'Reputational damage' fears discouraging corporate fraud investigations, expert warns

Out-Law News | 17 Feb 2016 | 4:13 pm | 3 min. read

Corporate victims of fraud will send a "convincing message about their values" to investors and customers if they set aside their fears of reputational damage in order to publicly investigate and deal with the discovery, an expert has said.

Alan Sheeley, a civil fraud and asset recovery expert at Pinsent Masons, the law firm behind Out-Law.com, was commenting on the reported doubling of high-value frauds during 2015, as reflected in accountancy firm BDO's latest 'FraudTrack' report. The total value of reported fraud over £50,000 more than doubled to £1.5 billion in 2015 according to the figures, and Sheeley said that this was likely to be "just the tip of the iceberg".

"Figures identifying both the total value of fraud and the average value of fraud more than doubling are not surprising in today's economic climate, but these figures have been obtained from publicly available sources," he said. "In my experience, there are always more frauds which have not been disclosed or reported to the authorities and many more which are ongoing and have not yet been uncovered. Even Adrian Leppard, the previous Commissioner of the City of London Police, stated in October 2015 that '[w]e receive about 250,000 reports of crime every year but we think that the true level is at least 12 times that'."

"Having the spotlight on an organisation's failures which gave rise to the fraud will not be something any management group will want to draw attention to. However, in my experience, an organisation which seeks to recover its losses from the fraudster and remedies any shortcomings in its systems which gave rise to the fraud will send the right message to all stakeholders. A positive reaction to a fraud related crisis will inspire confidence in the management of the organisation and ensure a positive working environment for all employees; as well as making it clear to all that the organisation does not tolerate fraud and will take active steps to defend itself and protect its position," he said.

BDO's report was based on publicly reported fraud cases over £50,000 in value, which occurred between 1 December 2014 and 30 November 2015. As well as reporting a 110% increase in the overall value of reported fraud, BDO also found that the average value per fraud had increased to £2.9 million, driven in part by some cases worth over £250m reaching court. The total number of reported cases actually fell last year, by 5.2% to 519, according to the report.

Although financial services businesses continued to attract the highest level of reported fraud in 2015, this was driven by a small number of very high value cases and the overall number of cases fell by more than 40%, according to the report. Third party fraud involving financial services firms increased by £197m; with the combined £210m of reported third party fraud cases including a fake invoices case, an investor con and a £142m case where six businessmen were charged with conspiracy to commit fraud on broadband installation contracts against financial institutions.

Report author Kaley Crossthwaite said that stripping the small number of high value financial services fraud cases out of the report's findings would have shown an "apparent fall in volume and value year on year". However, echoing Sheeley's comments, she added that the reported figures did not show "the full picture".

"Increasingly we are seeing high value complex fraud being dealt with outside of the judicial system as companies prefer to deal with these situations behind closed doors to avoid the reputational damage to their businesses," she said. "Our experience would suggest that both volume and value in real terms continue to rise despite efforts by companies in the sector to strengthen their processes."

The same reasoning could be applied to the low number of reported cases involving retailers, who were often reluctant to report fraud due to "the reputational damage and potentially a further loss of profits as customers lose trust and security in the retailer who holds their personal data", she said.

Sheeley said that businesses and individuals operating in the sectors most susceptible to fraud should take "immediate action to reverse this worrying trend", and to protect themselves from falling victim to fraudsters.

"I am a huge advocate for businesses and indeed individuals undertaking risk assessments to identify areas of potential vulnerability in order to implement procedures and safeguards which could prevent systems being compromised," he said.

"Ensuring policies are fit for purpose, and subsequently reviewing and testing those safeguards, will increase an organisation's or individual's ability to avoid falling victim to a fraud. The policies should be aimed at preventing, detecting and reacting to a fraud and should be implemented without delay. Taking the time to implement proper procedures will reap huge dividends at a later date," he said.