News

The National Fraud Strategy – New Rules to Crackdown on Fraud.

Date: 30 Mar 09

Increasingly, the national press has highlighted the growing detection of fraud cases by a variety of law enforcement agencies. Without detailing an exhaustive list in the form of an international rogue’s gallery, the most notorious of these has included: Jerome Karivel, who in 2007 cost SocGen £3.7 billion pounds by allegedly making huge unauthorised trades that he hid for months by hacking into computers.

The French Finance Ministry’s report on what was described in regulatory and compliance circles as the worst banking fraud in history was critical of SocGen’s internal controls, stating that the sophisticated risk control procedures were to no avail if human factors were ignored. In 2008, the Royal Bank of Scotland faced losses of £400 Million after Bernard Madoff admitted defrauding investors of £33 Billion in a giant Ponzi “Pyramid” Scheme.

There has been growing debate as to whether consumer awareness of the incidence of fraud is keeping pace with the development of anti-fraud techniques, which many firms in the financial services sector have invested in. Historically, there was a lack of authoritative statistics in the area on the scale of fraud in the UK, posing a ‘policy’ challenge for the UK government. Additionally, the Criminal Law and court procedure, which are at the heart of an effective anti-fraud strategy, were complex and largely ineffective.

To date, trials have grown in length and the volume and complexity of documentary evidence presented in Court has proved a major obstacle to swift justice. Outdated and inflexible legislation prevented many large fraud cases from being brought to court at all.

A significant development, introduced to deal with such failures to prosecute, was the Fraud Act 2006 which created a legal definition and a substantive offence of Fraud. Unfortunately, notwithstanding such measures, it is estimated that consumers and businesses lose £14 billion per annum to fraudsters.

Essentially, the Government’s role is to restore people’s confidence, already damaged by the impact of the economic downturn enabling consumers and businesses to conduct their business safely. To this end, major policy developments have  recently been published:

• A national fraud strategy which includes new criminal justice measures to enhance fraud prosecutions

Such measures will be welcomed by the legal community, businesses and consumers alike, as in 2006 the Fraud Review noted that ‘fraud is a hidden tax on everyone. It increases the cost of goods and services impoverishes small as well as corporate shareholders, strikes at the future of private pension holders, jeopardises jobs and saps faith in the City’s unique understanding at home and abroad. It damages business growth and investment.’

The National Fraud Strategic Authority (NFSA), an executive agency of the Attorney General’s Office, is to take forward the government’s response to fraud.  Building on the recommendations made by the Fraud review, the NFSA recently published its national fraud strategy. The strategy reflects a new partnership approach between the NFSA and over 25 public and private sector organisations.

The Attorney General, Baroness Scotland QC, stated that ‘this strategy represents an emphatic response from the Government and the wider economy, to the misconception that fraud is a ‘victimless crime.’’

In terms of counter fraud activity, the three-year strategy tackles four key priorities:

• Improving the building and sharing of information about fraud, by the City of London Police, establishing a new National Fraud Reporting Centre and National Fraud Intelligence Bureau;
• Tackling the most serious and harmful fraud threats, such as identity and mass marketing fraud, disrupting and punishing more fraudsters while improving support to their victims, by working with the Association of Chief Police Officers and victim support and new criminal justice measures. Two criminal justice measures have been introduced to enhance prosecutions against fraudsters and improve support to the victims of fraud. The measures are plea negotiations and extending Crown Court powers. New Attorney General guidelines, issued to prosecutors will encourage discussions about guilty pleas in fraud trials to happen earlier and more transparently. The Crown Court will be given new powers to bar fraudsters from professional practice and winding up their businesses. The range of fraud victims eligible for criminal compensation will be widened, and enforcement measures strengthened.
• Improving the nation’s long-term capability to prevent fraud, by better co-ordinating fraud public awareness activity and building strong, supportive partnerships among the counter fraud community.

The government is to be commended on a strong anti-fraud framework, the effectiveness of which will be judged on the future results it achieves. The challenge for any new strategy is to keep pace with the techniques of fraudsters and the rapid transformation and sophistication of such techniques. Fraud is an expense to individuals and businesses alike, for example the financial services sector suffered from £300m plus of alleged fraud in 2008.

In relation to the above sector, essentially financial services firms need to establish and embed an anti-fraud culture, in the form of an effective fraud prevention policy and compliance framework. Staff should be trained and given the appropriate tool-kit, assisting them to detect and report internal threats posed by fraudulent staff and external threats from criminal groups and opportunist individuals whose aim is to defraud the organisation. Fraud inflicted from inside and outside businesses, undermines profits and drives up costs. It is estimated that over a two year period firms suffer an average loss from fraud of £1.58 million. Faced with turbulent market conditions and worsening economic conditions, fraud is an expense that firms wish to avoid and should ensure that they have built an anti-fraud ‘shield’ to such threats.

– ENDS –

Jason D. Haines, Head, Financial Crime Prevention, Huntswood.

For further information on how the new fraud strategy will affect your business and/or how Huntswood’s financial crime team could assist your compliance requirements, please contact

Jason Haines
e: j.haines@huntswood.com
t: 07795 814 816

About Huntswood
Huntswood is a professional services firm, providing specialist resources and solutions to the UK financial services industry. Our mission is to work with clients to improve their performance and reduce their risk in regulated, highly complex, customer sensitive environments. We are a trusted partner to many leading organisations as a specialist provider of a range of people and consulting services. We are increasingly working with our clients to establish full process outsourcing arrangements.
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