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Fraud Updates 2008
25 July
USA
The United States continues to press financial institutions to assist in tackling fraud.
The chief financial officer of UBS Global Wealth Management and Business Banking has said that the bank will no longer offer offshore banking or securities services to US residents through its US branches. The statement came in his testimony to the senate subcommittee which is investigating allegations that UBS banking practices facilitated US citizens in tax evasion.
The New York district attorney has now also filed civil charges against the bank. The charges refer to the use of false marketing to sell securities in order to reduce the bank's exposure. The securities were allegedly falsely marketed as safe and liquid. The civil action seeks to force UBS to buy back the securities and bringing criminal charges has not been ruled out.
UK
The Financial Services Authority (FSA) in the UK is also encouraging financial institutions to help combat fraud.
It hopes that about 150 mortgage lenders will help in its scheme to tackle mortgage fraud, part of which will include encouraging the reporting of rogue brokers. It has also produced a mortgage fraud database which will allow it to analyse patterns and identify possible targets.
The FSA has also charged a former partner at a stock broking firm with insider dealing. The allegations stem from profits made from the purchasing of shares in six companies by the former partner. The stock broking firm acted as an advisor in take over deals involving the six companies.
Russia
Allegations continue to be made that the Russian tax authorities were defrauded of $230m ride by fraudsters who stole three companies, used the subsequent court cases to generate fake losses at the companies which exceeded their profits, thus allowing them to claim the money back from tax authorities.
It is alleged that the companies were fraudulently reregistered giving ownership to the fraudsters. According to Hermitage Capital Management, officials from the Interior Ministry carried out raids on its offices and the offices of its lawyers and removed papers subsequently used in the frauds.
Companies are increasingly finding themselves embroiled in fraudulent schemes, often through no fault of their own. The importance of effective monitoring and reporting systems remains crucial in helping to prevent frauds occurring. It is also important to remember that should the worst happen, acting quickly and using the appropriate expertise to secure misappropriated assets and preserve evidence can reduce the damage caused in terms of reputation and costs.
15 July
The fraud prevention service, Cifas has released research which shows that the number of frauds in the UK climbed by 14% in the first six months of 2008. The types of fraud include asset finance, bank account, mortgage and credit card fraud.
Cifas confirmed that since January this year, 104,548 cases of fraud have been added to its database.
Cifas also found that the top ten hot spots for mortgage and credit card fraud were all within the M25.
This research shows that the dangers of becoming a victim of fraud are still prevalent, particularly around the capital and that vigilance and awareness remain essential first steps in preventing fraud.
7 July
During the course of the last couple of weeks, there have been a number of developments in fraud related matters.
BDO Stoy Hayward - FraudTrack
The latest FraudTrack report from BDO Stoy Hayward makes grim reading for businesses already hit by a shaky financial climate.
According to the report, fraud is booming and is on the rise. UK businesses have reported losses of over £705m in the last six months and £317m of that was in April alone. These figures are a staggering 74% increase on the same period last year.
Even more worrying is that as the credit crunch continues to bite, the threat is changing from organised criminal gangs to employees and other businesses. The report showed that management fraud and third party fraud accounted for 46% and 32% of fraud cases respectively.
Part of the problem as identified by BDO is the punishments handed out to fraudsters by British courts. While custodial sentences have increased from 2.88yrs in 2005 to 3.14yrs in 2008, these lag woefully behind those handed out in other countries, particularly in America where prison sentences of up to 20yrs are not unheard of.
Recent examples of international sentencing include:
The conviction of 9 defendants in an Austrian banking fraud case at the end of a year of proceedings after losses of €1.9bn came to light in 2006. Sentences ranged from probation to 9
A 16 year sentence being handed down by a New York court in the wake of the collapse of Refco Inc, the world's largest independent commodities broker, in 2005. The sentence followed the conviction of Refco’s former CEO who faced counts of fraud, conspiracy, money laundering and false accounting.
The usual problems of inadequate control and reporting systems are highlighted by BDO as adding to businesses' woes. The head of BDO's Fraud Services Team said that "commercial organisations of all types and size throughout the UK are currently failing, in some cases quite spectacularly, to get to grips with the fraudulent activity of their staff."
This is an international issue as is apparent from the report into SocGen and allegations involving Greencore.
SocGen
According to the French banking regulator, inadequate internal systems facilitated the €4.8bn loss at Societe Generale caused by a rogue trader. The regulator has imposed a €4m fine and pointed to SocGen's inadequate internal controls as allowing the losses to occur and to remain unidentified for so long.
Failures in staff monitoring systems were particularly highlighted by the regulator as being deficient. The regulator's findings show the importance of ensuring monitoring systems are not only in place but are also updated and adhered to in order to help to avoid losses and associated liability for such losses.
Greencore
Allegations have been made of a complex fraud at a Greencore subsidiary by former senior employees. Reports claim that its complexity meant that it was initially not identified by internal or external audits. The fraud is said to have cost Greencore €21m and that further accountants are assisting with an exercise to review the company's internal controls and reporting systems.
As in most cases where a subsidiary is said to be involved, the case is illustrative of the degree of awareness which parent companies must have of the processes within their subsidiaries.
Accountants
Accountants have therefore found themselves again in the firing line.
One firm has been fined £495,000 and ordered to pay £1.15m and officially reprimanded by the Accountants' Joint Disciplinary Scheme. This penalty comes after the collapse of Independent Insurance in 2001. The firm was accused of failing to investigate non-economic contracts which distorted Independent's accounts despite being notified that there may be a problem. Whilst it was accepted by the firm that it could have done better, it also pointed out that it had been a victim of the fraud as a result of information having been withheld from it.
The JDS investigation comes after the 2007 jailing of Independent's former Chief Executive for 7 years, former deputy Managing Director for 3 years and former Finance Director for 4 years. All had been found guilty of serious fraud offences after a criminal investigation by the SFO and lend support to the findings of the BDO report concerning the comparatively lighter sentences imposed by the English criminal system.
IRS
In the meantime, the US Inland Revenue Service is continuing with its ongoing challenge of bringing to book those trying to avoid paying taxes in the US by using offshore accounts.
On 1 July a US court directed UBS to provide the IRS with account details of US taxpayers holding undeclared accounts in Switzerland between 2002 and 2007.
The IRS used a John Doe summons as they were unaware of the identities of those holding accounts of interest. Whilst problems for UBS may lie in complying with the summons while not infringing Swiss bank secrecy laws, the case shows that that the US courts are ready to assist the IRS in tackling tax evasion.
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