Fraud In The Economic Downturn

Malcolm Gardner Counter-Fraud Group

Benefit Fraud in the Economic Downturn

An Equal Opportunities Crime  The Rich  Very few fortunes are made without some

sharp practice at the very least and outright thievery at the very most  Nobody likes to pay tax

 Professionals and Managerial  The Audit Commission identified this as the

highest risk in any organisation  Local Government managers accounted for 20% of internal fraud incidents That resulted in 80% of the value of the loss

 Most likely to fiddle their expenses

An Equal Opportunities Crime  “Blue

Collar” or “The Workers”

 Often see theft or minor fraud as a

“perk”  Stealing from stores  The

Unemployed and the disenfranchised  When you have little or nothing...

An Equal Opportunities Crime  In

some cases it can be a culture, especially where sharp practice and fraud become separated by only an ethical point of view  Ford Employees in the 1970s  Doncaster Council in the 2000s  Hedge funds, Sub-Prime Mortgages  House of Commons 2009 Mid 1990s Late 1960s...

Fraud  Fraud,

like other crime, can best be explained by three factors:  a supply of motivated offenders  the availability of suitable targets  and the absence of capable guardians control systems or verification (Cohen & Felson 1979)

Psychology of Fraud  At

first glance, a psychological explanation for fraud would appear simple—greed and dishonesty.  Such an explanation is, however, overly

simplistic.

 There

are those in society who are aggressively acquisitive but are generally law abiding  However, there are those in society who are generally law abiding who become aggressively acquisitive when opportunity and need present

Psychology of Fraud  As

the Sociologist and criminologist Gwynne Nettler observed in 1974:  The intensity of desire and the perception of opportunity are personality variables  The balance between desire and

opportunity moves. Temptation to steal, fluctuates with individual temperament and situation

 Motivation

is therefore a combination of an individual’s personality and the

Psychology of Fraud  What

we have discovered since the 1970s – although we probably always knew it – was that the risk of getting caught was a missing variable as was the perception of whether the theft is wrong  “Perceived risk of detection is much more important than the fear of penalties in deterring crime”.  Social Security Research Report 64 (1997)

 The

general public see benefit fraud and tax evasion as much less serious than crimes against the person or

Psychology of Fraud The risk of fraud at any point of entry in to a system can be expressed as r=(o*m)/(c*e)  Where r=risk of fraud, o=opportunity, m=

motivation (need or desire), c=likelihood of being caught, e=ethical standpoint on the crime

Punishment does not come into the equation it is not considered  Especially if being caught does not result in any

punishment

In terms of potential loss to a company you could express it as: r=p*((o*m)/(c*e)) where p = number people (customers, staff or users) There is another equation to be developed around successful fraud as opposed to the risk of fraud

Increased Risk during Increased Risk during an economic downturn an economic downturn

Opportunity 

Figures for the last quarter show an increase in the number of businesses going into administration 24.2%    



North East 57% Retail 23.9% Construction 32.4% Rochdale deprivation forecast an additional 21,000 JSA claimants by the end of 2010 – 10% of the borough’s whole population

This equates into opportunity for the fraudster through cutting back or cutting corners for example  Failing to properly identify customers  This has already caused a rise in credit card fraud  Credit and debit card fraud has risen by 25% in the last

year to £535m.  Reduced training for front line staff as companies and government seek to reduce cost

Opportunity: The Internet  Cost effective way of trading and delivering

government services  Who can not love the way in which the internet has improved our lives  Without the internet could we have ever hoped to have seen Angelina Jolie naked? Or played poker with strangers a million miles away? Or helped some poor Nigerian official eradicate his money from a corrupt regime Or watched that brand new movie without the need to go to the cinema Or obtain cheap pharmaceutical without the need to sit in a doctors waiting room with people who may have swine fever Or shared our personal details with millions of facebook friends

Opportunity: The Internet  

So back to the fact that cost effectively -- especially when you are trying to reduce your expenditure by say £9bn per year – the clever thing to do is introduce Electronic Portals  e-Government  e-Commerce  In March 2009 APACS reported 132% increase in online fraud



during 2008

According to e-Crime Congress survey2009  62% of respondents do not believe their business devote    

enough resource, time or money on locating vulnerabilities 66% believed that out of work IT technicians will turn to cyber crime and the underground economy 45% increase on phishing employees 63% increase on infected web sites There is a lack of buy in to the extent of the risk of online fraud by executive officers

Case Study  In

2005 more than half of the 40,000 suspicious tax credit applications detected by HM Revenue and Customs (HMRC) during a six-month period were made by organised criminal gangs. This forced HMRC to close the online tax credits portal . The personal details of 13,000 civil servants working at the DWP had been used by criminals to make false

Motivation  Less

money or threat of redundancy has a profound effect on Customers and Staff  Customers  Rise in Council Tax and NNDR defaulters  Increases in insurance fraud 2008 (AIB) Car Insurance 52,000 fake or exaggerated claims Home Insurance: 55,000 claims, 17% percent, total value reaching £730 million - up 30%

Motivation: Customers Government is at even more risk  Everyone feels that Government is a legitimate    

target, the “Robin Hood”, “Bread” and “Del Boy” mentality Everything is regulated (3,000 new criminal offences under Labour) which generates resentment In the mind of the Citizen Benefit Fraud competes with dog fouling for what they think is the more heinous crime Officially benefit fraud stands at £2.2m although we already know that it is higher and rising According to the BFI & AC, verification of claimants within councils is higher than the Jobcentres and tax office but cut backs and DWP instruction is reducing the level of verification opting instead for faster payments

Motivation: Customers  The

bottom line is that need and deprivation is on the increase and people will be motivated to protect their families  There are more children in poverty than

10-years ago

 Divorce is on the rise  The break up of families will also bring

motivation to commit fraud

 When

you have nothing then you have nothing to lose.

Examples of Local Government Fraud  Housing

Benefit and Council Tax Benefit Fraud £550k  Blue Badge fraud up to 50%  A call centre employee parking his

Porche Cayenne using blue badge he had obtained through his position working for a council  Rochdale customer services officer sacked for selling blue badges  LA

Insurance fraud 50%

Motivation: Employees  Reductions

in staffing will inevitably increase risk  Pressure  Worry  Resentment

 Internal

controls will be less adhered

too  According to KPMG’s fraud barometer almost 78% of fraud by individuals against UK organisations is committed by employees  The report reveals that employee fraud across all UK organisations grew by six

Analytics: Both Customers & Employees In reality we only identify 20% of known fraud KPMG say that the only way to reach beyond the 20% of well-known frauds is to take a datadriven approach Effectively, data matching and mining.  This involves tapping into all the data sources within

organisations such as e-mail, building access logs, telephone records and employee database activity

Analytics technology can use all this information to uncover hidden patterns of activity linked to fraud and enable organisations to prevent fraud when similar patterns are detected in future, whether that is internal or external  HBMS  NFI

Likelihood of being caught  Most

organisations believe that publically prosecuting fraud shows that the organisation is weak and a victim. Being a victim is embarrassing and does not engender confidence  However, fraudsters just think they will not get caught  Create a culture of fraud: The DWP’s targeting fraud is an effective campaign  Some elected members believe it is counter productive against take-up  The Audit Commission KLoE expect councils to pursue fraud and publicise the result  Elected members are expected to monitor

Ethical Standpoint on the crime  In the public’s mind:  Banks, insurance companies and other

financial institutions are run by crooks and conmen, they have taken us all for a ride and therefore a fair target Thank you Sir Fred.

 Government is run by greedy politicians who

have their snouts in the trough

Thank you, Jackie Smith, Geoff Hoon, Eric Pickles… and the rest of you greedy buggers

 When the good and the great behave in a

way which seems unfair and creates a onerule society then we all return to self justification for bad behaviour

In Conclusion  Fraud

will increase as

 Public attitudes will become more

tolerant towards low level fraud because more and more people will be doing it  Controls and protection drop in the rush for market share or to handle the increased number of claimants

final question is this: in 21st Century Britain who are our moral leaders?

 My

Malcolm Gardner The Counter-Fraud Group and Meritec 0113 286 8828 [email protected] and [email protected] www.counterfraudgroup.co.uk and www.meritec.co.uk

The end