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Volume of Fraud at Highest Level For 12 years

Special Reports

BDO’s 2015 FraudTrack Report values fraud at £720m

 

The latest February 2015 BDO FraudTrack report shows that the total value of fraud in 2014 was £720m, a decrease of 31% from the previous year and the lowest value since FraudTrack started in 2003.

Paradoxically, the latest FraudTrack report, which examines all reported fraud cases over £50,000 in the UK, finds that the total number of reported cases rose to a record 546 cases 1 in 2014 from 525 in 2013. The average value of fraud meanwhile, has continued to fall from £3.3m in 2012 to £2.0m in 2013 and £1.3m in 2014.

• Average value of fraud drops by 34% as larger complex cases increasingly dealt with outside the judicial system

• 45% increase in non-corporate fraud prosecutions to highest levels since 2006

• Financial Services fraud falls to lowest value since 2008 falling 56% in 2014 to £236m - Volume falls 11% to 118 cases

Increased Enforcement of Low Value Fraud Whilst the average value of reported fraud fell by 34% to £1.3m in 2014, just two frauds (a film tax evasion case, and a money laundering operation at a bureaux de change) accounted for 31% of total reported frauds in 2014. Removing these two cases, the average value of remaining frauds was £0.9m which is a 55% fall from 2013.

Further to this the report shows that 402 of the 546 reported cases had a value of £0.5m or below. Whilst these cases represent 74% of all fraud cases they only make up 9% of the total value of all reported fraud.

The report's author, Kaley Crossthwaite, Partner and Head of Fraud, BDO LLP commented: "2014 was characterised by a large increase in unsophisticated fraudulent activity which was of low value but high in volume. The continued growth in number of reported frauds suggests that the police and courts are becoming increasingly effective at convicting low level fraudulent activity.

The report's author, Kaley Crossthwaite, Partner and Head of Fraud, BDO LLP commented: "2014 was characterised by a large increase in unsophisticated fraudulent activity which was of low value but high in volume. The continued growth in number of reported frauds suggests that the police and courts are becoming increasingly effective at convicting low level fraudulent activity.

"One of the reasons why we have seen the lowest total value of fraud since 2003 is due to a growing trend for high value complex fraud to be dealt with outside of the judicial system and out of the public eye. Companies are increasingly assessing the reputational cost to their brands of a public case against the cost of pursuing the perpetrators of the fraud through the courts. This is leading to large numbers of cases being dealt with privately in-house and through alternative remedies. There is a clear correlation emerging between low value crime being reported and taken through the courts which is deemed to be less damaging to corporate reputations, in opposition to those cases of large financial loss being dealt with through other means of remediation."

Many of the cases dealt with publicly in 2014 involved "old fashioned" manipulation of victims and authorities, and relatively low-tech fraud schemes. Submitting false invoices whether to get cash, support insurance claims or VAT refunds are all simple and make up a large number of cases, often in conjunction with other types of fraud.

In terms of fraud per location, London and the South East continues to grow as the hotspot for reported fraud in UK, increasing from 56% in 2013 to 67% in 2014, with a value of £484m from reported cases.

Fall in fraud in the Financial Services Sector
In terms of sectors, perhaps surprisingly the total value of fraud in Finance and Insurance more than halved, falling 56% from £532m in 2013 to £236m in 2014. Yet despite this, and in line with the overall trend, the volume of fraud in the Financial Services industry has continued to remain high relative to other sectors, with the volume of cases only dropping by 11% to 118 in 2014 from 132 in 2013.

BDO's Kaley Crossthwaite added: "In line with the paradoxical trend in fraud, the value of fraud in the Financial Services sector has plummeted despite volumes remaining high with Money Laundering in particular also following this trend."

Mortgage fraud and money laundering accounts for 47% of all fraud cases in the finance and insurance sector but 74% of total value of fraud in that sector. Other cases in the finance and insurance sector include:

• A £6.5m cheque fraud scheme based around intercepting cheques and new cheque books in the post. Thousands of pages from fresh cheque books were copied and used to print forged cheques. The co-conspirators responsible each received a nine year jail term.

• A Ponzi scheme run by an un-authorized investment manager who convinced the FCA he was no longer trading by asking his customers to lie to the regulator. The help his victims gave him allowed him to operate for seven years and steal
£21m. He was jailed for seven years.

Increase in non-corporate fraud prosecutions
Prosecutions against non-corporates or individuals have increased in 2014 with a total of 97 cases (an increase of 45% from 67 cases in 2013) and total value of fraud at £103m (an increase of 31% from £78m in 2013). Non-corporate fraud now accounts for 21% of all reported fraud in 2014 2 compared to 7% in 2013 and 1% in 2012.

Prosecutions of this type are often for fraud committed against vulnerable individuals, family or close friends; however this is not always the case.Some of the frauds include more complex, elaborate and wide-reaching schemes including a case of two women who devised a pyramid scheme which drew in over ten thousand victims with a value of £21m and a case of a fraudster who used the claim that his assets had been frozen under the suspicion of terrorism in order to extract £2.2m from those he befriended.

Kaley Crossthwaite, added: "In 2014 we have seen non-corporate prosecutions increase by 45% and the average value of each prosecuted fraud fall by 55%. If this trend continues the UK courts' capacity to deal with corporate or complex fraud will be diminished. This may re-ignite the debate over whether a jury based trial of complex fraud is the most appropriate way of dealing with cases that sometimes take many months to be heard. Corporates may continue to choose to deal with larger and more complex frauds outside the criminal courts. This will inevitably lead to further fog around the true size and cost of fraud in Britain."

Other sectors to have seen an increase in fraud during 2014 include:
• Health Care and Social Assistance - 163% increase (£4.1m in 2013 to £10.7m in 2014)

• Manufacturing- 238% increase (£1.1m in 2013 to £3.8m in 2014)

• Professional, Scientific and Technical Services - 60% increase (£7.4m in 2013 to £11.9m in 2014)

• Public Administration - 70% increase (£150m in 2013 to £254m in 2014)

• Retail Trade - 80% increase (£17m in 2013 to £31m in 2014)

• Wholesale Trade - 1194% increase (£1.2m in 2013 to £15.2m in 2014)

Sector breakdown:
The top three industries3 most susceptible to fraudulent activity are:

• Public Administration - £254m (35% of all activity)

• Finance and Insurance - £236m (33% of all activity)

•Retail Trade - £31m (4% of all activity)

Types of fraudulent activity:

• Tax fraud - £235m (33 % of all activity)

• Money laundering - £144m (20% of all activity)

• Third party fraud (suppliers, customers) - £102m (14% of all activity)

• Employee Fraud - £71m (10% of all activity)

• Mortgage fraud - £57m (8% of all activity)

Kaley Crossthwaite concluded: "2014 was perhaps a paradoxical year exemplified by an overall drop in the value of fraud but a rise in the volume. As enforcement professionals have become more proficient at securing convictions for high volume low value fraud this has become the focus of their attention.
We must be careful that the pursuit of the low hanging fruit does not distract attention away from larger more complex fraud."

Fraud Track is prepared by BDO LLP and is based on all reported fraud cases over £50,000 between 01/12/2013 and 30/11/2014. The sources for the database are publicly available and include the UK's national, regional and local press.

References
1 Volume of fraud at highest level since FraudTrack started in 2003

2 Excluding two cases which account for one third of all reported fraud

3 Not including non-corporate fraud

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