The enemy within

Report highlights
• The taxpayer was the biggest victim of fraud, with the value of tax fraud increasing by 16 percent since 2004 and by 159 percent since 2003 to over UK£350million in 2005.
• By value, nearly half of all fraud reported (UK£465million – 47 percent) was committed in London and the South East, with the rest of the UK accounting for UK£516million.
• The biggest sector in terms of frauds was the financial services industry (accounting for 50 percent by value – nearly UK£0.5billion), followed by the wholesale trade at 26 percent (about UK£0.26billion).
• Fraud continues to be a male-dominated domain, with women accounting for only 18 percent of those convicted. However, for the first time since the analysis was started in 2003, women under the age of 20 have been convicted for involvement in fraud.
• Of the 90 percent of employees who claimed they would report a fraud if they discovered it, only 8 percent would report it directly to the police. A quarter would raise it with an outside adviser such as a lawyer or their trade union, whilst 53 percent would want to report it to someone senior at work. However, of those who would report it at work, over one third feared some sort of recrimination, whether losing their job, being cold-shouldered by colleagues or in some way having their career prospects harmed – only 8 percent expected reward, recognition or promotion.

The tip of the iceberg – major frauds in 2005 included:

UK£156 million – A fugitive VAT fraudster made UK£156 million from the illegal sale of computer chips and mobile phones (around three times the size of the recent high-profile robbery in Kent). In April, Nasser Ahmed fled his trial minutes before a jury found him guilty and was sentenced in August in his absence to six-years in prison. The UK£156 million would have put him among the top 250 people in the UK according to 2004 rich lists. The court was told he had absconded from bail twice but was given bail again before his third and final disappearance on the last day of his trial. (Source: Bristol Evening Post)

UK£76 million – Financier Ian Andrew Leaf was found guilty at Southwark Crown Court, UK, of 13 counts of fraudulent trading, following an eight-year investigation by HM Revenue & Customs and in December was sentenced to 12 years and 6 months. The complex UK£76 million fraud featured thousands of fictitious documents centred on a company purchase scheme, which involved Leaf buying 13 UK subsidiary companies. Leaf created fictitious documents from a bank registered in the Pacific island of Nauru, controlled by him, which fictitiously showed the companies had borrowed huge sums of money. The resulting fabricated interest payments were used to reclaim corporation tax rightly paid by the companies before he purchased them. (Source: HMRC & BBC Website)

Defining fraud
Revenue diversion frauds typically involve payments to the business being intercepted by the fraudster, who then destroys evidence that the money is owed (for example, by erasing the original invoice).

Procurement frauds typically involve an employee rigging the tender for a contract in return for a bribe or placing orders with businesses in which they have a secret financial or family connection.

Payment frauds involve the payments, whether for real or false bills, being diverted to the fraudster.

Examples of employee fraud:

Payroll fraud – In February 2006, hospital manager Joy Henry was sentenced to four years for defrauding the National Health Service (NHS) of almost UK£600,000 through creating ‘ghost’ employees, whose salaries she and associates received over a 2.5 year period. The fraud at the Kings College Hospital NHS Trust involved her putting 10 bogus employees on the payroll, and was used to fund a luxury lifestyle, including an expensive Audi convertible and regular holidays to America and Nigeria. (Source: Daily Telegraph)

Procurement fraud – Havering council officer Kevin Barry was sentenced in August to 15 months for rigging the tenders for IT contracts, resulting in the council paying over the odds for PCs, printers and software. Christopher Clarke, the managing director of Orbital Solutions of Essex was sentenced to a year for the scam, which took place over a 14-month period. (Source: Essex Chronicle)

Payment fraud – Solicitor Ian Macfarlane, who stole UK£825,000 by setting up a bogus account in the name of ‘I Revue’ was jailed for three years and nine months. The fraud lasted for nearly eight years and involved 164 cheques that should have been paid to the Inland Revenue. The money was used to develop his own property business and pay for his children’s school fees. (Source: Press Association)

About BDO Stoy Hayward
BDO Stoy Hayward is the UK member firm of BDO International, the world's fifth largest accountancy network, with more than 600 offices in over 100 countries. BDO Stoy Hayward LLP and BDO Stoy Hayward Belfast are both authorised and regulated by the Financial Services Authority to conduct investment business.

For complimentary copies of the FraudTrack report, please contact Emily Smith at Emily.smith@bdo.co.uk.