Newsletter - April 2010

Welcome to the latest edition of the Anti-Fraud Network newsletter.

Fraud in the UK: The Need for Rigorous Investigation Across All Sectors

Author: Peter Tickner

In 2006, Attorney General Lord Goldsmith presented the Fraud Review to Parliament. Goldsmith had hoped to be able to provide alongside the Fraud Review an estimate of the level of fraud against the UK economy, but the results of a study commissioned by the Association of Chief Police Officers and conducted by Professor Michael Levi weren’t published until the following year. This study eventually estimated UK fraud at £13.7 billion for 2006.

As a result of the Fraud Review’s recommendations, the Labour Government set up the National Fraud Authority. One of its key remits was to try to get an accurate estimate of the levels of fraud. The first results of the more comprehensive survey by the Authority were published in January 2010. The Authority estimated fraud against the UK economy for 2008 at a staggering £30.5 billion, more than twice Professor Levi’s 2006 estimate. Of this, over half (£17.6 billion) was against the public sector.

The National Fraud Authority’s review of the level of fraud in 2008 was more wide-ranging than the 2006 Levi study and therefore expected to find a greater value of total fraud, but it is also clear that every UK fraud reviewer and major forensic accounting organisation has reported an upward spiral of increasing fraud since the recession first hit the UK economy. And the level of undiscovered fraud still remains a question of educated guesswork. Whether there can ever be an accurate measure of the true level of fraud—even in countries as analysed and observed as the UK—is a matter of doubt, an elusive Holy Grail for those of us who rely on organisations to want to seek our help to find frauds and track down fraudsters.

Whilst it is the high value, long-term frauds and bribe cases such as Satyam and Rio Tinto and those involving “personalities”, such as Madoff, that make headlines and draw attention, the fact remains that the public sector also suffers heavily from fraud, usually far more so than most senior managers are prepared to admit. Indeed, as the public sector is a reliable payer of bills, the sector is far more vulnerable than the private sector during a recession.

While most of the fraud against the public sector in the UK stems from tax evasion, both by companies and by individuals, there are also sizeable amounts lost elsewhere in central government, by local authorities and the National Health Service (NHS). Much of these losses stem from procurement frauds or corruption involving contractors or those paid on piece rates rather than fixed salaries, such as dentists, chemists and opticians in the NHS, minor works and maintenance contractors, linguists and providers of specialist and technical services.

My formative years in the NHS taught me that there was a lot of fraud going on but management either couldn’t see it or was less keen to pursue it than we were. The frauds and scams we found being perpetrated on the NHS in the 1970s, long before the NHS Counter-Fraud Service came into being, are very much alive in modern variants today.

Of course, public sector fraud isn’t restricted to the NHS. Her Majesty’s Treasury, for example has seen its fair share of scandal. As Head of Internal Audit at the Treasury, I unearthed two major scandals, the first one involving fraud and corruption by the senior management of the government organisation that then ran civil service catering. They had tried to manipulate their financial information so that when the government sold off the organisation to the private sector it would seem less profitable than it really was. This was part of an elaborate scheme to put off commercial bidders from offering a fair price and to win a “management buy-out”. The two most senior executives had then planned to sell the new business to a private catering company, hoping to walk away rich men. Unhappily for them, but happily for the tax-payer, the fraud was discovered and prevented and the Treasury parted company with them before selling the business for a substantial sum.

The second scandal involved the Undersecretary who had been in charge of a government agency; he eventually went to prison for offences under the Theft Acts. It still remains extremely rare for any senior official in the UK to be sent to prison for fraud. We had strong suspicions about potential corruption with certain major contractors but it was impossible to prove. It is always advisable in such circumstances to take the line of least resistance and in this case that line was to concentrate our investigative efforts on examining his expenses in detail. Corrupt officials are by nature greedy for money and will generally do whatever is necessary to get their hands on more money than they are entitled; expenses are therefore often an easy route for them and an even easier route for the investigator to prove fraudulent behaviour. It was this tactic that enabled us to identify the wrongdoing and one of the reasons why this case stands out.

It is usually quicker to catch an official on their expenses than to spend potentially fruitless months investigating corruption, which can be hard to prove in the UK. You only need enough evidence to be able to sack an official once. Spending public funds on a lengthy investigation that proves they behaved badly in a number of different ways won’t add to the penalty of dismissal and can cause unnecessary delay, especially if it becomes a major criminal enquiry. The rest of the investigation may be necessary for the removal of corrupt contractors, but that can be conducted separately and form part of any legal proceedings necessary to take against those companies in the civil courts. In the civil courts, the balance of probabilities argument is a less stern test than that requiring “beyond doubt” and a jury to convince for criminal proceedings.

Wherever I worked in government, I found fraud and corruption, including during recent years at the Metropolitan Police, by far the largest of the police services that operate in greater London, also known as Scotland Yard or the Met. By public service standards in the UK, the Met is a large organisation, bigger than many government departments and employing over 55,000 staff, including 30,000 police officers. It spends £3.5 billion a year on running costs. This makes is as vulnerable to fraudulent activity as any private sector business with a similar turnover and, as arsonists are attracted to the fire service, so criminals are attracted to the police. One excellent example is an instance in which the Met allowed an armed robber to slip under the radar and granted his company a works and maintenance contract with the police.

As a result of the number of frauds I uncovered at Scotland Yard, I was granted the authority to set up an internal fraud investigation team, headed by a retired Detective Superintendent who’d had considerable Fraud Squad experience. His expertise proved invaluable. The team later expanded to become an investigative branch headed by an experienced ex-head of internal investigations from HM Customs, nine investigators, a fraud prevention manager and two analysts in support. Over the years, this team saved Scotland Yard—and the taxpayer—millions of pounds, as well as removed fraudulent contractors and staff from the organisation. Just as important was the fact that innocent people who had been suspected of wrong-doing were cleared, an often forgotten benefit of thorough investigation.

By raising fraud awareness we increased levels of fraud prevention as well as discovery, cessation and the recovery of losses.

So while the private sector may grab the headlines and attract all the attention, consider the frauds being perpetrated onthe public sector and how a little more effort could save a lot more money and improve efficiency.

Peter Tickner’s practical guide to fraud investigation, How to be a Successful Frauditor is published on 16 April by Wiley in the UK, Europe and the US. As a special offer, valid until 31 July, recipients of this newsletter can use the following link to contact Wiley and order the book at a discount of 30% off the published price. http://eu.wiley.com/WileyCDA/WileyTitle/productCd-0470681853.html

Peter Tickner, MSc FIIA MIIA has been a public sector auditor and investigator—a frauditor—in the UK for nearly 40 years. After an early career as an external auditor in the National Health Service, he was Head of Internal Audit for Her Majesty’s Treasury during the collapse of the Pound in the early 1990s. He has spent the last 14 years of his public sector career as the Director of Internal Audit for the Metropolitan Police in London (better known to the world at large as ”Scotland Yard”, even though the police moved out of their original Scotland Yard offices over a hundred years ago). Peter is Director at Peter Tickner Associates Ltd.

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News

Rio Tinto Executives Found Guilty
During a three day trial, the four Rio Tinto exectutives arrested last July pleaded guilty to accepting bribes while only one, Ge Minqiang, was found guilty of commercial espionage. The men have been given sentences ranging from 7 to 14 years. China claims it paid 1 billion yuan ($160.5 million) too much for iron ore last year as a result of bribery and industrial espionage by the Rio Tinto four. Rio Tinto has sacked all four men. Tom Albanese, Rio Tinto's chief executive, said: "I am determined that the unacceptable conduct of these four employees will not prevent Rio Tinto from continuing to build its important relationship with China."

HMRC Puts Viper into Action
Three men have been arrested as part of a “Viper” investigation by HM Revenue & Customs (HMRC) into a suspected £1 million VAT and money laundering fraud. Viper Operations are a new approach to tackling serious organised crime. They involve a structured and carefully co-ordinated response, taking a broader view and using every resource available to attack the criminal, not just the crime. The men were arrested on suspicion of offences of Conspiracy to Cheat the Public Revenue, the Fraudulent evasion of VAT under the VAT Act 1994 and Money Laundering under the Proceeds of Crime Act 2002.

Spain’s Largest Ever Money Laundering Case Starts
Nineteen people have gone on trial in Spain as a record money laundering case finally reaches court in an investigation that started in 2005. Allegedly, €12 million passed through the network and the defendants are charged with a total of 40 crimes of money laundering, 141 of document falsification, three crimes against the Spanish treasury and two of false testimony. The majority of the defendants are alleged to be members of criminal groups and at least two are thought to be public officials.

Senior Italian Figures Arrested in Money Laundering Investigation
Senior police officer Luca Berriola is one of a number of high profile figures arrested as part of an investigation into money laundering in Italy. Mr Berriola is allegedly suspected of assisting the owner of an engineering firm with bringing €1.5 million into the country. Fifty-six warrants were issued across Europe for a number of prominent businessmen and Nicola Di Girolamo, a senator in Silvio Berlusconi’s People of Freedom Party. Mr Di Girolamo is alleged to be held on suspicion of assisting Calabrian crime syndicate 'Ndrangheta launder money.

David Mills Released in Berlusconi Bribe Case Appeal
David Mills, husband of the UK’s Olympics Minister, Tessa Jowell, has won an appeal in Italy’s top appeals court, overturning his conviction of having accepted a bribe. The £390,000 bribe was alleged to have come from Italian Premier Silvio Berlusconi in return for Mr Mills’ silence in relation to corruption charges that Mr Berlusconi faced in the 1990s. The Italian Appeals Court has ruled that the case had expired under Italy’s statute of limitations, almost definitely preventing the case against Mr Berlusconi for having given the bribe from continuing. Massimo Donadi, an opposition MP, said: “The expiration of the statute of limitations does not erase the crime... The corruption happened and in a civilised country the Prime Minister would have stepped down.”

Bahrainian Minister in Money Laundering Case
For the first time since Bahrain achieved independence from Britain in 1971, a government minister has been questioned over an investigation into alleged money laundering. At the time of going to press, the only official announcement made by the Ministry for the Interior stated that a money-laundering operation has been carried out in Bahrain and abroad and that the investigation was launched in 2008 when the suspicious activities came to the attention of the Ministry. The unnamed alleged ringleader and his aides had been monitored since that time. Mansour Bin Rajab has confirmed that he was interviewed by the Ministry for the Interior and answered questions about his staff. Mr Bin Rajab has been dismissed from his post by the King of Bahrain but denies the charges as being false and claims that his dismissal is intended to facilitate the ongoing investigation.

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