Occupational fraud accounts for billions of pounds of lost revenue globally.
#BusinessFraud
The most recent publication from The Association of Certified Fraud Examiners #ACFE ‘“The ACFE 2024 Report“, shows that 5% of revenue is lost to fraud in each year in any business/organisation in every and any sector.
A new finding in the ACFE 2024 report, shows a statistic that of the 1,921 cases studied across 138 countries and territories, ‘the longer a fraudster has worked for an organization, the more costly the fraud’…That means, that those who have been in business; the ones who are most trusted and have the confidence of shareholders, staff, and creditors alike, should not be overlooked. Everyone in a business is susceptible to fall morally, ethically, and legally to greed.
That is an alarming finding, but perhaps something which, at least in England and Wales, is being potentially addressed.
Although the Economic Crime and Corporate Transparency Act (ECCTA’) was passed in 2022, certain aspects of it have yet to come into force and effect.
In particular, the criminal offence of failing to prevent fraud does not come into effect until 1st September 2025.
Failing to prevent fraud offence.
This places the onus on a business to have in place appropriate checks and systems to prevent fraud.
The offences of fraud are set out in Schedule 13 to ECCTA as ‘base fraud’: Economic Crime and Corporate Transparency Act 2023. The range of offences incorporate amongst others, the common law offence of cheating the public revenue, statutory offences of false accounting, company director false statements, various sections of the Fraud Act 2006, and the Theft Act 1968.
This is most welcome amongst counter-fraud practitioners. To better understand motivating factors as to why fraud thrives, at its foundation, I refer to Donald Cressey’s fraud triangle:
Why fraud occurs, is a complex question, but Cressey considered that at least three elements would be in play for fraud to thrive.
Having systems and checks in place reduces the ‘the opportunity’ to commit fraud. It is a preventative measure.
Counter-fraud practitioners have forever been frustrated at the lack of pro-activity to prevent fraud. Most businesses only wake up to the fact that they do not have systems and checks in place…when they have been defrauded. Even then, if the measure of fraud is typically 3 to 5% of turnover, a business might take a view to do nothing simply accepting that this is a statistic that can not be avoided. Instead, they might for example simply add this loss to a premium of insurance, or the cost of a mobile phone.
The ACFE 2024 Report observes that 82% of victim organizations modified their anti-fraud controls following the fraud.
Home Office published in November 2024, Offence of ‘failure to prevent fraud’ introduced by ECCTA – GOV.UK which gives some guidance.
This is again welcome, as this never happened with the Bribery Act 2010. Although it is a defence to have in place an Anti-Bribery Policy, there is an absence of guidance as to what conduct and behaviour should be considered bribery. What amount? Any amount?
Yet, in the ACFE Report to the Nations, 48% of all reported cases of fraud, also included corruption. I would welcome some better guidance from the Home Office on Counter-Bribery and Corruption. The silence on this issue is palpable.
However, taking a crude form of understanding how corruption thrives anywhere, it is usually because someone in a position of power / discretion to make a decision, where there is a lack of transparency and accountability, makes a decision driven not by fairness, honesty, and judgment, but by financial or otherwise beneficial gain for themselves or others. It is very much hoped therefore, that since ECCTA seeks to tackle ‘transparency’ in business, that an indirect effect will be that corruption and the environment in which corruption breeds, is lessened, by implementation of systems and checks to both prevent and detect fraud.
Back to the latest guidance from the Home Office:
The businesses who would be subject to the new offence coming into effect, are large corporations (defined as meeting at least two of the following criteria: Turnover of more than £36million, balance sheet total of more than £18million, and more than 250 employees) to seek to prevent fraud.
What about smaller businesses? Fraud occurs across the board.
The ‘base fraud’ must be committed by a person associated with the relevant body’. This includes an employee, an agent, a subsidiary of the relevant body, and a person who provides services for or on behalf of the relevant body whilst providing those services.
Fraud Prevention Principles:
The Home Office guidance deals not just with ‘prevention’, but with ‘detection’ as well, as they identify six fraud prevention principles namely:
1. Top-level commitment.
2. Risk assessment.
3. Proportionate risk-based prevention procedures.
4. Due diligence.
5. Communication (including training).
6. Monitoring and review.
It is an observation of the ACFE 2024 Report that having a confidential tip-off hotline in place, accounted for 43% of fraud detected. Half of those tips came from employees, and nearly one third came from suppliers and customers. Web-based mechanisms for tipping off, accounted for the most used medium for tipping off, followed by emails, and then telephone calls.
David Rosen & Co, offer a range of Protective Security, Business Fraud and Investigations services.
Professor David Rosen is a solicitor-advocate and principal of David Rosen & Co. He is a Certified Fraud Examiner, a member of the ACFE Advisory Council, a member of RUSI, and a former strategic director of the Board of the ACFE UK Chapter. He regularly lectures on counter-fraud and counter-corruption as a Professor of Professional Practice at the Brunel University of London Law School.
