something is too good to be true, it usually is. When assessing the performance of a business or an individual within it, make sure adequate attention is paid to over-performance.

8 – Review changes to the supplier master file. This is part of a computerised accounts payable system where data is held on suppliers, including bank account details. It is very important that an exception report is produced of any changes to standing data on the supplier master file.

9 – Monitor the car park. Although it is stupid to flaunt ill-gotten gains at work, many fraudsters do. Pay close attention to the cars parked in the car park and consider whether the salary paid staff warrants the vehicles they drive.

10 – Perform background checks on recruitment. Don’t give those with a flawed history the chance to commit fraud in the business. Over 50 per cent of people lie on their CV; pre-employment screening to detect such falsehoods can prevent the employment of those lacking integrity.

11 – Pay attention to morale. Fraudsters are often dissatisfied with their work and rationalise their entitlement to further reward.

12 – Investigate high staff turnover. It is very hard to be a whistleblower at work. It is much easier to refine a CV and look for another job. Management should pay particular attention to those areas of the business that have high staff turnover. It is good policy to have in place a system of exit interviews for staff that enables management to understand concerns that staff may not have raised prior to deciding to leave the organisation.

Summary

Fraud will never completely go away. However, that doesn’t mean that firms cannot combat it. Keeping a watchful eye, ensuring that staff know that fraud will be investigated and reported will go some way to protecting the business.

Reduce the risk of computer-based fraud

1 – Ignore unexpected links in email. If an unexpected email, text, WhatsApp or any other message arrives, any included hyperlinks shouldn’t be followed. Criminals posing as a bank may try to steal sensitive data or trick an individual into sending money; they may even create fake websites to impersonate banks and other firms. Similarly, attachments shouldn’t be downloaded and nor should unrecognised phone numbers be called either. When contacting a bank, it should be rung via a trusted number, such as that on a bank card.

2 – Check security software. All devices should have up-to-date software – most will do this automatically when connected to the internet. Never download software because a caller recommends it.

3 – Protect mobiles.
Adjust settings so that phones lock after a short period of inactivity. At the same time, lock screen notifications should be disabled to prevent criminals seeing incoming texts which could include bank codes for accessing an account.

4 – Check social media privacy settings. Any personal information such as email, date of birth and phone number should be removed from social media profiles. All of these can be used by criminals to steal an identity or impersonate a bank. Only accept friend requests from people that are known.

5 – Replace default passwords on the router. This will prevent anyone else accessing it. Avoid banking on unsecured wireless networks or public computers.

6 – Use the National Cyber Security Centre’s (NCSC) Cyber Action Plan, a free assessment online tool that’s aimed at small and medium-sized firms. It’s a five-minute assessment which offers tailored advice on improving cybersecurity. See www.ncsc.gov.uk/cyberaware/actionplan.

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