Corporate fraudsters will find the net closing in on them as police fraud squads harness the resources of private security to help investigate this booming crime.
Although the true extent of fraud can never be known for certain, it is generally accepted that the cost to UK business runs into the billions of pounds a year. In London alone last year there were 80,000 cases of fraud reported to police.
To combat this growing trend, and in recognition that police resources are stretched to investigate this crime, a joint initiative between the CBI and the fraud squads of the City of London Police and the Metropolitan Police was launched recently by the president of the CBI, Sir Clive Thompson. It will see police fraud detectives cooperating with investigators in the public and private sectors to gather and prepare evidence for possible criminal prosecution.
The scheme recognises that police and private corporations were already sharing information in criminal investigations, as and when it was deemed necessary and appropriate. However, this scheme formalises the procedure by the adoption of a Statement of Intent (SOI), basically a contract between the police and the investigator governing the terms of their professional relationship and the means by which information will be shared.
Not all cases will be judged suitable for SOI. Based on a conference with the investigator, police may decide the case is not serious enough to warrant their cooperation, is so serious that it must be investigated by the police or the Serious Fraud Office or that it falls somewhere in between – that is, it’s an ideal SOI case.
If the case is judged suitable for investigation by a private investigator, the police case officer will provide guidance on how to gather the evidence and how to prepare the evidential package. Investigators will have to abide by a code of practice during all stages of the investigations or face sanctions.
During the one-year experiment, the fraud initiative will operate as something of a closed shop, with the fraud squads working with the Big Five accounting firms, three firms of private investigators (Kroll, Control Risks and the Risk Management Group) and the investigators employed in-house by CBI-member companies.
If the experiment is judged a success, they will expand the scheme to work with any private investigator who has been inspected and approved under accreditation criteria being drawn up by a committee chaired by the Head of the Metropolitan Fraud Squad, James Perry. As reported in SMT, the National Security Inspectorate, the umbrella organisation which includes NACOSS and ISI, will administer the inspection and accreditation scheme (SMT April 2000).
Ministerial blessing
At a conference held at CBI headquarters in London, the Home Secretary Jack Straw gave the keynote address, during which he praised the initiative: “These proposals demonstrate how the police can harness private sector expertise, while introducing necessary quality control checks, to assist the investigation process,” he said.
It was emphasised that the intention of this scheme is not primarily to enable companies to recover lost assets in the civil courts, although it was conceded that the evidence gathered might prove useful in such cases. Sir John Stevens, Commissioner of the Met, who spoke after the Home Secretary, was at pains to emphasise that this was not a case of the police “contracting out” of investigating fraud cases, nor privatisation by the back-door. “The MPS has always treated fraud seriously and it has been very successful in dealing with serious and complex cases. We are determined to combat corporate fraud, and have now joined forces with the City of London police and the private sector to ensure that our respective expertise and resources are used in the most efficient way.”
These proposals demonstrate how the police can harness private sector expertise...to assist the investigation process
Home Secretary - Jack Straw
However, investigating fraud is a time-consuming process. “It is found that it takes a long time to determine even that the fraud has been committed,” he said. Companies would be able to approach the police for help in investigating a possible fraud earlier than ever before, encouraging early intervention and investigation and minimising the chances of the fraudster escaping.
Thinking like one
“To find fraud you have to think like a fraudster,” said David Sherwin, head of Ernst & Young’s fraud investigation group.
Ernst & Young have produced a wealth of information on fraud prevention and investigation as part of its marketing drive for its services. “Management are now increasingly being held accountable for ensuring that appropriate control and review procedures are in place,” he said.
Corporate governance guidelines like the Turnbull report require Boards of Directors to consider risk management in every aspect of the business. It is, say heads of security, helping to open the eyes of senior management to security as a corporate, board level issue.
Internal medicine
Ken Farrow, who heads up the City of London Police fraud squad, warned that criminals are turning increasingly to fraud because they believe that there is more money to be made with less risk than in other crimes like selling and dealing drugs.
But the risk is greater still internally, from employees who have detected flaws in the financial controls. The problem, said Farrow, is that employers too often turn a blind eye to the problem until it gets out of hand. But this sends the wrong message to employees, that crime will be tolerated, and before long others are tempted to join in.
“Businesses should not be ashamed to go public, if by doing so they are demonstrating that they are dealing with the problem promptly and vigorously,” he said.
However, anyone wanting to talk about a potential problem informally and off-the-record should feel free to ring Farrow’s office, he said – a sentiment that was echoed by the next speaker, DCS James Perry, Head of the Metropolitan Police Fraud Squad.
Risky business
Businesses should not be ashamed to go public
Ken Farrow, head of City of London fraud squad
Perry claimed his squad has been responsible for saving victims of fraud some £150 million. Next to drugs, fraud is the main criminal threat, according to the National Criminal Intelligence Service.
Between them, the Met and the City of London Police employ over 200 officers investigating fraud. In addition, they work with fraud investigators from HM Customs, NHS, the Benefits Agency, the DTI and other agencies. The Met’s squad also works with 32 boroughs, 16 health authorities and the fire and ambulance services to investigate fraud, and reporting is up 300%.
He echoed Farrow in warning companies not to allow fraud to be swept under the carpet. “What message does it send if companies turn a blind eye to fraud? Prosecution, whether successful or not, sends a clear message to staff and shareholders,” he said, adding: “Fraudsters do their own risk assessments.”
He continued: “Early reporting, especially in public sector fraud, enables us to catch the people in the act, making it much easier to prosecute. Cases do go stale if left too long.” Police are often brought in too late.
“If you suspect fraud, come to us as soon as possible,” he said. “We will ask you to employ an accredited investigator, either independent or in-house.” If this is considered to be an appropriate case of fraud, an investigating officer will be appointed to work with the private investigator to deliver what the police want, in a manner which is acceptable to the courts.
“If we don’t want to take on this case, we will write to you explaining our reasons: either not serious enough or too serious – we need to pass this to the Serious Fraud Office – or we will investigate this ourselves.”
Positive betting
In the security industry, the smart money is on the success of the scheme. Bill Wyllie – deputy chairman of ASIS 208 and recently appointed chief security advisor at the Bank of England – is chairman of the Chapter 208 Fraud Forum.
Wyllie commented: “We are very supportive of the initiative. It’s a welcome step in the security community’s ability to target fraud, bearing in mind the expense involved in investigating fraud and the limited resources of the police,” he said, adding: “There’s massive expertise in security, so why not use it?”
John Smith, head of group security at the Prudential, was chairman of the committee that drew up the SOI and a prime instigator behind the initiative. He said that private industry welcomed the opportunity to work more closely with police while also relieving some of the investigative burden from their shoulders.
“Fraud is a very difficult and time-
Common Frauds
There is no single offence that can be called "fraud", but it is usually understood to be theft or false accounting. In these two groupings there are almost as many types of frauds as there are individual incidents, each having its unique features. Broadly speaking they fall into these categories:- False accounting - the main aim of the fraudster is to present the results and affairs of an organisation in a better light than they are in reality, to obtain bank financing, manipulate share price, attract customers, gain performance-related bonuses, cover up theft or improve results and mislead auditors.
- Theft - any business asset can be stolen, but with fraud it usually involves misappropriation of some sort: theft by employees or management, such as direct theft of stock or other assets or making false expense claims; third-party fraud, for instance investment fraud or advance fee fraud; or collusion between employees and third parties, such as receiving kickbacks or failure to disclose personal business interests.
- Computer fraud - while there is no such thing as "computer fraud" as such, some fraudsters make good use of the computer to commit and hide fraudulent activities such as unauthorised transfer of funds from one bank account to another, defrauding internet customers with commercial websites or manipulating share price by releasing bogus company news, so-called "ramping".
Information Revolution
Information has always been passed between police and investigators when the case warrants it, said John Smith, head of group security at the Prudential. But there has never been a clear procedure for doing this which may have lead to problems with the courts and the Data Protection Commissioner - that is, until now. Smith was part of a CBI group that went to Scotland Yard as part of an on-going discussion about partnerships between the public and private sector last year. One of the subjects covered was fraud. A working party was put together with David Veness, then assistant commissioner for special operations. It included the heads of the Met and City fraud squads, CBI member companies, representatives of the Big Five accountancy firms and the investigations firms that are members of the CBI, representatives from BT and Royal Mail and John Smith, representing the Association of British Insurers and CBI. Smith chaired a committee which produced the statement of intent (SOI), members of which included Mark Tantam, a solicitor and partner in the Fraud Management Services division of Deloitte and Touche, who donated his services pro bono. A key issue when information is passed between the police and private investigators is that the data be immediately and directly relevant to the investigation, a point addressed by the committee in drawing up the statement of intent. Such information can be crucial to an investigation. An example would be an organisation which suspected it was the victim of a purchasing fraud. They call in an investigator who builds a strong case around dodgy-looking invoices to one or a series of suppliers. To progress the investigation they need access to specific information which only police can obtain, for example, whether a particular telephone call was made or transaction took place. While the information may be crucial, it's important that investigators not be allowed to engage in "fishing expeditions", said Smith. Provided they are looking for specific information which could either prove or disprove their case, the request for information should be covered by the SOI. Concerns about Date Protection regulations have made some police forces wary about sharing information, but provided that the London scheme proves a success in the next 12 months, those fears should be allayed. Early indications are that it shouldn't pose a problem: the Data Protection Commissioner's Office suggests that it should be possible to process personal data for these purposes in compliance with the Data Protection Act 1998.Source
SMT
