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Defeating the assassin within

Friday 11 January 2013 5:00

Now is the time that companies can least afford to be ripped off. Yet now is the very time when they are likely to fall victim, writes Brian Nicholls.

Corporate crime bleeds too many firms – sometimes to death. While UK fraud by bosses and employees fell in the first half of 2012, it was not so in the North East. The value of large (£100k plus) frauds then more than doubled year on year to £13.5m – partly due to a large duty evasion case at Newcastle Crown Court.

In another big hearing a group of nine, including a mortgage advisor from County Durham, were brought to court for stealing £2.2m from financial organisations through mortgage fraud.

Sara Smith of KPMG’s Newcastle forensic practice says: “The extent and impact of fraud perpetrated from within businesses has historically been masked by a handful of exceptionally large cases coming to court.

"The fall in such ‘super’ cases even so shines a spotlight on a chronic threat to businesses in these austere times.”

Two North East solicitors in three months were jailed at Newcastle Crown Court. One, 63 and from Durham City, had siphoned off more than £300,000 of clients’ money.

On his admission of four counts of taking money by deception and five counts of fraud, he was jailed for two years.

Before that, the same court heard that a 64-year-old solicitor from Longhoughton in Northumberland had taken lump sums of £20,000 and £40,000 from clients’ accounts - £1m-plus in all - and spent a lot of it on holidays abroad and cars.

He was jailed for four years and his business partner for two. UK fraud has been running at £3.5bn a year, KPMG reckons. Financial institutions and commercial firms between them lost £1.7bn of that.

David Arthur, managing partner at accountants Tait Walker in Newcastle, complains that politicians who could stiffen laws and sentences don’t seem to acknowledge that corporate crime is bigger perhaps than all other theft put together.

Taxpayers have to make up the shortfall in part of revenues that don’t reach the Chancellor. Tim Thompson, a risk analyst with Deloitte says fraud happens where employers have the most lax controls or where management attention drifts.

The problem is so great now in the North East that Frank Nesbitt, a former detective who served with Northumbria Police for 30 years then became a forensic services manager at Tait Walker for six, has just set up his own company Quo Vadis Forensics in Washington, to investigate complex fraud for clients all around the country.

Nesbitt says the likelihood of internal fraud increases in difficult times such as now, when even staff who normally contribute to security may be cut back. The largest group perpetrating fraud, by the way (by value), are management.

They make up 55% of cases. Cybercrime has become the second most commonly reported economic crime hitting the financial services. Only asset misappropriation (the traditional way of defrauding an organisation) is more prevalent, PwC says.

Cybercrime accounted for 38% of economic crimes compared to 16% for other industries in a survey. One in seven large organisations have been hacked in the last year.

The average large organisation faces a significant outsider attack every week- small businesses one a month. Customer impersonation has tripled since 2008 – with financial services affected most.

The number of large organisations being hacked into is at a record high. Overall cost of security breaches to UK plc now runs to billions of pounds a year. Yet 20% of organisations spend less than 1% of their IT budget on information security.

A tad under half of IT professionals in the UK are concerned that any potential threat to the intellectual property of their organisations would directly lead to the loss of their job, according to research by the Federation Against Software Theft (FAST).

Martin Tyeley, a director in KPMG’s Northern risk consulting team, wants businesses in the North East to arm themselves better against online threats. He says: “The world of cyber security has been tilted on its axis over the past two years, from the actions of hacktivists and associated groups, through to state sponsored agencies with seemingly unlimited resources.”

Petty theft is no small item either. Workers who “borrow” stuff from their offices are racking up costs of £2bn a year - and unwittingly leaving their employers open to security breaches with far-reaching implications.

Banner Business Services quotes a survey revealing that more than twothirds of people in office jobs have admitted taking stationery from work. UK business in fact is one of the hardest hit in Europe by office theft.

Booty includes: Post-it notes, adhesive tape, scissors, toilet roll, photocopy paper, USB memory sticks, notepads, pens, staplers, and highlighters. Little by little, it all adds up. Construction payroll firms cost the taxman nearly £2bn in lost revenue, Ucatt union has calculated in a report on false self-employment.

It says the practice by such companies of keeping workers classified as self-employed is spreading. The largest payroll company reportedly has more than 114,000 workers on its books.