Economic crime is on the increase and knows no boundaries. Its impact can be far reaching, tarnishing reputations and diminishing hard-earned profits. Asset misappropriation, cheque and credit card fraud, cyber fraud, identity theft, and money laundering are all examples of the economic crimes that now present a serious business risk to UK companies.
Not since the publication of the findings of the Roskill Commission on fraud trials in 1986 - which led to the formation of the Serious Fraud Office - has economic crime been so high on the political agenda. The publication of the Government's fraud review in July this year is a sign that the issue has not gone away and is now a matter that no business can afford to ignore.
The fraud review was established to recommend ways of reducing fraud and the harm it does to society and the economy. It was asked to address three major questions, one of which is: what is the scale of the problem? In addressing this question, the fraud review noted that RSM Robson Rhodes' economic crime survey was one of the best known private sector studies providing statistics on the scale of the problem.
The measurement of fraud is extremely complex. At the time of writing, there are no reliable estimates of the cost of fraud to the economy as a whole. Indeed, defining the cost of fraud is problematic in its own right, as the true cost goes well beyond the direct losses to individuals and business. While there are numerous estimates of fraud from a variety of organisations, there is no legal definition of fraud. This means that such estimates are not directly comparable, as each organisation makes its own definitions. This is about to change with the introduction of the Fraud Bill, which will, for the first time, create a legal definition of fraud. However, the analysis of the trends, such as that conducted by ourselves, is still a useful and valid exercise.
Economic crime, including fraud in all its guises, is not a victimless crime. Recent studies on the harm caused to society by organised crime suggests that economic crime may be second only to Class A drug trafficking and roughly equal to people smuggling and people trafficking combined.
In-depth research
To raise awareness at board level and quantify losses, RSM Robson Rhodes has spent the last two years undertaking in-depth research into economic crime with the support of the Home Office, the CBI and the Fraud Advisory Panel.
The responses, from over 300 UK businesses of all sizes and various sectors, confirm suspicions: that the depth and spread of economic crime within UK business have become, and will continue to be, a serious threat. The percentage of people expecting economic crime to rise in the next three years nearly doubled from the previous year and now stands at 60%.
The survey shows that businesses are becoming increasingly aware of the danger of economic crime and are taking action to counter it. The good news is that there is impressive action in a number of areas, especially in investment in risk management systems, board awareness and staff training.
Greater awareness of crime
A particular area of concern is corporate identity theft, with over a quarter of businesses reporting incidents in the year prior to the survey - well up on the figure for 2004.
There is greater awareness of economic crime. A large majority of businesses reported that their boards had discussed economic crime within the past six months. Virtually all businesses surveyed understand the importance of board responsibility for building defences against economic crime and most would routinely report all detected economic crime to their board. However, although the proportions are increasing, still less than half of the 2005 survey respondents believed that their boards were trained in economic crime risk assessment.
In addition, only a third of boards have had risk management training even though respondents ranked risk management reviews as their number one method of prevention with internal audits as the most successful in detecting fraud.
There is more investment in anti-fraud measures, with almost all businesses surveyed establishing additional risk management systems in the past two years. However, even in 2005, a substantial minority of respondents still did not have a fraud response plan in place.
Information sharing remains a concern. A majority of respondents would not share information on fraudulent activity of staff with neighbouring or competing companies - again creating the risk that dismissed employees will defraud other firms.
Significant financial losses
Many of the financial sector's largest organisations previously stating annual losses greater than £10m moved to the higher range of £50m+ in the following year. The average loss per respondent due to economic crime in 2005 was £5.54m, substantially higher that the £1.05m estimated in the 2004 survey. However, averages such as this can be misleading as they can be easily distorted by one or two large cases.
Estimating the cost of economic crime is fraught with difficulty, as there is insufficient reliable data available. However, earlier this year, the Office of National Statistics said that Customs lost some £5bn in 2005 due to VAT fraud (carousel fraud) alone. Given this figure and the level of losses reported by the respondents, it is clear that the true cost of this type of fraud is likely to be significantly greater.
Smaller enterprises
An innovation in the 2005 survey was to take a look at the returns from small and medium sized enterprises (SMEs). The results show that the level of awareness and the propensity to take action significantly differ from the survey as a whole. For the most part, the 91 SME sector returns suggested that there is less awareness and less effective action.
The survey showed that substantially fewer SMEs had made any investment in risk management systems or in anti-fraud measures. Even fewer had given their boards, or equivalent, risk management training and hardly any SME board equivalents had discussed economic crime within the last six months. There were not many fraud response plans and of those that did exist, 70% were not regularly tested.
Notwithstanding this result, only 35% considered that they needed advice and training on economic crime. The bright spot for SMEs was that a much higher proportion (71% as compared with 37% for the survey as a whole) were prepared to share information locally with neighbouring and competing businesses.
Areas of complacency
Businesses know that they are facing a real problem. The survey shows that many businesses understand that economic crime is having an increasing impact and is likely to grow faster in the future. Boards are discussing the issue with increasing regularity. In 2004, 68% had discussed the issue within six months. In 2005, the figure had grown to 82%.
Surprisingly, however, the survey revealed areas of complacency: a large proportion of respondents believed that their business was experiencing lower levels of loss from economic crime than their competitors. This suggests some misplaced confidence.
- Hossein Hamedani is forensic partner at RSM Robson Rhodes LLP, Tel: 020 7865 2489, E-mail: Hossein.Hamedani@rsmi.co.uk
The Lost Billions
Economic crime is a term used to describe asset misappropriation, bribery, cheque and credit card fraud, corruption, cyber crime, identity theft, insurance fraud, money laundering, procurement fraud, product counterfeiting and revenue and VAT fraud.
RSM Robson Rhodes' extrapolation of data received indicate that during the period 2004-2005 UK companies lost between £20bn and £32bn due to economic crime and the cost of prevention was estimated at a further 25% of these figures.
