fap review 2002-2003.qxd 28/8/03 10:55 am page 2 fraud

Fraud costs,corrupts,destroys.

The Fraud Advisory Panel5th Annual Review 2002-2003

FAP Review 2002-2003.qxd 28/8/03 10:55 AM Page 2

Most British firms have been financial crime victims

Lack of resourceshinders UK fraud battle

Money launderinis a serious and tangible threat

Huge surge in identity thefts

Fraud is growing fast. It cost £1 billion in 1985, £4 billion in 1994 and at least £13.8 billion in 2000 - £230 for every man, woman and child in Britain (figures exclusive of money laundering).City of London Police, 2002/ National EconomicResearch Associates for the Home Office, 2000

Fraud wrecks ordinary lives by destroyingjobs, savings and pensions. 16 investorstook their own lives in the aftermath ofthe Barlow Clowes fraud.The Serious Fraud Office, 2002

Fraud takes money from our pockets everyday. Plastic card fraud alone cost £424.6million in 2002 – 30% up on the year before.Association for Payment Clearing Services, April 2003

Fraud leads to higher prices as businesscovers its losses. False motor andhousehold claims alone cost the insuranceindustry and policy holders £20 millionper week.Association of British Insurers, April 2003


Anti-laundering team swamped

Fraudsters aregetting off scot-free...

More companies than ever affected by fraud

g

Massive fraud leads to £13billion(yes, billion) revision inUK trade

Fraud causes productivity loss, cash flowproblems and corporate collapses. 51% ofBritish businesses have been victims offraud in the last two years.PricewaterhouseCoopers, UK survey, July 2003

Fraud hits public services and means more tax has to be raised than wouldotherwise be required. Benefit fraud alonecosts £2 billion a year, £80 for every familyin the land.Department of Work and Pensions, June 2003

Fraud harms trust in Britain’s financialservices industry. The Financial ServicesAuthority has warned that infiltration of City institutions is high on the criminal agenda.

Fraud feeds organised crime. The NationalCriminal Intelligence Service (NCIS) hasreported that gangs now derive as muchmoney from financial crime as from drugtrafficking.

∑Fraud corrupts business, finance and the professions. The Home Office hasestimated that money launderingaccounts for 2% of Britain’s GDP.The Cabinet Office, 2002


Sounding the Alert on Fraud:The Role of The FraudAdvisory Panel

The Panel’s role is to alert the nation tothe immense social and economic damagecaused by fraud and help both public andprivate sectors to fight back. It is dedicatedto a holistic approach and the long view.

The Panel works to:

Originate proposals for reform of the lawand public policy on fraud (includingmoney laundering and corruption).

Develop recommendations that willenhance the investigation andprosecution of fraud.

Advise business as a whole on fraudprevention, detection and reporting.

Assist in improving fraud-relatededucation and training in business andthe professions.

Establish a more accurate picture of theextent, causes and nature of fraud.

The FAP is an independent body ofvolunteers drawn from the law andaccountancy, banking, insurance, commerce,regulators, law enforcement, governmentdepartments and public agencies. It is notrestricted by seeing the problem from anysingle point of view but works to encouragea truly multi-disciplinary perspective. Noother organisation has such a range anddepth of knowledge, both of the problemand of the means to combat it.

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“Quite simply, British business needs the as a powerhouse of new ideas and as atake fraud seriously. If we didn’t have thwould have to get together to invent it.”Lord Sharman of Redlynch OBE, Chairman of the Government’s “Foresight” Panel on Crime Prevention


Five Years of Achievement

Since it was formed in 1998 the Panel hassucceeded in:

Creating close working links withgovernment which have helped push fraudto the top of the legislative programme.

Developing major proposals for reformingserious fraud trials, many of them adoptedin the Auld Report and the currentCriminal Justice Bill.

Proposing major anti-fraud reforms incompany law and corporate governance.

Highlighting the impact of fraud on smalland medium sized enterprises (SMEs) andproviding ground-breaking practical advice.

Improving the anti-fraud content ofbusiness and professional education and training.

Conducting new research into the extent,nature and causes of fraud.

Raising awareness of fraud and promotingprevention via conferences and seminars,and in business and professional journals.

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Panel as a voice in high places,kind of conscience pressing it toe FAP, I guarantee you that we

“This is an organisation that deserves the activesupport of British business. A stronger Panelmeans a stronger voice on fraud policy andprevention in places that matter.”Digby Jones, Director-General CBI


5 Chairman’s Overview:Willing the ends but not the means?

7 Five policies that will make a difference

8 The Panel’s year 2002-2003

8 Investigation, Prosecution and Law Reform

9 Cybercrime

9 Education, Events & Training

10 Research, Information and Intelligence

11 Seminars and conferences

12 Making the Panel work

12 Benefits of membership

12 Corporate members and supporters

13 Paying for the Panel

13 New website

14 The Board

16 Identity fraud – a new threat

17 Battling in the dark: Why no proper figures on fraud?

19 Give us the tools: Law, regulation and the courts

19 Legislative progress

20 Better management of trials in serious fraud cases

21 A single offence of fraud

21 Plea bargaining

22 Too much law, too few resources? The draft Money Laundering Regulations

23 Close to breakdown? Policing fraud

24 Reform frustrated

26 Ticking boxes? Corporate governance and financial reporting

26 A culture of complacency

27 Incorporating fraud prevention into corporate governance

28 Back to basics in auditing

Contents

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“Economic crime is a crucial and growing concern yet in recent years I fear it hasslipped off the agenda. Hard and sustained thinking and campaigning by theFraud Advisory Panel is helping to turn the tide.”

Commissioner James Hart QPM, City of London Police


The absence of a huge Enron-type scandalin Britain has persuaded many people thatour vulnerability to fraud is much lowerthan America’s. I wonder how carefullysuch people read the newspapers, let alonespecialist reports. Certainly it’s some yearssince BCCI, Barings and Maxwell but thenthe likes of the Brinks Mat and great trainrobberies aren’t every day events either.The rarity of such spectacular thefts hasn’tstopped ‘ordinary’ crime injuring millionsof people and eroding the quality of ourlives. In the same way fraud is less aboutheadline incidents and more to do with arising tide of financial crime. Individualfrauds may often involve the loss of ‘only’thousands or millions of pounds but theyare part of a wider attack on our societythat devours many billions every year.

It is true there has been a good deal ofvaluable anti-fraud and money launderinglegislation in recent years, with more on theway; auditing and accounting regulationhas proved more robust than theirAmerican counterparts; the Higgs andSmith proposals have been able to buildon existing corporate governance practicesrather than invent them; and we can allwelcome the forthcoming introduction ofmicrochips and PIN numbers in credit anddebit cards. Unfortunately self-congratu-lation can blind us to facts ‘on theground’; the steep decline in police fraudsquads, the current crisis in the processingof money laundering reports, thewidespread lack of coherent corporate riskmanagement, the general weakness offraud-related education and training andthe surge in identity fraud.

With fraud spreading like a stain throughour society there can be no room for amere box-ticking mentality. Rules, vitalthough they are, can never be enough.Fighting fraud demands funding, systems,vigilance and co-ordination. Are we willingthe end without willing the means? Bold statements and wise laws are just so much waste paper if there isn’t the willto implement them. Let me give threecrucial examples:

Britain’s police fraud squads are in crisisthrough lack of funding and specialisedmanpower. The number of investigatorsfell from 869 in 1995 to around only 600 inthis year. Many frauds are going uninves-tigated and some county fraud squadshave closed altogether.

Companies are doing nowhere nearenough to protect themselves. A recentsurvey by PricewaterhouseCoopers foundthat 46% of UK companies discoveredfraud by accident compared to only 43%who did so via their internal controls.Only 26% ran anti-fraud training formanagement. Yet 85% were confident that their controls were adequate to dealwith significant financial loss. That iscomplacency writ large.

None of the recent wave of reports oncorporate governance (nor the CombinedCode) give any prominence to fraudprevention despite it being one of thegravest risks to corporate survival.

Chairman’s Overview

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Willing the ends but not the means?


The Fraud Advisory Panel has called upongovernment to set up an Economic CrimeCommission to monitor, galvanise andcounsel the public and private sectors. Sofar our call has gone unheeded but we aredoing something to fill the gap: the Panelis an Economic Crime Commission bydefault, a unique independent body ofvolunteers combining the expertise ofaccountants, lawyers, law enforcementofficers, business people, security and ITexperts. Founded in 1998, with thecontinuing support of the Institute ofChartered Accountants in England & Wales(ICAEW), it works to develop new anti-fraud policies, brief Whitehall and educatebusiness and the professions. Fightingeconomic crime (for our remit includesmoney laundering and corruption too) is too broad a task for law enforcementalone and the Panel serves as acombination of ‘watchdog’ and ‘thinktank’. When Derek Higgs said that hisproposals were “about rigour…aboutgetting away from casualness...aboutgetting the right people working in theright way” he might have been describingthe role of the FAP.

Credit for that is due in large measure toGeorge Staple who retired from the Chairon 30th April. George was the Panel’sfounder Chairman who brought and kepttogether a very wide range of people fromall disciplines to serve a common end. It istestimony to his leadership, expertise andcharacter that in just five years the FAPhas become a mature member of the fraudprevention community and its work isachieving recognition beyond the narrowboundaries of law enforcement. I speak forall Panel members in saying how pleasedwe are that George remains involved as amember of our Investigation, Prosecutionand Law Reform Working Group.

My own background is in law enforcement,largely in the field of financial andcommercial crime. I retired in April aftersix years as Director of the Serious FraudOffice. My immediate aim for the Panel isto establish as comprehensive a picture aspossible of the impact of fraud. Studies todate, though valuable and informative,have been selective, confined only toreported fraud or certain sectors. I alsowant to develop the advice we give tobusinesses, the professions andindividuals on the danger from new typesof fraud and how to beat them. The Panel’seducational work is absolutely vital.

FAP members are uniquely equipped andexperienced and their efforts are facilitatedthrough the financial support of a widerange of organisations. We are indebted toour sponsors and members and would liketo encourage more to join and support ourwork. I am also most grateful for the specialsupport that the ICAEW continues to giveus. Thanks are also due to Tony Bingham,one of the Panel’s founders and aninvaluable counsellor and facilitator whoretired as a Director in April; to SimonPearce who has helped prepare the AnnualReview; and, as always, to Helen Fay ourindefatigable administrator.

Rosalind Wright CB, Chairman,The Fraud Advisory PanelSeptember 2003

Chairman’s Overview

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Though curbing fraud is a long-term taskthere are measures which will make aswift and significant contribution toreducing the damage it causes. The FAPadvocates five significant changes that will make a real difference to the wayfraud is tackled.

1. Give the police the resources to fightfraud. It is nothing less than a disgrace thatso many frauds now go uninvestigated. Itwould cost around £85 million to create,and provide infrastructure for, a NationalFraud Squad with 1,200 officers (costingsby the Government’s Inter-departmentalWorking Party on Improving the Responseto Fraud). Such expenditure would quicklypay for itself.

2. Upgrade the Combined Code onCorporate Governance so that listedcompanies must report to shareholders ontheir anti-fraud policies and programmesor the lack thereof. Listed companiesshould also be required to report material

fraud involving directors, or seniormanagement, to shareholders – who havea right to know about monies or assetsstolen from them.

3. Introduce better and more focussedtraining for specialised judges to try fraudcases. Jury trials for serious and complexfrauds demand effective trial management.

4. Bring English law up-to-date with asingle offence of fraud instead of theconfusing and often inadequate range ofoffences currently available to prosecutors.

5. Introduce compulsory corporate fraud reporting via an annual return toCompanies House. Firms would declarewhether they have suffered a fraud; whatthey believe it was worth and whether ithas been reported to the police. Thereturns should not be declared to otheragencies but would allow a better pictureof commercial fraud to be built up.

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“The Bank of England warmly endorses the activitiesof the Fraud Advisory Panel and commends thepractical advice and support it offers.”Mervyn King, Governor of the Bank of England

Five policies that will make a difference


The Panel is run by a Board of Directors,chaired by Rosalind Wright, who served asDirector of the Serious Fraud Office untilApril this year. It operates as a companylimited by guarantee and every pennyraised is ploughed back into its activities.The statutory Report and Accounts for2002-2003 will be published later this year.

Most of the Panel’s work is carried out byfour multi-disciplinary working groups.

Investigation, Prosecutionand Law Reform

“To review the legal process and statutelaw as it relates to fraud and recommendchanges where desirable.” Chaired by Neil Griffiths

The Group had the satisfaction of seeingthe Criminal Justice Bill substantiallyadopt the Auld Report’s views on pre-trialprocedures – which had in turn beenlargely based on the Working Group’srecommendations to the Lord Chancellorin 1998. Advising Whitehall is a key part ofthe Group’s work:

A response was submitted in February tothe Government’s proposals to amend theMoney Laundering Regulations.

A response was submitted to the “Justicefor All” White Paper by Jonathan Fisher QCon behalf of the Group last autumn.

The Working Group is representing thePanel in a joint project on company lawreform with the Institute of CharteredSecretaries and Administrators.

The Group continues to monitor theoperation of the Proceeds of Crime Act2002 and its associated codes of practice.

Educational work continued with a majorseminar on asset tracing.

The Group is currently conducting twofurther studies: on the effectiveness of thenew money laundering regime; and onlegislative and regulatory obstacles to thedetection and prevention of fraud, withparticular reference to the impact of theData Protection Act 1998.

The Panel’s year 2002-2003

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Research, policy development, training, education and informationexchange are all essential parts of the battle. Key work areas during2002-2003 were identity theft, money laundering, the impact of theData Protection Act, SMEs, corporate governance and company law.

The Fraud Advisory Panel’s remit is a broad one because economiccrime is a complex problem.


Cybercrime

“To promote greater understanding ofcybercrime and the safeguards against it.”Chaired by Steven Philippsohn

The Group seeks to build trust andconfidence in e-commerce via thepromotion of better risk managementstrategies. Representatives of banks,the telecommunication industry,risk management organisations andinsurance companies have all acceptedinvitations to join during the last year.Activities have included:

A major, and widely reported, paper onidentity fraud which provided policyproposals and practical advice to businessand the public.

Action against credit card crime andretailer “charge-backs” (where retailers arecharged if card details have been fraudu-lently obtained even if the transaction hasbeen correctly authorised).

Preparation of a cybercrime awarenesscourse for SMEs.

Development of a seminar on identityfraud to be held later this year.

Education, Events & Training

“To identify and disseminate best practicein training and guidance in fraudprevention, detection and investigation.”Chaired by Martin Robinson

There are vast gaps in business and profes-sional anti-fraud education and training.The Group works to identify and closesome of them via its own programmewhich includes:

A special emphasis on SMEs which oftenlack the time and money to develop anti-fraud knowledge and systems (in collabo-ration with the Research, Information andIntelligence Working Group).

Liaison with academic and professionalinstitutions on improving the anti-fraudcontent of their syllabuses.

Development of a standard fraud awarenesspresentation for business and highereducation (which has been piloted twice).

Lunchtime and breakfast briefing sessionson whistle-blowing and money launderingrespectively.

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“…the thoughtful submissions of the Fraud Advisory Panel…”Lord Justice Auld, “Review of the Criminal Courts in England and Wales”, 2002


Preparing a series of factsheets providingfraud prevention advice for managers.

Martin Robinson also represented thePanel on two National Audit Officeworking parties.

Future activities include a series oflunchtime and breakfast briefing sessionson corruption, ethics, the impact of thenew US Sarbanes-Oxley Act andprocurement fraud.

Research, Information and Intelligence

“To investigate the nature, extent andconsequences of fraud; to identify, developand publish new sources of informationand intelligence.” Chaired by Mike Hoare MBE

The Group is as much an information-based network of anti-fraud professionalsas a conventional committee. Its role is to cast light on previously neglected areasof fraud. In conjunction with MartinRobinson’s team it has emphasised thethreat to small and medium-sizedenterprises (SMEs). Three major researchprojects are underway on:

Anti-fraud education, examining content,gaps and take-up.

Bribery and corruption, with particularreference to procurement fraud.

Identifying cyber fraud. This report, byProfessor Paul Barnes of NottinghamBusiness School, will review the extensiveliterature on the subject and providepractical advice on preventive measures.

The Panel’s year 2002-2003

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“The Panel’s work - delivering both highis at the heart of the fight against frauthat this extends to smaller businesses knowledge and resources to recogniseGeorge Cox, Director-General, The Institute of Directors


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Seminars and conferences

The FAP aims to ensure a cross-fertili-sation of ideas, information andexperiences. Over the last 12 months thePanel has staged a series of well-attendedseminars for professionals workingagainst economic crime, often inassociation with other organisations.

“How to keep squeaky clean” on the MoneyLaundering Regulations in conjunctionwith the FSA, the Law Society and NCIS.

“We all have whistles – but should weblow them?”, a look at whistle-blowing forthe professional in conjunction withPublic Concern at Work.

“Global justice to fight global crime: TheEuropean Perspective” a discussion oninternational mutual legal assistance inconjunction with Transparency InternationalUK and the Law Society, chaired by LordLester of Herne Hill.

“International fraud and corruption andcross-border asset tracing and recovery” in conjunction with TransparencyInternational UK.

“Is fraud a risk you can manage?” a oneday conference in conjunction with theInstitute of Internal Auditors, UK andIreland addressed by the Panel’s GeorgeStaple, the Metropolitan Police and theSerious Fraud Office.

“Fraud and how to stop it” in conjunctionwith the ICAEW, addressed by Panel DeputyChairman Gerry Acher and the City ofLondon Police.

-level policy and practical advice - ud. It is particularly pleasing to see

which have often lacked theand prevent fraud.”


Making the Panel Work

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The Panel’s work depends almost entirelyon voluntary effort and is funded bysubscription and sponsorship. As ofAugust this year there were 107 individualmembers, 29 corporate members and 88observers. Individual membership costs£50 a year and is open to those notrepresented by any corporate or otherbody. Corporate membership is £1,000 ayear and provides for up to 20 individualsto join Panel activities.

Benefits of membershipNetworking and information exchange:Panel members meet experts drawn frombanking, insurance, accountancy, the law,policing, academia, and the IT and securityindustries.

Taking part in working groups on suchtopics as Investigation, Prosecution andLaw Reform; Research, Information andIntelligence; Education, Events andTraining; and Cybercrime.

Speakers meetings: hearing expert, andoften alternative, points of view.

Access to working group deliberations viathe members only section of the FAPwebsite.

Influencing public policy via the Panel’sproposals to government.

Addressing business and the professionsvia the Panel’s seminars and publications.

Corporate members andsupportersA glance at the list of corporate membersshows that the Panel is a remarkablybroad based affair enjoying support frompublic and private sectors, business andprofessional bodies.

The Accountants' Joint DisciplinaryScheme

AVIVA Plc

∑Association of British Insurers

Association of Chartered CertifiedAccountants

∑Association of Certified Fraud Examiners

The Bank of England

BDO Stoy Hayward

Bentley Jennison

Bishop International Ltd

Cadbury Schweppes Plc

Capcon Ltd

Chantrey Vellacott DFK

Chartered Institute of ManagementAccountants

Control Risks Group

Deloitte & Touche

Denton Wilde Sapte

Gallaher Group Plc

Grant Thornton

HBOS Plc

Making the Panel Work


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The Institute of Chartered Accountants inEngland & Wales

∑The Institute of Chartered Accountants ofScotland

Institute of Internal Auditors, UK andIreland

∑ The Law Society of England & Wales

∑ Legal & General Group Plc

∑ MCL Software Ltd

∑ PricewaterhouseCoopers

∑ Prudential Plc

∑ Royal & SunAlliance

∑ Royal Mail

Nine organisations also provided the Panelwith financial support during 2002-2003:

∑ Barclays Bank

∑ Boots Company Plc

∑ Canary Wharf Group Plc

∑ HSBC Holdings Plc

∑ The Institute of Chartered Accountants inEngland and Wales

∑ Lloyds TSB Bank Plc

∑ Nationwide Building Society

∑ Royal & Sun Alliance Plc

∑ Zurich Financial Services (UKISA) Ltd

The Corporation of London has alsogenerously hosted major events for thePanel at both the Mansion House and theGuildhall, the former with the kindpermission of the Lord Mayor of London.

The Board is deeply grateful to all thoseindividuals and organisations whosegenerous support has made the Panel’swork possible.

Paying for the PanelThere were wry smiles at the FAP Boardwhen “The Times” diary joked about it“joining the twentieth century” by openinga website. Yet the truth was that shortageof funds had caused long delays. And thereare other Panel activities that are currentlyshelved for lack of funds - research,publications, conferences as well as anadditional member of staff to support suchinitiatives. For instance, a professionalresearch project and report on procurementfraud will cost up to £15,000. More support isurgently needed. For further details pleasecontact the Panel at [email protected] or telephone 020 7920 8721.

New websiteThe Panel’s website www.fraudadvisorypanel.org was launchedin August 2002 thanks to sponsorship fromRoyal & SunAlliance which paid for websitedesign and construction and contributesto the cost of a professional webmaster.The site contains information about thePanel, its role, objectives and achievements;most publications; notice of Panel anduseful third party events; updates on theactivities of each of the various workinggroups; links to other relevant websites;membership criteria and applicationforms. A Members Section opened in Julyand has just gone ‘password only’.

“The FAP isn’t part of government or law enforcement anddoesn’t have a commercial agenda. That’s why business sees it as an impartial source of information and advice.”Mike Bluestone, Panel member


The Board

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Rosalind Wright CBChairman since 30th April 2003; Director ofthe Serious Fraud Office 1997-2003; GeneralCounsel and Executive Director in chargeof the Investor Protection Policy and LegalDivision at the Securities and FuturesAuthority 1987-97; Head of the Director ofPublic Prosecution's Fraud InvestigationGroup for the City of London andMetropolitan Police areas 1983-1987;Independent Member of the StrategicBoard of the Office of Fair Trading;Independent Member of the Departmentof Trade and Industry’s Legal ServicesBoard; Vice Chairman, Jewish Associationfor Business Ethics; former Chairman ofthe Association to Combat Fraud inEurope (ACFE); Bencher of the MiddleTemple; a member of the Bar Council.

Gerry Acher CBE LVO FCADeputy-Chairman; Head of the Partnershipin Policing Agenda as Vice-Chairman ofLondon First with the Metropolitan PoliceService; Chairman, DTI Foresight Panelworking party on crime and business;member of the Board of KPMG and SeniorPartner of its London office until 31stDecember 2001; founder Chairman of theAudit Faculty of the Institute of CharteredAccountants in England and Wales 1996-2001 and an ICAEW Council Member forthat period; Non Executive Director of BPBplc and Camelot Group plc.

Felicity Banks MSc FCAHead of Business Law at the Institute ofChartered Accountants in England andWales; represents the ICAEW on economiccrime issues, including money laundering,general business law and regulatedfinancial services; represents theaccounting profession on HM Treasury’sMoney Laundering Advisory Committee.

Ruth Eisenberg BSc FCADirector, Special Projects at the Institute ofChartered Accountants in England & Wales.

Neil GriffithsChairman, Investigations, Prosecutionsand Law Reform Working Group; solicitor;a partner in the Insolvency Group atDenton Wilde Sapte; Vice-Chairman of theCreditors Rights Committee of theInternational Bar Association.


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Mike Hoare MBE Chairman, Research, Information andIntelligence Working Group; Hon.Chairman of the Risk and SecurityManagement Forum having beenChairman from 1990-2002; formerly aMetropolitan Police Commander andDirector of the Investigation Departmentof the Post Office.

Steven Philippsohn Chairman of the Cybercrime WorkingGroup; solicitor; founder and SeniorPartner, Philippsohn Crawfords Berwald;Co-Editor of the UK Manual of theAssociation of Certified Fraud Examiners;member of the editorial boards of “E-Commerce Law & Policy” and “InsideFraud Bulletin.”

Martin Robinson FCIS, FIIAChairman, Education, Events and TrainingWorking Group; Independent consultant;Training Development Adviser to theInstitute of Internal Auditors, UK andIreland; Audit Adviser to the Institute ofChartered Secretaries and Administrators;former Head of Risk Training, Lloyds TSBBank Plc.

George Staple CB QC Chairman 1998-30th April 2003; Consultantto, and former partner of, Clifford Chance;Director of the Serious Fraud Office 1992-97; a Chairman of the disciplinarytribunals of the Securities Association andthe Securities and Futures Authority 1987-91; former DTI Companies Act Inspector;Member, Senior Salaries Review Body;Chairman of the Review Board forGovernment Contracts.

Tony Bingham FCA Director 1998-3rd April 2003; Partner atPricewaterhouseCoopers; originator of the“Taking Fraud Seriously” initiative whichresulted in the foundation of the Panel;Chairman of the Technical AuditingCommittee of the Institute of CharteredAccountants in England and Wales;Board member of TransparencyInternational UK; member of workingparties of the Auditing Practices Boardand the Federation Europeens ExpertsComptables.


Relatively rare a decade ago, identity fraud– the theft and criminal exploitation ofindividual and business IDs – has nowbecome a major scourge. Examinationhighlights five vital truths also commonto other types of economic crime:

It is large scale. A Cabinet Office reportstated in 2002 that identity fraud costs theBritish economy an incredible £1.3 billionper year. The total number of cases(including impersonation) rose from20,000 in 1999, to 53,000 in 2001 andreached 74,000 in 2002 (figures from CIFAS– The UK’s Fraud Prevention Service).Some fraudsters have even hijacked theidentities of banks.

It hits ordinary people and small firms aswell as big institutions. The Home Officehas reported that it takes an average of 300hours for victims of identity fraud to setthe record straight.

It is increasingly organised. NCIS believesthat identity fraud underpins muchserious and organised crime.

It thrives by exploiting gaps in the law andbusiness procedures as well as low levelsof personal awareness. Scotland Yard’sAssistant Commissioner in charge ofcrime operations said recently that “It isnow comparatively easy to assume theidentity of another person and live in theUK without fear of exposure.”

It will grow at a frightening rate withoutco-ordinated action by government, policeand business.

The Panel’s July 2003 report, “Identitytheft: Do you know the signs?” set outrecommendations for action:

Urgent clarification or amendment of theData Protection Act 1998. Uncertaintyabout the scope of the law is hinderingattempts to reduce identity fraud via data-sharing on known criminals andsuspected persons.

Procedures for issuing birth certificatesmust be tightened up. CIFAS has reportedthat 9,000 identity frauds in 2002 involvedthe use of a dead person’s identificationdetails compared to 5,000 in 2001.

A central register of stolen identities anddocumentation should be established.

The issuing of driving licences andpassports should be recorded and datashared between the passport and thedriving licence agencies.

Fraud and the nation

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Identity fraud - a new threat


Why are there no official and authoritativestatistics on fraud in the United Kingdom?And how can either police or governmentdirect scarce resources intelligentlywithout them? Their absence allows theproblem of economic crime to bepolitically marginalized. The Panel firsthighlighted this statistical black hole in2000. That autumn the Home Officepublished “The Economic Cost of Fraud”by National Economic Research Associates(NERA). Valuable though it undoubtedlywas the report was based on informationthat often dated from the middle of theprevious decade. It has not been updated.

NERA not only sought to calculate knowndirect losses, it also allocated costs toinvestigations, court proceedings andpreventive measures and estimated theextra tax revenue required to offset thecost of frauds on public funds. Theestimated total economic cost of fraud wasup to £13.8 billion in 2000. £10.3 billion ofwhich was the result of actual fraud, theremainder the result of consequentialexpenditures (figures exclude moneylaundering). NERA believed these figureswere likely to be underestimates; itregarded the insurance industry’s 1999calculation that fraud costing the country£16 billion a year as “not outside thebounds of plausibility, especially when thepotential scale of undiscovered fraud istaken into account”.

It is worth noting by way of internationalcomparison that the US Association ofCertified Fraud Examiners surveyedAmerica’s Chief Financial Officers in 2002and discovered fraud losses of $9 peremployee a day – 6% of corporate revenues.Private research proved necessary becausethe Federal Government, like our own, hasfailed to measure the economic effects offraud and abuse.

The importance of obtaining a reliablepicture of fraud was underlined in July2003 when the Office of National Statisticsreported that “missing trader fraud”(where a firm imports goods from the EUand then disappears without paying anyVAT) had masked trade worth more than£20 billion- 2% of GDP - over the past fouryears. Britain's current account deficit withthe rest of the world for 2002 rose from £10billion to more than £20 billion as a resultand growth figures will also be affected.

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Why no proper figures on fraud?

Battling in the dark


The Panel plans to undertake its ownresearch into the cost of fraud but theideal solution lies with government.Three options suggest themselves:

Creating a new version of the BritishCrime Survey dedicated to reporting crimeagainst business. The BCS is regarded asthe most reliable indicator of the true levelof crime and of public attitudes toward it.The results play an important role inshaping public policy. The Home Office isconsidering a Business Crime Survey forEngland and Wales but it is essential thatthis be designed to elicit a reliable pictureof both the extent and cost of fraud.

Compulsory corporate reporting. The leastburdensome form of this would be tooblige companies to make an annualreturn to Companies House declaringwhether they have suffered a fraud; whatthey believe the fraud was worth; whataction they took, including reports to thepolice and recovery via civil action. Thereturns should not be declared to otheragencies but a much better picture ofcommercial fraud would be built up.

A biennial review of existing informationalong the lines of the NERA report. This isthe least satisfactory option because somany available sources are out-of-date ordifficult to compare.

An interim arrangement would be torequire individual police forces to estimatethe value (rather than the numericalincidence) of the various crimes whichconstitute fraud and to do so on a mutuallyconsistent basis .“Fraud” as such is notcounted by the police as a reportable crimeso its designation as a single criminaloffence would allow a more accurateestimate of the scale of the problem.


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Organised criminality is now a significantand growing threat to law and order, onerooted in, and profiting from, fraud and itsclose relation, money laundering. Gangsand terrorist groups need to introduce the proceeds of their crimes, includingtrafficking in drugs, people and weaponsinto the legitimate financial system. TheHome Office has estimated that moneylaundering accounts for a staggering 2% of Britain’s GDP, at least £20 billion a year.Dirty money drives out clean and there is a danger that as large amounts of criminalmoney infiltrates legitimate business itwill also bring corruption, threats ofviolence and blackmail in its wake.

Legislative progress

The Government is to be congratulated on understanding this danger and forintroducing a raft of anti-fraud andeconomic crime measures since 1998.Improved financial services regulation and extensive new money laundering ruleshave together given Britain one of thestrongest legislative armouries in the world.The Proceeds of Crime Act 2002 (PoCA),which came into force this year, illustratesthe benefits of the new approach. It extendsthe confiscation regime to all serious crimes,making seizure the norm rather than theexception. It enables the freezing ofsuspects’ assets from the start of a criminalinvestigation and a confiscation order maythen be made following any conviction inthe Crown or Magistrates’ Court. A CrownCourt must decide at the start of confis-cation proceedings if the offender has a“criminal lifestyle” – defined by certaintrigger offences such as drug dealing, or acertain pattern of acquisitive offences – inwhich case all assets accumulated over sixyears can be confiscated. PoCA also targetsthose not convicted of an offence but whocan be shown to have benefited fromcriminal conduct. Enforcement proceduresare provided. The Taskforce set up topursue outstanding confiscation ordersnetted £2.7 million in criminal assetsbetween December 2000 and last Marchalone. A target has been set to recover £60 million in 2004-2005.

Give us the tools:law, regulation and the courts


Further measures are on the way:

The new Criminal Justice Bill addresses longstanding issues, proposing an alternative,judge-only, form of trial for complex andlengthy fraud cases; a wholesale reform ofthe laws of evidence and hearsay; andcodification of the criminal law.

The introduction of the British version ofthe latest EU regulations later this yearwill radically reshape the law on moneylaundering. An “objective test” has beenintroduced whereby a SuspiciousTransaction Report (STR) must be madenot only when a firm actually knows of,or suspects, laundering but also whenthere are reasonable grounds for thatknowledge or suspicion.

A draft Corruption Bill, which includesprovisions against procurement fraud, hasbeen the subject of a report by a JointCommittee of Lords and Commons. Itsrecommendations are now beingconsidered by the Home Office.

The Crime (International Co-operation) Billwill strike at international fraudsters byfacilitating cross-border evidence gathering.

The Panel welcomes these proposals butalso believes that care must be taken toensure that this great tide of law does notcreate practical problems for those whomust enforce it (see below).

Better management of trialsin serious fraud cases

Jury trials have proved their worth andshould clearly be retained for almost everycategory of serious crime. Yet ironically, itis the very presence of the jury that resultsin lengthy fraud trials, which sometimeslast as long as a year. Lengthy andrepetitious explanations, cross-examination and speeches are introducedto ‘help’ jurors. Paper is only replaced bysimple screened images and graphics in avery few cases. Evidence is all too plentifuland investigators scoop it all up, fearfulthat some vital piece of the jigsaw mightbe missed. The result is huge, unwieldycases which, to be understood by a jury,must be chopped into manageable parts.In the Guinness case, severance by subjectmatter resulted in orders for threeseparate trials which, had they run theirfull length, would have spanned two ormore years. And the prosecution is onlyallowed one ‘bite of the cherry’. Thesecond Maxwell case was stopped whenthe judge ruled that some of the issues atstake had been central to the first in whichthe defendants had been acquitted.

There are immediate and obviousadvantages of trial without a jury; a judgealone, or with assessors, could read thedocumentation in advance of the trial andlimit cross-examination and speeches. Notleast he would give a reasoned judgmentat the conclusion of the proceedingsdescribing how the verdict was arrived at.But this proposal, embodied in thepresent Criminal Justice Bill, does notmeet with universal enthusiasm and maynot be enacted. In any event, better trialmanagement is essential:


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Specialised judges must have thoroughand professional training in trialmanagement techniques.

∑Counsel must be discouraged fromindulging in lengthy and repetitious crossexaminations and speeches.

∑More intense efforts must be made beforethe trial starts to bring prosecution anddefence to agreement on undisputedissues which need not be brought beforethe court.

∑More robust and consistent efforts mustbe made to improve the way evidence ispresented, particularly via greater use ofvisual presentations.

A single offence of fraud

The Panel endorses the Law Commission’srecommendation for a single offence offraud to replace the complex variety ofoffences which confuse juries, but onwhich the prosecuting authorities mustcurrently rely. The mechanics of fraud arerelatively unimportant. The real issue iswhether there has been deception withthe dishonest intention of obtainingadvantage, avoiding an obligation orcausing loss to a third party. Generaloffences of fraud are used successfully inmany jurisdictions, including a numberwhich have also signed up to theEuropean Convention on Human Rights.

Plea bargaining

Lord Justice Auld recommended theintroduction, via a judicial sentencingguideline, of sentencing discounts, sostructured that the earlier a guilty plea isentered the higher the discount thatwould apply. A judge would be formallyentitled to indicate the maximumsentence in the event of a plea of guilty atparticular stages of the proceedings,together with the possible sentence onconviction. The Panel supports LordAuld’s proposals, a form of which has along and successful history in the UnitedStates. ‘Plea bargaining’ would shortenfraud trials while ensuring a higherconviction rate.

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Too much law,too few resources? The draft Money Laundering Regulations

The Panel’s sole goal is to reduce theimpact of fraud. But this does not meanblanket approval of every law and ruleintended to suppress it. Idealisticlawmaking can sometimes create as manyproblems as it solves if it fails to considerthe practicalities of implementation. ThePanel has highlighted the problemscaused by the Data Protection Act 1998which sometimes inhibits investigatorsfrom gathering information on fraudsuspects. Now the new draft MoneyLaundering Regulations risk swampingNCIS, the already struggling assessor ofSuspicious Transaction Reports (STRs).

Accountants, insolvency practitioners,estate agents, legal and tax advisers,transporters of funds, dealers in preciousmetals and casino operators must informNCIS of any criminal offence that theysuspect may have been commited by their clients, their client’s staff and/orcustomers. Indeed they risk imprisonmentif they fail to do so. Law enforcementofficers have expressed concern at the lackof a de minimis provision; Britain is theonly EU member that has chosen to dowithout one. The Home Office did notwish to set a monetary limit to STRs onthe grounds that some serious crimeinvolves repeated small transactions.But other approaches are possible, forinstance designating specific crimes thatmust be reported.

Change makes sense when NCIS isstruggling to cope with the presentvolume of reporting. In July the HomeOffice published a report by KPMG whichrevealed the present counter-productivestate of play:

There were 63,000 STRs in 2002, up from30,000 the year before, with 100,000expected in 2003.

∑There is a backlog of 58,000 unprocessedreports from financial institutions.

∑Intelligence derived from such reports istaking an average of 181 days to reach lawenforcement agencies.

Information providers, NCIS and lawenforcement agencies are not geared up tomake the system work as it should:

Many STRs are prepared and presented inunsatisfactory ways yet little feedback isgiven to disclosers to help them improvethe quality of their reports.

∑Law enforcement bodies often fail toprovide adequate guidance to NCIS on thekind of information they need.

∑Law enforcement agencies tend to devoteinadequate resources to handling theintelligence NCIS sends them.

How could the system cope with the tidalwave of STRs that would be generated bythe proposed Money LaunderingRegulations?

The Government has set up a task force tooverhaul the existing system. The Panelbelieves that ministers should go further,creating a de minimis provision in theRegulations, providing new resources forNCIS and issuing firm guidance on thegeneration and utilisation of STRs by boththe regulated sectors and law enforcement.


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Good laws are not enough to detereconomic crime. Without an adequatesupply of skilled investigators the law is impotent. And that is increasingly thesituation in some parts of the country asfraudsters rob without fear of the police.Given the pressure on chief constables the principal responsibility must lie withgovernment.

The number of officers tasked to fraudsquads is in steep decline and has beensince the mid-1990s. There were 869mainstream fraud investigators in 1995and around 600 today, each of whom isliable to be, and often is, called away toother duties. On a good day in summer2003 there are, perhaps, 400 officersavailable ( the figures were released by theAttorney-General in June 2002 and havebeen updated by the City of LondonPolice). Last year saw only seven policeforces operating with more than 15 investi-gators. Some county forces have closedtheir fraud squads altogether and othershave only a handful of officers. There arealso strategic deficiencies. The SeriousFraud Office (SFO) is only equipped tohandle 80 to 100 cases a year, all of whichare worth at least £1 million, while NCIShas no resources available to collect oranalyse criminal intelligence on majorcommercial (as distinct from publicsector) fraud.

The Attorney-General, Lord Goldsmith,acknowledged last year that “largeamounts of fraud are going uninves-tigated” and the new SFO Director RobertWardle has concurred. Mr Wardle pointsout that most forces do not even operate afilter to determine which frauds mustreceive police attention (for instance,according to the number or vulnerabilityof victims, or impact on the economy).Indeed some fraudsters deliberatelyoperate in places where they know thepolice response to be weak.

The crisis touches London as well as theregions. The Metropolitan Police’s FraudSquad has been merged into a SpecialistCrime Directorate and fraud investigationssuffer from repeated diversion of officersto other urgent tasks. The situation isaggravated by London’s general shortageof detectives as well as a specific shortfallin officers with a background in financialinvestigations. Some local stations feelcompelled to turn away significantcomplaints of fraud because of their lack of specialist manpower. So difficult is the Met’s position that consideration isbeing given to recruiting accountants asspecial constables and tasking them tofraud enquiries.

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Close to breakdown?

Policing fraud


Even the work of the Serious Fraud Officeis being adversely effected. An average offour police officers were made available forevery case in 1997; this fell to two officers per case in 1999 and to one officer in 2003.Mr Wardle has said that “the SFO wasestablished on the basis that it wouldinvestigate in conjunction with the police,and if their resources are not available...cases at the very least take longer toinvestigate and, on occasions, cannot beinvestigated at all”. Though an impressive40% real-terms rise in the SFO’s budgetwill occur from 2003-2005 much of this willgo to dealing with new cartel offencescreated by the Enterprise Act 2002.

Part of the problem is that fraud does notfigure in the Home Office’s list of policepriorities, nor are individual forcesrequired to devise anti-fraud strategies.Detective Chief Superintendent KenFarrow, Head of the City of London’s FraudSquad has pointed out that “Consequentlythere is little or no incentive for localpolice chiefs to commit already stretchedpersonnel to combating economic crime.The situation is compounded bydwindling numbers of qualified fraudinvestigators, as experienced officers retireand are not replaced.”

Reform frustrated

Last year’s Panel Annual Review reportedthe recommendations of the Government’sInterdepartmental Working Party onImproving the Response to Fraud whichsat during 2000-2002 and included seniorrepresentatives from the police,departments of state and the FSA.Ministers accepted its recommendationsin principle. They included:

1. A study of the feasibility and cost of anational police fraud squad.

2. Increasing the SFO’s civilianinvestigative and casework resources.

3. Better training for police fraud officersand financial investigators.

4. New guidelines on which type of fraudcases would be accepted by the police,what criteria would be applied and whichforce would take the lead when casescrossed police boundaries.

5. Revised criteria allowing police forces toprovide consistent estimates of the cost ofreported fraud.

6. A “thematic inspection” throughoutEngland and Wales by HM Inspectorate ofConstabulary into the way fraud investi-gations are carried out.


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Progress has been poor. A national fraudsquad was rejected as too costly. City ofLondon Police and the SFO are insteadexamining a possible joint approachwhere the City’s Fraud Squad would act asa “lead force” for major investigations inthe capital and the South-East of England.This, though a welcome step, would gonowhere near addressing the nation-wideproblem. The other working partyrecommendations, (increased SFOresourcing aside) are on hold pending adecision on the “lead force” proposal.

Yet the Interdepartmental Working Partyconcluded that the cost of expanding thepolice’s drive against fraud would berelatively small. It estimated that £85million would pay for a National FraudSquad of 1,200 officers sited in five well-equipped regional centres. It would costeven less to distribute the same numberof officers to county forces – though thisis very much a second-best option sinceinvestigators would inevitably bedetached to work on other categories ofcrime. The proposed City of Londonpolice/SFO scheme will cost under £5million. These figures do not take intoaccount the economic benefits ofimproved deterrence, recovery of stolenfunds and confiscation of criminal assets.

Other useful immediate, and low coststeps, would be to offer short-termcontracts to recently retired officers withanti-fraud skills and to introduce a moreflexible approach to the rotation of seniorinvestigators out of fraud squads.


A culture of complacency

British corporate reporting and governancehave come under close scrutiny in the wakeof Enron and other US business scandals.A series of government commissioned or inspired reports have recommendedexpanding the role of non-executivedirectors (NEDs) and enhancing theirindependence (the Higgs Report);enhancing the role and responsibilities of audit committees (Smith); tighteningaudit and accountancy regulation (the Co-ordinating Group on Audit andAccounting); and changing the structureof accountancy regulation (Swift).

The Panel welcomes the proposed reformsbut notes a missed opportunity. NeitherHiggs nor Smith paid much explicitattention to fraud and the revisedCombined Code on Corporate Governancegives insufficient prominence to the needfor companies to guard against it.America’s new Sarbanes-Oxley Act oncorporate governance requires the twomost senior company officers topersonally certify the veracity of theiraccounts, on pain of a large fine or severalyears in prison. The Panel is notrecommending similar British legislationbut the comparison illustrates another,more urgent, response to corporate fraud.

Fraud kills companies as well as robbingthem. Its impacts include broken bankcovenants, cash flow crises and share pricedecline when bad results are declared,regardless of whether the original fraudwas reported to the police. Yet a recentPricewaterhouseCoopers survey revealedthat 46% of UK firms intervieweddiscovered fraud by accident, compared toonly 43% who did so via their riskmanagement systems. The survey alsofound that only 68% of companies had ananti-fraud code of conduct; only 59% usedpre-employment screening; only 59% had a whistle-blowing policy; and only 26%provided managers with anti-fraudtraining. The same survey showed 85% of British firms as “confident” or “veryconfident” in their controls.

Too few firms have risk reviews which payserious attention to fraud. Many othersfocus disproportionately on misappro-priation by low-level employees. This is apotentially disastrous mistake when mostserious frauds tend to involve managementor even executive directors. Boards shouldavoid emulating the British intelligenceservices of the 1940s and ‘50s whose seniorofficers refused to believe that traitorscould be found amongst their own ranks.


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Ticking Boxes?Corporate governance and financial reporting


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Fraud management should be designedinto corporate systems. This requires clearpolicies and implementation programmes;it means allocating specific, andsufficiently senior, staff to manage andmonitor; it demands comprehensive riskevaluation and the matching of controlsto identifiable risks. Support is needed viagood management information, a stafffraud awareness programme, recruitmentscreening, a whistle-blowing policy and aresponse plan. Fraud prevention should bepart of corporate culture, endorsed byhigh-level example, inculcated byeducation and training and involve reviewby external auditors. It must also beplaced firmly on the Board agenda.

Incorporating fraudprevention into corporategovernance

The Panel’s submission to Higgs arguedthat non-executive directors should havean explicit role, on behalf of the wholeBoard, in assessing whether fraud riskshave been properly identified, andwhether adequate preventive measures arein place. This means that:

Non-executives must be satisfied that thecompany has clear and properlycommunicated anti-fraud policies.

All directors (and NEDs in particular) mustbe assured that the company hasconducted a proper risk assessment andinstalled adequate risk management andinternal control procedures.

Non-executives must be satisfied thatfraud warnings will be reported tomanagers untainted by suspicion; thatNEDs will receive reports of materialproblems; and that appropriate actionswill be taken.

All non-executives must undergoappropriate training and the entire Boardmust submit to the procedures it imposeson employees.

Listed companies should be required toreport material matters involving directoror senior management malpractice to theshareholders. A more open approachshould be seen as enhancing a company’sreputation rather than diminishing it.

The Panel would also like to see theCombined Code on Corporate Governanceupgraded so that listed companies mustreport to shareholders on their anti-fraudpolicies and programmes or the lackthereof. Shareholders have a right to knowabout monies or assets that have beenstolen from them.


Back to basics in auditing

The current Chairman of the ICAEW’sAudit and Assurance Faculty has said that:“Audit is all about integrity, independenceand judgement…[it] is not and never canbe a commodity.” A significant step inreasserting the authority of these vitalprinciples was taken when the Americanauditing profession introduced a newstandard (SAS99) last year on the auditingof fraud risk. This maintains the auditors’existing legal and professional responsi-bility but seeks to improve auditorperformance so that:

Greater emphasis is placed on auditorsadopting an appropriate mindset ofprofessional scepticism.

Auditors give a more thorough andthoughtful assessment of fraud risks.

They provide a closer study of assessedrisks.

∑Specific procedures are introduced inresponse to the ever-present risk ofmanagement override.

This US stance has now been taken as thestarting point for updating internationalauditing standard ISA240. Britain, incommon with other members of the EU, haspledged to adopt international auditingand accounting standards by 2005.

The ICAEW’s Audit and Assurance Facultyintends to publish guidance for itsmembers later this year which willencourage a move towards the US modelin anticipation of the internationalstandard taking effect. It is likely that theguidance will stress the need for Britain’sauditing profession to take a moreassertive attitude toward fraud risk.

The Panel welcomes action to reassertintelligent professional judgement over anexclusively rule-based approach. Itbelieves that the former is far more likelyto produce a frame of mind conducive tothe detection and deterrence of fraud.

Auditors must also guard against so-called“aggressive earnings management” (AEM)which artificially improves corporateresults by exploiting generally acceptedaccounting policies and treatments anddistorting a true view of a firm’s financialposition and prospects. Regulatorsincreasingly view AEM as “fraudulentbehaviour” regardless of technicalcompliance with reporting standards. Thisis clearly a vital issue for auditors too.

Offenders are being offered a chance toclean the skeletons out of their cupboardsvia the adoption in the last year of UKFinancial Reporting Standard FRS 18,which requires companies to adopt the‘most appropriate’ accounting policiesrather than merely adequate ones.


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For information, to become a member,or to offer support, please contact:

The Fraud Advisory Panel,Chartered Accountants’ Hall,PO Box 433, Moorgate Place,

London EC2P 2BJTel 020 7920 8721Fax 020 7920 8536

e-mail [email protected]


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