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KPMG UK’s fraud barometer shows record level of fraud

More fraud cases have been recorded in the first half of 2003, than the whole of 2002.

Fraud cases reached a record high during the first six months of this year (90) according to the latest figures from KPMG Forensic’s Fraud Barometer. While the number of cases in the first six months of the year has already exceeded the total number of cases for the whole of 2002 (83), the average value per case in the same period decreased from £9m to £3m.

The total value of fraud within the six-month period to 30 June 2003 reached £216m, a 15% decrease compared to the same period last year (£255m), The research considered major fraud cases being heard in the UK (charges over £100,000 in Crown Court).

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.”

More cases of ‘carousel’ fraud VAT on phone fraud continues to be a major problem for the UK’s trade deficit as recent statistics from the Office for National Statistics showed. The Fraud Barometer recorded five cases totalling £69 million of VAT fraud, highlighting the continued problem of “carousel” fraud so named because of the circular nature of repeated cross border purchases, often of computer chips or mobile phones between connected companies, 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 £38m 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.

Banking and electronic fraud on the increase The number of financial/banking frauds increased almost three-fold during this six month period compared to the last six months of 2002 – up from five cases to fourteen – at an average of £1.1m per case. Many of these frauds were perpetrated by employees who used their inside knowledge of the business to steal from their employer. In one example, a former employee of Lloyds TSB was charged with stealing £1.2m from the bank.

Identity fraud remained a threat within this sector. One example 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; while 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 continued: “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.”

Victims of fraud
The highest numbers of victims of fraud were found in 30 cases within 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).

Regional figures show total value of fraud highest in the Midlands London and the South East continue to report the greatest number of frauds (23), compared to the Midlands (17) and the North East (13). However, the total value of fraud within the Midlands (£97.6m) outstripped the South East (£67.7m). In the South West and Wales, eleven cases were recorded totalling £6.1m – an average fraud value of just over £0.5m per case.

KPMG's Alexander concluded: “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.”

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