Fight fraud by staying alert

Fight fraud by staying alert

The current crisis, with furloughed teams, remote working and management preoccupied with protecting the business, presents the perfect conditions for fraudsters. 

Management teams of financial businesses in particular need to be on their guard right now. 

In times of most global crises — whether a financial crash, economic slump or the current pandemic — a spike in corporate fraud typically tends to follow. 

Figures from the Office for National Statistics showed that after the financial crisis in 2008 the number of people charged with fraud offences increased by 21 per cent in the following two years. 

Key Points

  • Business are vulnerable to fraud in times of stress
  • There are steps companies can take to prevent fraud from happening
  • Small businesses are just as much at risk as larger businesses

This occurred for a variety of reasons. First and foremost, there is increased opportunity for fraudsters.

Senior management teams of most companies are rightly focused on other things — trying to keep their businesses afloat and their staff in jobs for a start.

A perfect storm

In ‘good times’ fraudsters, in my experience, are motivated by greed. 

A typical example is Alistair Greig, who owned and ran Midas Financial Solutions; as reported in FTAdviser last month, he helped himself to investors’ funds in order to fund his lavish lifestyle, with almost £6m going into his own bank accounts.

However, in times of crisis, motivation is driven more by need (or perceived need) due to the heightened concern over financial security. 

This may lead to an increase in various types of frauds that financial businesses will need to consider:

  • Employee fraud (eg, payment of a fictitious supplier invoice);
  • Management fraud (eg, manipulation of results to boost profits);
  • Third-party fraud (eg, external targeting of a ‘cash-rich’ business to extract funds); and
  • Investor fraud – in the current low return environment, investors will be looking for alternatives. If the advertised returns are too good to be true, they usually are (FTAdviser reported on February 5 2020 that victims lost £339m to investment fraud in 2019).

In the current coronavirus lockdown with increased home working, especially in the financial services sector (with fewer people at work overseeing finance, security and operations) fraudsters will have more opportunity, with less scrutiny, more freedom and fewer questions asked.

Combined, all these factors make a global crisis the perfect climate for fraud to germinate and gather pace.

Fraud is likely to hit businesses even harder

Fraud was perceived as the number one financial crime in 2019 according to the Resilience Barometer 2020 – a recent global study of over 2,000 senior executives by FTI Consulting – with 24 per cent reporting exposure to it.

If we were to apply this percentage to the 2019 turnover of FTSE 350 companies and based on an average loss on 5 per cent of annual turnover, this would mean an enormous £28bn was lost to fraud in 2019 in the FTSE 350 alone. 

Even if the 5 per cent figure was an overstatement and it was closer to 1 per cent, this would still be sizeable and indicative of a serious risk for businesses.

But one thing we can be certain about is that corporate fraud costs the financial sector a huge amount year on year, and the Resilience Barometer also identified that fraud would be the number one financial crime in 2020, with 28 per cent of executives believing their companies would be exposed to it (up 16 per cent on 2019).

How are companies handling investigations?

In buoyant financial markets, such as 2019, we saw many companies taking a commercial view on dealing with discovered frauds. Some investigated whether there was a high chance of recovery or if a regulator made it imperative. Others ‘moved the person on’ to stop any further losses.