The Fraud Advisory PanelSixth Annual Review 2003-2004

There is nothing inevitable about fraud. Insight and initiative can turn the tide. This year’s Review focuses on organisations which are getting it right.

The Fraud Advisory Panel’s role is to raiseawareness of the immense social and economicdamage caused by fraud and help both publicand private sectors fight back. It is dedicated to a holistic approach and the long view.

The Panel works to:

Originate proposals for reform of the law andpublic policy on fraud.

Develop recommendations that will enhancethe investigation and prosecution of fraud.

Advise business as a whole on fraudprevention, detection and reporting.

Assist in improving fraud related educationand training in business and the professions.

Establish a more accurate picture of the extent,causes and nature of fraud.

The Panel is an independent body of volunteersdrawn from the law and accountancy, financialservices, commerce, government departments,law enforcement, regulators, public agenciesand academia. It is not restricted to seeing the problem from any single point of view butworks to encourage a truly multi-disciplinaryperspective. No other organisation has such a range and depth of knowledge, both of theproblem and of the means to combat it.

Sounding the Alert on Fraud:The Role of The Fraud Advisory Panel

“[Let us] explode the myth sometimes spread that economiccrime is somehow less evil than other criminal activity because itdoes not damage people. I reject this argument. Economic crimefuels terrorism. Money laundering is essential to serious andorganised crime. Revenue fraud... is one of the major threats tothe UK from organised crime. The cost to the UK economy offraud has been put at £l4billion a year, which is the equivalent of£230 for each member of the population. It is not victimless butis indiscriminate, hitting both rich and poor. Fraud may involveno violence… but it can be devastating in its effects.”The Attorney General, the Rt Hon The Lord Goldsmith QC, 7th September 2003

Contents

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Chairman’s Overview: Three Keys to Tackling Fraud

Getting it Right (i): The Fraud Advisory Panel 2003-2004

StructureActivitiesMembershipThe Board

Getting it Right (ii): Case Studies

Strategic Co-ordinationThe ACPO Economic Crime ForumThe National Intellectual Property Crime StrategyThe North-East Fraud Forum

PolicingThe City Police as the Lead Force in the South-EastThe Met’s “Operation Sterling”The Dedicated Cheque and Plastic Card Unit

BusinessCHIP & PINNorwich UnionCIFAS-the UK’s Fraud Prevention Service

Public SectorThe NHS Counter Fraud ServiceThe Audit Commission’s National Fraud InitiativeThe National Audit Office

Fraud and the Nation 2003-2004

Definition, Cost, Impact

Changing the Law:A Single Offence of Fraud at Last?Non-Jury Trials in Serious Fraud CasesThe Data Protection Act 1998

Resourcing Investigations

Business and AccountancyRestoring Professional Scepticism in AuditingCorporate Governance

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Chairman’s Overview

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This year’s Review takes the novel stance ofwelcoming, albeit with a degree of caution, theprogress that is being made in the fight againstfraud. This isn’t because fraud is declining,quite the reverse; but a crucial part of thesolution involves directing attention to notablesuccess and new initiatives. The case studies inthis Review encourage a well-founded hope thatstemming - and reversing – the tide of fraud is a realistic aspiration, not an utopian dream.

The time has come to start dispelling themood of pessimism about fraud. The veryseriousness of the situation is forcing radicalthinking and bolder actions; both police andgovernment are now well aware of the urgentthreat posed by organised crime’s involvementin fraud. Business too is learning lessons, evenif it is usually less willing to talk publiclyabout its efforts. The growth of self help in theprivate sector is a highly positive development- and, in view of limited police resources, a verynecessary one.

There are, broadly speaking, three keys to“getting it right”.

Strategic thinking

Fraud is a national issue and the response to itneeds to be directed at a high level rather thanthrough piecemeal local initiatives. TheAssociation of Chief Police Officers, byexpanding the scope and membership of itsEconomic Crime Forum, is one organisationaddressing a key fraud policing problemidentified by the Panel in our 2001 review, whenwe identified a general lack of “joined upthinking”. Indeed, all the organisationsdiscussed in the following pages are preparedto do the hard work of serious analysis andlong-term planning. All refuse to think solelyin terms of the headlines that derive from‘quick wins’.

Policing partnerships

Closer co-operation between the police andbusiness, notably in the pooling of intelligence,is becoming increasingly common. The NorthEast Fraud Forum is a particularly interestingregional example and, at a national level, so isthe development of a closer relationshipbetween the police and the financial sector.Even the best resourced police service will beunable to cope with all the demands imposedby economic crime; a constructive and openrelationship with business is essential.

Chairman’s Overview:Three Keys to Tackling Fraud

Chairman’s Overview

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Cultural change

Long-term fraud reduction also depends oninforming, training and motivating the widestpossible range of employees. Economic crime istoo widespread to be tackled by only a fewspecialist staff and consultants. The success ofthe NHS and Norwich Union in slashing fraudlosses illustrates the benefits of mobilising theworkforce.

Of course fraud is very far from disappearing;this year has seen many instances in the courtsand the press of new variations on old ways ofcommitting familiar frauds. So our rapture ismodified. Progress has been made but it needsto be consolidated and built on.

The Panel has played a part in creating thischanging climate of opinion, not least inWhitehall and at board level. Given oursustained representations on the subject weare particularly pleased that the new NationalPolicing Plan 2004-2007 treats fraud and moneylaundering as examples of serious andorganised crime, one of the Home Office’s “keypriorities” for national policing. And, aftermany years of our advocating the introductionof a generic offence of fraud the Home Officehas at last consulted on implementation of theLaw Commission’s 2002 proposals. We haveearned a reputation as an authoritative voiceon fraud, indeed as the only body that seeks toaddress the whole issue from an expert andindependent perspective.

The Panel depends almost entirely on itsmembers, all volunteers who give generously of their time and energy. I would like to payparticular tribute to those directors who havestood down over the last year, albeit whileremaining active members. They include GerryAcher, Deputy Chairman since our foundationin 1998; Mike Hoare, another founding Director;and Ruth Eisenberg who served from 2000-2003.Martin Robinson stood down as a Director uponhis appointment as our Adviser on Education,Events and Training in which post he continuesto make an important contribution.

Thanks also to Mia Campbell, our invaluableExecutive, the Panel’s single full-time employee;Peter Alvey who supervises our financial affairs;Bill Cleghorn for his continuing help withspecial projects; Simon Pearce who hasresearched and drafted this Review (his fifth);and Wayne Martin, its designer.

Finally, I wish to express the deepest gratitudeto our members, individual and corporate,whose support makes the Panel viable. Chiefamongst these is the Institute of CharteredAccountants in England & Wales which played avital role in establishing the Panel and remainsits principal supporter.

Rosalind Wright CBSeptember 2004

Getting it Right

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The Panel is a think tank and educator,providing ideas, advice and information to Whitehall, Parliament, business, theprofessions and the general public. Since it was formed in 1998 it has:

Raised the profile of fraud in Whitehall,helping to push the issue to the top of thelegislative agenda.

Developed major proposals for the reform of criminal and company law.

Worked to improve the anti-fraud content of business and professional education and training.

Commissioned new research, notably oncybercrime, SMEs and the extent of fraud.

Raised awareness of fraud and right responsesto the problem through conferences, seminarsand the media.

The Panel operates as a company limited byguarantee; every penny raised is ploughed backinto its activities.

Structure

The Panel is led by a Board of Directors, chairedby Rosalind Wright, Director of the SeriousFraud Office from 1998-2003. A Projects Sub-Committee develops and supervises researchand publications. The Panel is supported by afull-time Executive, Mia Campbell, and anEducation and Training Adviser, MartinRobinson, who identifies fraud training issuesand develops appropriate training packages.

One of the Panel’s principal aims is to ensure across-fertilisation of thought and experiences.To this end much of its work is carried out byfour multi-disciplinary groups.

Investigation, Prosecution and Law Reform:Reviewing the legal process and the law as itrelates to fraud. Chaired by Neil Griffiths.

Cybercrime: Promoting greater understandingof cybercrime and the safeguards against it.Chaired by Steven Philippsohn.

Education, Events & Training: Identifying anddisseminating best practice in fraudprevention, detection and investigation.Chaired by Martin Robinson.

The Anti-Money Laundering Monitoring Group:Studying the implications of the moneylaundering regulations for the reporting,policing and prosecution of fraud. Chaired byMonty Raphael.

Getting it Right (i)The Fraud Advisory Panel 2003-2004

Getting it Right

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Activities

Briefing Business

Two major publications: “Have You BeenScammed? Identifying Internet and e-mailScams” and "Cybercrime and the Proceeds ofCrime Act: A practical guide for business".

Staging seminars on identity and employeefraud, ethics in the workplace and moneylaundering. Speakers included representativesfrom the Home Office, the DTI and theMetropolitan Police as well as the Panel.

Providing training and support to business andeducational bodies. Panel representatives alsospoke at a wide range of conferences and events.

Revising and updating the 2002 publication“Fighting Fraud: A guide for SMEs” whichcontinues to be the Panel’s most frequentlydownloaded document.

Re-formatting the Panel’s public and members’websites (www.fraudadvisorypanel.org) tomake them a ‘one-stop-shop’ for people whowant to know more about fraud, and to serve as a portal to other relevant sites.

Advising Government and the Police

Submitting detailed responses to the HomeOffice’s consultation papers on policing,defeating organised crime and reforming the law of fraud.

Meetings with ministers and officials at the Home Office and Treasury.

Participation in the new Economic CrimeForum set up by the Association of Chief Police Officers.

Research

Commissioning major new research into theimpact of the Data Protection Act 1998 on theinvestigation of private sector fraud. This willinvolve interviews with corporate victims andthose involved in the actual conduct of investi-gations. A full report will be published in 2005.

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Membership

The Panel has 40 corporate, 130 individualmembers and 87 observers (mostly publicsector bodies precluded from taking out formalmembership).

Individual Membership costs £50 a year.Corporate Membership costs £1,000 and allowsup to 20 employees to participate in Panelactivities. All members are required to conformto a Code of Conduct.

Membership offers significant benefits:

Networking and exchange of news andinsights. Members meet a wide range ofexperts from banking and insurance,accountancy, the legal profession, academia,and the IT and security industries.

Involvement in specialist working groups onInvestigation, Prosecution and Law Reform;Education, Events and Training; Cybercrimeand Money Laundering. Working group deliber-ations can be accessed through the member’sonly section of the FAP website.

Speaker meetings. Hear informed, andsometimes alternative, points of view.

Influence public policy via the Panel’sproposals to government.

Address business and the professions throughthe Panel’s seminars and publications.

For further information please contact MiaCampbell at The Fraud Advisory Panel,Chartered Accountants’ Hall, PO Box 433,Moorgate Place, London, EC2P 2BJ; 020 79208721; info@fraudadvisorypanel.org .

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Corporate Members

Argos LtdAssociation of British InsurersAssociation of Certified Fraud ExaminersAssociation of Chartered Certified AccountantsAviva PlcBank of EnglandBDO Stoy Hayward LLPBishop International LtdCadbury Schweppes PlcCapcon PlcChantrey VellacottDFKChartered Institute of ManagementAccountantsCIFAS - the UK's Fraud Prevention ServiceControl Risks GroupDeloitte & Touche LLPDenton Wilde SapteFinance & Leasing AssociationGallaher Group PlcGB Group PlcGrant ThorntonHBOS PlcIIR ConferencesInstitute of Chartered Accountants of ScotlandInstitute of Internal Auditors UK & IrelandInvestigator Training ServicesLaw Society of England & WalesLegal & General Group PlcLloyds TSB Bank PlcMCL Software LtdNHS Counter Fraud & Security ManagementServiceOvag LimitedPricewaterhouseCoopers LLPPrudential PlcRoyal & Sun Alliance PlcRoyal Mail Group PlcThe Accountants' Joint Disciplinary SchemeThe Institute of Chartered Accountants inEngland & WalesThe Law Society of ScotlandUBS AGWestLB AG

Supporters

Organisations making donations above thecorporate subscription:

Argos LtdCanary Wharf Group PlcLloyds TSB Bank PlcRoyal Sun Alliance PlcThe Institute of Chartered Accountants inEngland & Wales

The Board is deeply grateful to all thoseindividuals and organisations whose generoussupport makes the Panel’s work possible.

The Board

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Rosalind Wright CB (Chairman); Director of theSerious Fraud Office 1997-2003; General Counseland Executive Director in charge of the InvestorProtection Policy and Legal Division at theSecurities and Futures Authority 1987-97; Headof the DPP’s Public Prosecution's FraudInvestigation Group for the City of London andMetropolitan Police areas 1983-1987;Independent Member of the Board of the Officeof Fair Trading; Independent Member of theDepartment of Trade and Industry’s LegalServices and Companies Investigation Branchboards; Vice-Chairman, Jewish Association forBusiness Ethics; Bencher of the Middle Temple.

Gerry Acher CBE LVO FCA (Deputy Chairman);Board member, KPMG and former SeniorPartner of its London office; Deputy Chairmanof London First; member DTI Committee onreporting through the Operating and FinancialReview; former Chairman, DTI Foresight Panelworking party on crime and business; founderChairman of the Audit Faculty of the Instituteof Chartered Accountants in England & Wales1996-2001. Retired from the FAP Board 4thMarch 2004.

Felicity Banks MSc FCA; Head of Business Lawat the Institute of Chartered Accountants inEngland & Wales; represents the ICAEW oneconomic crime issues; represents theaccounting profession on HM Treasury’sMoney Laundering Advisory Committee.

Ruth Eisenberg BSC FCA; former Director,Special Projects at the Institute of CharteredAccountants in England & Wales. Retired fromthe FAP Board 4th September 2003.

Neil Griffiths (Chairman, Investigation,Prosecution and Law Reform Working Group);a partner in the Insolvency Group at DentonWilde Sapte; Vice-Chairman of the CreditorsRights Committee of the International BarAssociation.

Mike Hoare MBE; Hon. Chairman of the Risk and Security Management Forum having beenChairman from 1990-2002; former MetropolitanPolice Commander and Director of theInvestigation Department of the Post Office;former Chairman of the Panel’s Research,Information and Intelligence Working Group.Retired from the FAP Board 27th November 2003.

The Board

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Will Kenyon; partner inPricewaterhouseCoopers’ Forensic Servicesgroup; founding head of ForensicInvestigations, PricewaterhouseCoopersGmbH, Germany 1998-2001; involved in investi-gations and recovery actions for some of themost significant fraud cases of the last decade.

James Perry; a Director of InternationalCompliance Services Limited; former DetectiveChief Superintendent with the MetropolitanPolice and Commander in Charge of itsEconomic and Specialist Crime Unit; formerChair of the Association of Chief Police Officers'National Financial Investigation WorkingGroup; represented the police service in theofficial studies which led to the Proceeds ofCrime Act 2002 and Money LaunderingRegulations 2003.

Alex Plavsic; Head of Financial and FraudInvestigation at KPMG Forensic; conductedindependent reviews for regulators andgovernment departments; investigated serious fraud cases including Polly Peck and Group Torras.

Steven Philippsohn (Chairman, CybercrimeWorking Group); founder and Senior Partner,Philippsohn Crawfords Berwald; Co-Editor ofthe UK Manual of the Association of CertifiedFraud Examiners; member of the editorialboards of “E-Commerce Law & Policy” and“Inside Fraud Bulletin”.

Monty Raphael (Chairman, Anti-MoneyLaundering Monitoring Group); Senior Partner,Peters & Peters; conducted fraud enquiries forregulators, Inland Revenue and HM Customs &Excise; Visiting Professor in Law at KingstonUniversity; former President, London CriminalCourts Solicitors Association; founder of theBusiness Crime Committee of the InternationalBar Association and Chair of its Anti-Corruption Working Group.

Martin Robinson FCIS, FIIA (Chairman,Education, √Events and Training WorkingGroup); Training Development Adviser to theInstitute of Internal Auditors UK and Ireland;Audit Adviser to the Institute of CharteredSecretaries and Administrators. Retired fromthe FAP Board 2nd September 2004 upon hisappointment as the Panel’s Adviser onEducation, Events and Training.

Getting it Right

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The Panel has long argued for fundamentalchanges in the way the public and privatesectors attack fraud. These include:

Systematic analysis of the extent and causes of fraud.

∑A strategic and co-ordinated national approach.

∑Grass-roots business educational campaigns.

∑Creating additional and dedicated policeresources.

∑Cultural change within organisations involvingevery employee.

The case studies which follow show these ideas in action.

Strategic Co-ordination

The ACPO Economic Crime Forum: Getting anOverview

The Home Office acknowledges that it has nointegrated strategy to fight fraud againstbusiness. Though it is committed todiscussions with industry an important stephas already been taken by the Association ofChief Police Officers (ACPO).

Chaired by Dr James Hart, Commissioner ofPolice for the City of London, the Associationhas broadened its Economic Crime Forum toinclude representatives from business. “Therewas no scope for input from the consumers ofpolicing” says Commissioner Hart. “Good anti-fraud policing is hard without good feedbackand that demands a positive effort to obtain it”.

In early 2003 ACPO asked business associations,major financial institutions, regulators,government departments and the FraudAdvisory Panel to send representatives to theForum. The first step has been to identify areaswhere common practises and procedures couldbe created and this has resulted in a number of practical changes. The Commissioner notesthat “People naturally look at fraud from theirown perspective. For instance, a fraud riskmanager may not see the need for certain types of evidence which the law demands if aconviction is to be secured”. There has alsobeen a strong focus on tackling identity fraudand the growing problem of corrupt orintimidated bank employees working withcriminal gangs.

In the absence of a national commission oneconomic crime (which the Panel called forthree years ago) the Forum is the only publicbody considering fraud at a strategic andmultilateral level. ACPO is already consideringthe advantages of encouraging a number ofregional fora operating along similar lines.

The National Intellectual Property CrimeStrategy: A Holistic Approach to Fraud

Counterfeit goods are a virulent form of fraud,worth at least £9billion a year, deceiving honestcustomers and often cheating those seeking anillegal bargain buy. Some fakes are threats tohealth and safety. Tax and VAT revenue is lostand genuine manufacturers of software, videos,music, clothes, home furnishings andperfumes lose income. Even more alarming isthe advent of medicines, foods, beverages andcar parts which are not only sold under fakelabels but are also produced below safetystandards. Counterfeiting is also seen byorganised crime as an easy way to laundermoney, allowing it to be redirected into othercriminal enterprises.

Getting it Right (ii)Case studies

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The Department of Trade & Industry (DTI),through its executive agency, The Patent Office,has organised an alliance of brand owners, HMCustoms & Excise, police and local governmenttrading standards officers in a holistic nationalstrategy devised to defeat intellectual property(IP) crime. This puts into practice, albeit on asingle issue, the co-ordinated approach forwhich the Panel has argued since 2001 when itpointed out that the range of public bodiesinvolved in combating fraud led to what thePatent Office itself describes as duplicatedeffort, wasted resources and ambiguous signals.

A new annual “National Enforcement Report”will draw together the work carried out by themain participants. Its findings will be fed to aStrategic Tasking and Co-Ordination Groupcharged with setting priorities for preventionand enforcement. The strategy will also involvelegislation, international co-operation,training, and publicity aimed at raising publicawareness, as well as demonstrating thatcounterfeiting is not a ‘victimless crime’.

Another of the Panel’s principal goals has beento ensure that government, police and businessdevelop a clear picture of the nature, volumeand value of fraud. The Patent Officeacknowledges that “producing and sharingexpert information is essential in drivingstrategic and operational decisions”. TheNational Criminal Intelligence Service (NCIS) isworking with the Patent Office to produce ananalytical model which will informenforcement targeting.

The North-East Fraud Forum: Mobilising theGrass Roots

Law enforcement and business need closerregional and local, as well as nationalrelationships. Northumbria Police hasrecognised this, creating the North-East FraudForum (NEFF) in early 2003. DetectiveInspector Phil Butler, head of its EconomicCrime Unit and Forum Chairman says that hisforce was committed “to developing aninitiative to bring the public and privatesectors together, to promote a strong anti-fraud culture in the region.”

Working with the support of some local firms,Cleveland and Durham police and theGovernment Office for the North-East theForum held an inaugural conference atNewcastle-upon-Tyne in March 2003 attendedby 400 representatives. NEFF aims to:

∑Provide training. More than 1,000 representatives from 200 organisations have attended “fraud master classes” andother events.

Share intelligence and disseminateinnovative ideas from both the public andprivate sectors.

End the sense of embarrassment andisolation which makes some businessesreluctant to report fraud.

Promote partnership and develop acommon vision. “Our ultimate aim is for all of us within the public and privatesectors to adopt a single common sensefraud reduction strategy" says DI Butler.

In April 2004 a NEFF team gave a presentationin Vienna to the United Nations Commissionon International Trade (UNCITRAL) colloquiumon commercial fraud. UNCITRAL has used NEFFas the model for its new International FraudForum and has announced its intention ofcreating regional fora too.

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Policing

The City Police as the Lead Force in the South-East: Resourcing the Investigators

The Panel has often pointed to the decliningnumbers of fraud squad officers across Englandand Wales and the loss of experienced officersto other duties. A new initiative may signal abreak in this trend as well as giving countyforces access to additional specialist fraudinvestigators in serious cases.

The City of London Economic CrimeDepartment was designated “Lead Force” forfraud investigations in the 14 counties ofsouth-east England (including East Anglia) in April 2003. Jointly funded to the tune of £1million each by the Home Office and theCorporation of London the Force has recruitedan additional 24 trained investigators. TheGovernment has already indicated interest in creating similar units as regional foci forintelligence and expertise.

The Lead Force will serve as an investigatoryarm of the Serious Fraud Office (SFO) in about50 cases a year. Detective Chief SuperintendentKen Farrow says that his team will alsoinvestigate its own cases; some of these will be major cases which fall below the SFOacceptance criteria.

DCS Farrow points to three major advantagesof the Lead Force model:

∑75 investigators in six teams allows a heavyconcentration of resources in the crucialearly stages of complex investigations.

Officers wishing to specialise in fraud andfinancial investigation work now have theprospect of a lateral or upward career pathwithin the Economic Crime Department.This in turn deepens and widens the Force'spool of knowledge and contacts. This is inmarked contrast with many provincial forceswhich have suffered heavy losses of skilledfraud squad officers in recent years.

The Economic Crime Department isoverseen by a Detective ChiefSuperintendent who has direct access to the Commissioner on financial crime issues. Provincial fraud squads are usuallymanaged by Detective Inspectors who may also have other responsibilities.

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The Met’s “Operation Sterling”:Intelligence-led Policing

“Sterling” is a Metropolitan Police operationfocusing on serious and organised economiccrime in Greater London. An intelligence cellhas been created to identify trends in both the private and public sectors, key suspects and sectoral and geographic “hotspots”.Investigatory resources can then be directed at strategic problems on the basis of detailed analysis.

This intelligence-led approach has beensuccessful in other drives such as OperationTrident (black-on-black gun crime), andOperation Bumblebee (burglary). Stopping the growth of organised criminal activity is a priority; gangs have moved into economiccrime in a way almost unknown 20 years ago.Detailed analysis of London-wide patterns hasnational implications and information andanalysis is already being forwarded to regionalpolice forces.

Operation Sterling also involves the Police asleader and co-ordinator of joint public-privatesector projects. Fraud by bank employees,leading to theft of customer data as well asfunds, is one key area of study. The Met’s teamis working with the banks to strengthen theirown anti-fraud operations via better vetting ofnew employees, improving staff awareness and training and also ensuring that evidencecollected by internal investigators can be usedin criminal prosecutions. Though only publicauthorities are obliged to collect evidence inaccordance with the Police and CriminalEvidence Act (PACE) and the Regulation ofInvestigatory Powers Act (RIPA) businessesmust take both into account when gatheringmaterial that will later form part of aprosecution case.

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The Dedicated Cheque and Plastic Crime Unit(DCPCU): Police-Business Collaboration

The DCPCU is a joint operation between theAssociation for Payment Clearing Services(APACS - which represents the major Britishbanks and building societies on non-competitive payment issues), the Home Office,and the Metropolitan and City of London police.Losses from plastic card crime more than tripledfrom £135 million in 1998 to £424.6 million in2002. Yet this area of crime has seen a consid-erable decline in dedicated police resources;most forces no longer have a ‘cheque squad’.

DCPCU was launched in April 2002 with a remitto investigate these crimes in the GreaterLondon area. The banks supply intelligence andadministrative support; two-thirds of policestaffing is seconded from City of London Police,the rest from the Metropolitan force. Thisunique partnership was made possible by 75%APACS and 25% Home Office funding (thoughAPACS now bears the whole cost of the Unit).

In its first two years of operation to April 2004 DCPCU made 171 arrests resulting inconvictions, recovered over 36,000 stolen cardsand identities and saved £65 million. Theconviction figures underplay the overall impactof operations as the Unit has concentrated onbreaking up and disrupting gangs rather thantargeting petty criminals. Organised crime isresponsible for the lion’s share of British cardfraud and often operates via technically sophis-ticated factory operations. The Unit is nowreceiving funding from APACS which will allowit to expand its operations.

Business

CHIP & PIN: Direct Action for the Consumer

Card payments are set to overtake cash as thecountry’s most popular method of payment.In 2003 the value of cash payments onlyexceeded those made in card transactions by £268 billion to £244 billion. A recentPricewaterhouseCoopers survey found that 49%of the public have either been a victim of creditcard fraud, or know someone who has sufferedthe same fate.

The retail and banking industries are fightingfraud through the CHIP & PIN scheme. Thereare two elements involved in making a plasticcard transaction secure. The first is ensuringthat the card is genuine; the second isestablishing that the person presenting thecard is its true owner. The electronic chipembedded in the card ensures the former andthe owners’ unique Personal IdentificationNumber (PIN) facilitates identification. Thescheme’s promoters predict that it will morethan halve predicted UK fraud losses. A similarsystem for debit cards has largely contributedto an 80% reduction in French card fraud overthe last decade.

CHIP and PIN was tested in a three month trialin Northampton in 2003 and is currently beingextended across the nation. The programmeinvolves 42 million cardholders, 122 millionnew cards and 40,000 cash machine upgrades.

It is recognised that criminals will seek todivert their efforts to “card not present”telephone and Internet transactions. Plans aretherefore being developed to verify cardholder’saddresses and to cross check card security codes.

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Norwich Union: Knowledge the Basis of Success

Successive reports from the Fraud AdvisoryPanel have highlighted uncertainty about theextent, incidence and value of fraud. This lackof visibility has tended to marginalise itsimportance in the minds of senior managersand unintentionally ensures its growth.Norwich Union, the UK's largest insurer, hasadopted a highly systematic risk-basedapproach. The Company’s fraud savings haverisen from £46 million in 2002 to £71 millionlast year, with £51m delivered in the first 6months of 2004. Continuing growth isanticipated. £10 is saved for every £1 spent.

Reliable performance ManagementInformation (MI) and detached analysis comefirst and this requires patience as there are noearly economic benefits. Yet reliable and fullycredible data is an essential prerequisite for anyaccurate cost benefit analysis.

Next comes the optimisation of fraud detectionby staff dealing with customers. To be effective,fraud detection should be part of every dayclaims handling and this requires a sustainedeffort to secure staff commitment andenthusiasm. Relatively simple procedures help.For instance, claims handlers have historicallyused an unwieldy list of over 80 fraudindicators. This has been refined down to ahard core of 15 key indicators delivering 95% ofhistoric fraud savings values while reducing‘false positives’ by approximately 50%. This isfreeing claims handlers to focus on genuinelysuspect claims while simultaneously reducingdelays to genuine customers.

Continuing emphasis has also been laid onraising staff awareness. Specialised training iskey. Full time anti-fraud “champions” in everybranch deliver localised training, whilereporting back on staff ideas and practicalproblems. Norwich Union’s Head of Fraud ChrisHill notes that “Our central fraud team has only17 staff. Harnessing the skills and enthusiasmof our 3,000 plus claims handlers has beencentral to our success.”

CIFAS-the UK’s Fraud Prevention Service:Self-Help in Action

CIFAS is a not-for profit company whichenables its members to pool information onconsumer credit fraud. Member organisationsexchange details of credit applications whichfail verification checks. Member’s assessmentsof the savings they have made have grownfrom £10.5 million in 1990, to £487 million in2003 and a projected £650 million in 2004.

CIFAS was established in 1988 when a numberof retailers responded to police advice thatconsumer credit fraud was a non-competitiveissue and that co-operation and communicationbetween lenders was necessary. It has sinceexpanded to include companies operating inthe telecommunications, factoring, insurance,utility, share dealing and commercial creditindustries. It works closely with the police andthe National Consumers' Council (which alsonominates a representative to the Board).Both the Office of Fair Trading and theInformation Commissioner have been regularlyconsulted since the outset and there are closeworking relationships with many public sectororganisations.

Any member placing a warning on the CIFASdatabase must have sufficient evidence tojustify reporting the matter to the police(although it is not obliged to make a report in every case). Members must also be able todemonstrate they have either suffered, orwould have suffered, a financial loss. FormerInformation Commissioner Elizabeth Francehas said that “CIFAS has provided an earlyblueprint for the way the balance can be struckbetween the need to share information toprevent fraud, and protecting the privacy of the law abiding citizen”.

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Public Sector

The NHS Counter Fraud Service: Towards anAnti-Fraud Culture

The NHS Counter Fraud Service (NHS CFS) isdedicated to the development of a pervasiveanti-fraud culture within Britain’s biggestpublic sector organisation. More than 460professionally trained and accredited CounterFraud Specialists have been put into place across the NHS.

Figures released in April 2004 showed that£478 million had been saved since 1998,enough to pay for 60,000 kidney transplantoperations or 100,000 hip replacements - a 13:1 return on the Government’s budgetaryinvestment. Losses to pharmaceutical, dentaland optical patient fraud fell by 59.8%, 25.6%and 23.2% respectively. Overall losses frompatient fraud have been cut by 48.9%. In someareas, claims by NHS professionals have fallenby 31-46%. There have been 216 convictions (a97% success rate) and 275 successful civil anddisciplinary cases.

The CFS has made particular efforts to raiseNHS staff awareness, increase their knowledgeand secure their commitment. Over 1,100 FraudAwareness Presentations have been delivered tokey staff throughout the NHS and October 2003saw the first ever Fraud Awareness Month, with140 events being held in hospitals throughoutEngland and Wales. Publicity about the strongprocesses which now exist within the NHS toprevent, detect and investigate fraud has alsohelped build a deterrent effect. A recent internalsurvey showed that 74% of participantsrecognised that countering fraud was theirindividual responsibility, up from 34% in 2000.

Accountability has been strengthened bytailored training for key staff such as directorsof finance. This has been coupled with newcontracts of employment setting out anti-fraudresponsibilities for senior employees.

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The Audit Commission’s National FraudInitiative: The Benefits of Data Mining

Public bodies have huge databases; matchingthe information held on different systems is acrucial tool in detecting, and therefore deterring,fraud. The Audit Commission’s National FraudInitiative (NFI) involves 1,150 local councils, theNHS and central government in the analysis ofover 14 million data records. Data matchingidentifies potential inaccuracies and instanceswhere fraud may be occurring, for example,an individual claiming Housing Benefit whilstreceiving a salary or pension which precludes a claim. The Audit Commission returns thesematches to participating bodies for investi-gation together with guidance on action to take.

NFI matches resulted in the detection of over£83 million of fraud and overpayments in 2002-2003, up from £50 million in NFI 2000-2001 – a 66% increase. Total savings to date exceed £190million. The major areas of fraud detected todate are housing benefits, council tenancies andoccupational pensions. Record levels of fraudand overpayments were detected for the latter,with more than 2,000 incidences of an occupa-tional pension continuing to be paid after thedeath of the pensioner. Over 100 public sectoremployees resigned or were dismissed as aresult of frauds revealed by NFI 2002-2003.

A number of new data matching partnershipsand techniques are planned in order to addressissues such as corrupt tendering, abuse ofparking permits and payment to residentialhomes for deceased residents. As theCommission points out, data matchingdemonstrates “the importance of joined-upgovernment to protect the public purse.”

Getting it Right

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The National Audit Office: Raising Awareness of External Fraud

The National Audit Office (NAO) has made aparticular drive this year to tackle the threat ofexternal fraud in the public sector. In a newguide, “Good Practice in Tackling ExternalFraud”, to which the Panel contributed, the NAOhighlights ways in which different governmentorganisations are working to combat and detectfraud by outsiders against public funds. Thedocument gives examples of actual frauds;contains checklists to help managers assesstheir current anti-fraud practices; and givesadvice on identifying fraud risks.

Among the many examples of good practicehighlighted in the guide is HM Customs &Excise’s publicity campaign on tobaccosmuggling, designed to inform the public,would-be smugglers and key trade groups of what the law is and to help persuade them to comply with it. Evaluation of the campaignhas shown consistently high levels ofawareness and support for Customs’ messagesamong the targeted trade groups, andincreasing public awareness of the link betweensmuggling and organised crime, together withthe penalties that can be imposed.

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Definition, Cost, Impact

Fraud can cover activities as diverse as stealingcompany assets; financial manipulation andfalse accounting; obtaining goods and moneyby deception; impersonating an individual or a company to obtain credit or goods;or conspiracy to do all these things.

The overall cost of fraud, including remedialaction, was estimated in 2000 at £13.8 billion by National Economic Research Associates for the Home Office, around £230 per head of theUK population. These figures take no accountof undetected fraud. And fraud is growing fast;it cost £1 billion in 1985 and £4 billion in 1994.Drug-related crime is estimated to be worth£6.6 billion and vehicle thefts £900 million.

Recorded fraud and forgery offences grewfrom 174,742 to 317,900 between 1991 and 2003-2004. It is generally accepted that the HomeOffice crime counting rules are not accuratelyand consistently applied to fraud offences,and that as a result there is significant underrecording. For instance, the Financial ServicesAuthority (FSA), notes that even existing data“suggests the incidence of fraud in thefinancial sector is significant and rising”.As the FSA points out, the lack of officialstatistics on the true scale of fraud means that the issue is politically marginalized.

A more comprehensive picture of the damagedone by fraud must be assembled from variouspieces of evidence.

Major financial fraud has brought downlarge companies (BCCI, Maxwell, Baringsand many others), resulting in heavy joblosses and a “ripple effect” of economicsuffering for smaller customers, investorsand suppliers. A PricewaterhouseCooperssurvey in 2003 found that 51% of Britishbusinesses have been victims of fraud in the last two years. 16 investors took theirown lives in the aftermath of the BarlowClowes fraud.

HM Customs & Excise reports that VAT fraudand error cost the British taxpayer approxi-mately £11.9 billion in 2002-2003 - up 12%from £10.6 billion lost in the previous year.

The Association of British Insurersestimated in 1998 that 3.7% of all premiumscharged were directly attributable to fraudlosses. In April 2003 it calculated thatfraudulent motor and household claimsalone amounted to £20 million per week.

The Home Office reported in its 2002 consultation paper on identity fraud that itcan take victims up to 300 hours to rebuildtheir credit history. A Cabinet Office reportin 2002 suggested that £1.3 billion a year isthe minimum quantifiable cost to theeconomy arising from identity fraud.

Fraud feeds organised crime. NCIS hasreported that gangs derive as much moneyfrom financial crime as from drug trafficking.

Fraud can fund terrorist groups. Theinvolvement of republican and loyalistparamilitaries in Northern Ireland is well known. Two Algerians were convictedin 2003 under the Terrorism Act 2000 for credit card fraud on behalf of the Al Qaeda network.

Fraud and the Nation 2003-2004

Fraud and the Nation 2003-2004

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Changing the Law

A Single Offence of Fraud at Last?

The current law on fraud is mainly contained ineight statutory deception offences in the TheftActs 1968-1996, the companies act offence offraudulent trading and the common law offenceof conspiracy to defraud. These fail to cover theinfinite variety of fraudulent behaviour. Theappropriate offence in a particular case is notalways readily apparent; sometimes the facts of an undeniably dishonest transaction cannotbe encompassed by the wording of any existinglaw. As a result defendants have successfullyargued that their deceptive behaviour did notfit the definition of the offence with which they had been charged. It is unrealistic to addyet more specific offences; not only doespiecemeal reform generate further complexities,it also condemns the law to lag behind theingenuity of fraudsters as well asdevelopments in technology.

The Government’s June 2004 consultationpaper (building on some of the recommen-dations in the Law Commission’s Paper 276),proposed replacing this position with a generaloffence of fraud which could be committed inthree ways: false representation; wrongfullyfailing to disclose information; and abuse of

office. Behaviour in each case would have to bedishonest and aimed at securing a gain for thedefendant, or a loss for another person. A gainwould not have to be realised, as is the caseunder existing law, for an offence to occur.Current offences of deception would be repealed.

The Panel has welcomed the Government’sproposals; it makes sense to focus onmalevolent intention and the dishonestcharacter of the conduct in question. It has also urged the Government to consider thefollowing arguments:

A person should be guilty of fraud not onlywhen he knows a representation to be falseor misleading, but also when he is awarethat it might be false or misleading.

∑Abolishing the offence of conspiracy todefraud will severely restrict the ability toprosecute the largest and most seriousfraud cases. The current offence can beadopted by the courts to fit new situations,a considerable advantage given the rapiddevelopment of new financial instrumentsand technology.

Fraud and the Nation 2003-2004

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Non-Jury Trials in Serious Fraud Cases

Courts in serious fraud cases tend not toconsider all, or anything like, the total evidenceof dishonesty because the prosecution is oftenreluctant to burden jurors with large amountsof highly complex material. Lengthy andrepetitious explanations, cross-examinationand speeches are also introduced to ‘help’jurors. Moreover juries are effectively restrictedto those who can afford to devote six monthsor more to such cases.

Part 7 of The Criminal Justice Act 2003 providesthat cases of unusual length and/or complexitymay be tried by a judge alone if the interests ofjustice so require. Section 43 of the Act wouldenable both prosecution and defence to makeapplications to the trial judge for the case to beheard without a jury. As a result of the intensecontroversy surrounding the limitation of trialby jury the Government has agreed not toimplement these measures except by positiveresolution of both Houses of Parliament.Ministers are looking again at the possibility of special juries or panels of assessors.

Whatever the final outcome the Panel has longargued for methods which would ensureswifter trials in major criminal cases:

Judges must be given thorough training intrial management techniques.

∑More intensive efforts must be made beforea trial starts to bring prosecution and defenceto agreement on undisputed issues whichneed never be brought before the court.

∑More robust and consistent efforts must be made to improve the way evidence ispresented, for instance by better and greateruse of visual presentations.

The Data Protection Act 1998

The recent White Paper on organised crimeproposes increased private sector involvementin police intelligence-gathering. The Panel isconcerned that this fails to consider a gap inexisting law. Whilst the Data Protection Act1998 gives exemptions to law enforcementagencies, the same privileges have not beenextended to investigators working in theprivate sector, making it increasingly difficultfor the two sides to work together as they didbefore the Act came into force.

The Panel has commissioned a research project to establish the full extent of theproblem and to examine whether there is acase for creating exemptions for private sectorinvestigators which would allow more effectiveand clearly legal retention, sharing andgeneration of information. A full report will be published in 2005.

Fraud and the Nation 2003-2004

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Resourcing Investigations

The Government has a solid record ofachievement in fighting economic crime.Recent developments include the Home Office’srecognition of fraud and money laundering asexamples of serious and organised crime; andproposals to create a Serious Organised CrimeAgency (SOCA) by 2006, incorporating NCIS, theNational Crime Squad and elements of HMCustoms & Excise.

Yet the Attorney General, Lord Goldsmith,acknowledged last year that “large amounts offraud are going uninvestigated”. The Director ofthe Serious Fraud Office has said the same ofmany cases which would previously have beentaken on by local forces. The Commissioner ofPolice for the City of London and Chairman ofACPO’s Economic Crime Forum recently notedthat “Police forces have been distancingthemselves from fraud investigations for years”.

The Panel believes that the value of theGovernment’s many anti-fraud initiatives arediminished by this long-standing weakness in law enforcement. As both the legislativearmoury and institutional structure of policingare brought up to date attention must shift tothe human resources required to maximise theimpact of the Government’s reforms. A focuson more high-profile kinds of organised crimemay also lead to equally damaging commercialand financial fraud receiving insufficient police attention.

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The number of officers tasked to fraud squadshas declined steeply since the mid-1990s.There were 869 mainstream fraud investigatorsin 1995 and around 600 today. Supervisingofficers normally have other, non-fraud related,responsibilities and all officers are liable to be,and often are, called away to other duties.Skills are being lost to law enforcement asfraud squads are reduced in size and officersleave the Force altogether, disillusioned withthe outcomes of successive policing cutbacks in their specialist areas.

The creation of the Serious and OrganisedCrime Agency (SOCA) may aggravate theproblem rather than relieve it. SOCA’s diversefunctions - intelligence gathering and sharing,investigation and prosecution – will imposestark limits on its operations. This, plus,the inherent difficulties in creating a neworganisation, may serve to reduce rather thanimprove current levels of effectiveness in lawenforcement.

Particular attention must be paid to funding therecruitment, training and retention of specialistprosecutors and investigators, the need forwhich is growing fast in county forces as moneylaundering and confiscation legislation becomesmore widely used. Where will SOCA find suchstaff? If the intention is to recruit them from theranks of existing agencies such as the SFO orCrown Prosecution Service these already hardpressed bodies will be further depleted. Trainingprosecutors to do this specialised work willinevitably take time and distract trainers fromtheir other duties. As an intermediate measurethe Panel has recommended that SOCA consultwith the SFO before setting up new teams ofspecialist prosecutors. It should be open to the SFO to take over the prosecution of casesmeeting its normal criteria, so avoidingduplication of effort and unnecessarydeployment of scarce resources.

Fraud and the Nation 2003-2004

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Business and Accountancy

Restoring Professional Scepticism in Auditing

The Panel has called for some time for a returnto a proper “professional scepticism” inauditing, recognising that it can be a powerfulmeans of fraud detection and prevention. Thereare two essential elements to this; standardsetting plus changes in the procedures andculture of auditing firms themselves.

The post-Enron period has seen standardsetters place a growing emphasis on thedetection of material fraud. The InternationalAuditing and Assurance Standards Board(IAASB) has recently introduced new measuresin the critical areas of audit risk, fraud, andquality control. The most notable isInternational Standard of Auditing (ISA) 240,“The Auditor’s Responsibility to ConsiderFraud in an Audit of Financial Statements”which goes into far more detail than its Britishpredecessors in describing the necessary levelof professional engagement. The UK AuditPractice Board sees ISA 240 as a significantstrengthening of British standards and is in theprocess of implementing it. Britain, in commonwith other members of the EU, has pledged toadopt international auditing and accountingstandards by 2005.

ISA 240 requires auditors to obtain anunderstanding of a client’s organisation and its environment, including internal controls.Detailed risk assessment procedures are laiddown with a requirement for the audit team to discuss “the susceptibility of the entity’sfinancial statements to material mis-statement”.They must consider “the attitudes, awarenessand actions” of senior executives, the prevailingethical culture and tone as well as systems andstructures. Auditors must make “those chargedwith governance” aware of material weaknessesin the design or implementation of controls.

The IAASB has also issued a revised standard220 on “Quality Control for Audit Engagements”.Audit firms will need to promote an internalculture that values professional independenceand scepticism, supported by training,documented procedures and polices. Ultimateresponsibility for this will rest with the firm’ssenior partner.

The Institute of Chartered Accountants inEngland and Wales (ICAEW) has built on theseinitiatives by publishing “Fraud: Meeting theChallenge through External Audit”. This tenpoint action plan focuses on the cultivation ofa culture of professional rigour, scepticism andjudgement originating from the highest levelsof a firm, especially when a client is deemed to be at risk from fraud. Auditors are alsoenjoined to prepare a specific and separateassessment of fraud risk, to tailor auditprocedures accordingly and remember thatmanagement fraud (including so-called“aggressive earnings management”) is mostlikely to result in material misstatement ratherthan outright theft.

Corporate Governance

The Panel expressed disappointment whenneither the Smith or Higgs reports placedserious emphasis on the problem of corporatefraud. Two welcome opportunities toreconsider the issue have now arisen:

The Financial Reporting Council’s (FRC) firstregular review of the Combined Code onCorporate Governance. The revised Code was published in July 2003, and applies forreporting years beginning on or afterNovember 2003.

The FRC’s review of the Turnbull guidanceon internal control and risk management(first published in 1999). Any revisedguidance to directors will apply toaccounting periods commencing on or after 1st January 2006.

The Panel’s submission to Higgs argued thatnon-executive directors should have an explicitrole in assessing whether fraud risks have beenproperly identified, and whether adequatepreventive measures are in place.This means that:

Non-executives must be satisfied that the company has clear and properlycommunicated anti-fraud policies.

All directors (and non-executive directors inparticular) must be assured that the companyhas conducted a proper risk assessment andhas installed adequate risk managementand internal control procedures.

Non-executives must ascertain that staff can report suspicions of fraud to managersuntainted by those suspicions; that theywill receive reports of material problems;and that appropriate actions will be taken.

All non-executives must undergoappropriate training and the entire Boardmust submit to the procedures it imposeson employees.

Listed companies should be required toreport material matters involving director,or senior management, malpractice to the shareholders. A more open approachshould be seen as enhancing a company’sreputation rather than diminishing it.

The Panel would also like the Combined Code on Corporate Governance to oblige listedcompanies to report to shareholders on anti-fraud policies and programmes.

For more information please contact:

The Fraud Advisory PanelChartered Accountants’ HallPO Box 433, Moorgate PlaceLondon EC2P 2BJTel: 020 7920 8721Fax: 020 7920 8536Email: info@fraudadvisorypanel.org

Or visit:www.fraudadvisorypanel.org