Fraud cases up, financial losses down

VAT fraud, ID fraud skyrocket

The number of fraud cases reached a record high during the first six months of this year, according to KPMG Forensic's latest Fraud Barometer.

But the average value of fraud per case has decreased from £9m to £3m so that - in absolute financial terms - fraud is actually down.

The total value of fraud within the six-month period to 30 June 2003 reached £216 million, a 15 per cent decrease compared to the same period last year (£255 million), according to KPMG's survey.

KPMG's research considered major fraud cases charges over £100,000 in Crown Court) being heard in the UK. It also found the number of fraud cases this year (90) has already exceeded the total number of cases for the whole of 2002 (83).

David Alexander, fraud investigation partner at KPMG Forensic commented: "The Barometer shows that more companies than ever are affected by fraud. The fact that the amounts appear to be smaller does not lesson the impact on the company's reputation, share price or sheer amount of manager's time dealing with the after effects.

"In difficult economic times, the pressure on individuals to commit fraud is increased. This pressure can come from many sources ranging from trying to meet unrealistic profit targets to an inability to pay credit card bills or the mortgage. It is not surprising, therefore, that we are seeing a rise in 'smaller' frauds as more and more desperate people turn to fraud as the only way out."

Carousel fraud on the rise

The Fraud Barometer recorded five cases totalling £69 million of VAT fraud, highlighting the continued problem of "carousel" fraud.

Carousel fraud involves a circular trade of cross border purchases, typically of computer chips or mobile phones, between connected companies, and sometimes controlled by criminal syndicates.

In its simplest form, a fraudster imports goods from a zero-rate VAT source, sells the goods with VAT included and then disappears without passing the VAT onto Customs.

One example of carousel fraud included the case of two Staffordshire businessmen who were sentenced to over 16 years in jail for a £38 million fraud. They bought and sold mobile phones across Europe, and dodged the tax through businesses they set up in Spain, the Irish Republic and the UK.

Carousel, or Missing Trader Intra Community (MTIC) fraud, cost the UK taxpayer somewhere between £1.7 and £2.75 billion in the 2001/02 financial year, according to Customs estimates.

In a response to the KPMG survey, HM Customs and Excise said that over the last three years it has succeeded in stabilising the "previous rapid growth in losses from carousel fraud".

More than 400 Customs officers are dedicated to identifying and tackling carousel fraud, and measures introduced in this year's budget are designed to come down even harder on carousel fraud.

Customs said: "The measures are targeted at the serial abusers of the VAT system - those businesses that are run by fraudsters, are in cahoots with them, or are turning the blindest of blind eyes and allowing themselves to be sucked into a contrived supply chain, benefiting themselves by gaining an unfair advantage over legitimate businesses."

HM Customs and Excise has set a goal of reducing missing trader fraud losses by at least £750 million by the end of 2003-04.

Banking fraud

Banking and electronic fraud is also on the increase, KPMG reports.

The number of financial/banking frauds increased almost three-fold during the first six months of 2003 compared to the last six months of 2002 - up from five cases to fourteen - at an average of £1.1 million per case. Corrupt employees using inside knowledge to rip off their employers perpetrated many of these frauds. In one example, a former employee of Lloyds TSB was charged with stealing £1.2 million from the bank.

Identity fraud remained a threat within this sector. One example, cited by KPMG, was the case of a man who plundered the electoral roll to "steal" 59 identities to forge thousands of documents to support his credit card and bank applications to obtain £556,000 of funds.

Electronic payment fraud has also become a serious issue for financial institutions. Several frauds involving stolen cash point cards and PIN numbers were noted, including one group of twelve people who were jailed after they exploited a computer glitch, which allowed them to withdraw a total of £285,000 from their accounts without the amount actually being debited.

In Scotland, a worker in a bank call centre fraudulently accessed money after a customer accidentally revealed his PIN number - the fraud totalled £250,000.

Alexander comments: "Our current investigations are showing an increase in the incidences of electronic payment fraud, even above those reported in the Fraud Barometer.

"As businesses become more reliant on electronic payments than ever before, the associated fraud risks that have accompanied their rise in popularity has increased exponentially."

Don't be a victim

The most victims of fraud were found in the commercial sector which was greater than the total for the whole of 2002(24). Government (including tax fraud) came a close second with 27 cases - many of these were VAT fraud cases - again an increase on the total 2002 figures (22). By region, the Midlands and South East (including London) are the particular hot beds of UK fraud. KPMG recorded 17 cases involving £98 million in fraud in the Midlands compared in the year to date compared to just four cases involving £9.45 million in fraud that came to court in Scotland over the same period.

Alexander concludes: "The message for companies across the country as a whole is act now or you will be the next victim. Businesses need to ask some basic questions about their approach to fraud. What is the quality of your organisation's anti-fraud strategy? How effective is your fraud awareness programme? How developed is the understanding of fraud risks facing your organisation?"

"These are exactly the sorts of questions that companies are now being asked by their auditors, non-executives and regulatory bodies, and they will require answers. Businesses that fail to take fraud risk seriously, do so at their peril," he warned. ®

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Record level of fraud cases, says KPMG's Fraud Barometer

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