SWift Newsletter, November 2007 – Public Sector Fraud

Through recent work with local authorities, we have found that the public sector is subject to a wide range of frauds, notably benefit and tax, procurement, insurance, lending, and payment card frauds.

Findings published earlier this year by the Association of Chief Police Officers (ACPO) in its report, ‘The Nature, Extent and Economic Impact of Fraud in the UK’, show that the public sector lost some £6.5bn to fraud in 2005/2006. Research by insurer Zurich Municipal indicates that council tax payers are annually shouldering the burden of £1bn of fraudulent claims. But the exact costs are impossible to ascertain from the current levels of reporting, and the above figures are likely to be conservative estimates.

Fraud also impacts on local authorities and tax payers in indirect and immeasurable ways, ultimately resulting in higher taxes, poor-quality services and low morale.

Levels of fraud can fluctuate widely depending on the effectiveness of internal controls and offenders’ abilities. Annual departmental reports, which may conceal variations in any given year, are only a rough guide to fraud levels in the future.

Unfortunately, UK police authorities do not have sufficient resources to deal with the increase in local authority fraud as a priority, despite its expense to society, which is second only to Class A drugs.

Fraud has been a notoriously difficult offence to prove, resulting instead in charges such as false accounting and deception being used to pursue offenders. The expense and difficulty of securing a conviction has also meant that many allegations of fraud have not been investigated.

The investigation and prosecution of fraud was highlighted in the Attorney General’s Fraud Review 2006. The review, together with the new Fraud Act 2006, which introduced fraud as a statutory offence for the first time, and the proposed provisions of the Serious Crime Bill, will change the framework under which local authority counter-fraud work functions.

The Fraud Act makes provision for criminal liability for fraud and obtaining services dishonestly a criminal offence. It covers the key areas of false representation, failing to disclose information and abuse of position.

In addition to the new offences under the Fraud Act, the Serious Crime Bill sets out new measures that will affect counter-fraud practices, including the development of data-sharing within the public sector and between the private and public sectors. Local authorities will also be affected by other provisions in the Serious Crime Bill. These include the introduction of serious crime prevention orders and new offences of encouragement and assistance in crime.

The Fraud (Trials Without a Jury) Bill, which promotes non-jury trials in serious and complex fraud cases, is currently before Parliament. Under this proposed new legislation, local authorities can prepare cases for the police, who will then process them for court. This is similar to the existing arrangement between the Association of British Insurers (ABI) and ACPO.

A person found guilty of fraud under the new Act is now liable, on summary conviction (i.e. in a Magistrates’ Court), to imprisonment for up to six months or to a fine not exceeding the statutory maximum, or to both. On conviction on indictment (i.e. by jury in a Crown Court and above) the maximum sentence is imprisonment for up to ten years or a fine, or both.

Misconduct in public office, bribery and corruption remain serious offences, which can result in custodial sentences of up to 25 years and heavy fines.

As law enforcement officials have limited resources and skills for dealing with local authority fraud, anti-fraud initiatives work best where local authorities employ the services of expert fraud investigators. These investigators have both the resources and expertise to help gather evidence and prepare cases to be presented to the relevant law enforcement agency.

The recent changes to the law should increase the prosecution and conviction rates for fraud. With a joint approach, utilising the different skills and powers of investigation experts and law enforcement officials, local authorities should be able to increase their chances of recovering misappropriated funds.

• Bank reconciliations
• Cheque frauds
• Forged bank notes
• Overpayments
• Procurement

• Compliance with directives
• No emergency orders
• Proper authorisation

• Recruitment/selection policies
• CV vetting
• Reference checks
• Accredited recruitment agencies

• Payment before completion
• Fraudulent invoices
• Duplicate payments
• Over-invoicing

With the growing use of forensic technology in case preparation, John Holden looks at ways to control the scale and cost of investigations.

As the utilisation of computer systems for communication and data retention increases, so do the issues encountered when data is subject to review and analysis during dispute resolution. Consequently, forensic technology has moved centre stage in many investigations and disputes. However, compared to the traditional paper-based approach to case preparation, forensic technology is often viewed as an expensive luxury by solicitors and their clients.

Historically, when faced with the task of recovering data, the only avenue open to forensic technology practitioners has been to take a full copy or ‘image’ of the relevant data. This can be both time-consuming and intrusive to the client, and results in a large amount of non-relevant data being retrieved, stored and analysed, the cost of which is invariably passed on to the client.

A typical computer user stores between 150,000 and 225,000 pages of information on his/her computer and a reviewer can briefly examine 2,500 pages per day. If all the documents were to be printed, it would take a reviewer a minimum of 60 working days to go through the hard copies of one user’s data. Such an approach may be desirable in some cases but, with the use of technology, it is possible to be more selective with data capture.

Modern techniques allow prolonged and expensive electronic document processes to be effectively reduced. For instance, it is no longer necessary to extract the entire contents of a user’s data storage area. It is possible to take a forensically sound copy of an individual file or folder, which will be quicker for data capture and review.

Expert assessment at an early stage, using knowledge of systems and including factors such as proportionality, can identify time-saving opportunities and reduce the amount of material captured. This can save time in terms of both data capture and review, while the careful de-duplication of documents can reduce this even further – sometimes by between 50% and 70%.

Forensic technology practitioners are also able to stagger the stages of the assignment, placing process and/or financial checkpoints along the way. These controls enable the client to judge where and when additional resources are utilised, and to focus on the most relevant areas.

By encouraging greater dialogue between clients and the forensic technology practitioners at an early stage, the use of modern techniques and processes to examine data can be more cost-effective than seen at present. This will produce better results in less time.

We were instructed on behalf of the former directors of a print design company that had gone into administration following a downturn in business. Shortly before administration, a number of business assets, including goodwill, had been transferred to a new venture. We were asked to value the goodwill, which the administrator alleged had been sold under value. Given that the directors were committed to leaving the company, we demonstrated that the business had negligible future maintainable earnings, and the dispute was settled.

A firm of accountants was accused of professional negligence concerning advice given during a corporate finance transaction in the late 1990s. We were instructed to act on its behalf, and were able to provide highly credible opinion evidence by combining our corporate finance and forensic expertise. Other experts engaged by the co-defendants and the claimants either had little corporate finance experience or were rarely involved in contentious matters. The case was settled during the course of the trial.

A fashion garment company’s goods had been seized by the company responsible for transfer of goods from the manufacturer to partially settle unpaid bills. As part of the action to force the release of these goods, we were asked to testify on the fashion company’s ability to meet any adverse judgment at a notional date in the future. In the face of expert accounting evidence to the contrary, the court preferred ours, which showed that the orders secured by the company and the strength of its current balance sheet meant it was likely that it would be able to meet any such judgment.

We were instructed to assist with an investigation into a suspected international boiler room operation. Our work involved investigating the backgrounds of a number of individuals from the UK and several overseas jurisdictions, analysing a large volume of financial and non-financial information, and assessing whether the relevant regulatory and statutory reporting requirements had been complied with. As a result of our investigation and findings, the matter was settled out of court.

A firm specialising in white-collar crime defence work appointed us on behalf of a client accused of theft and false accounting from the IT training businesses he ran. After a review of the work undertaken by the Crown’s forensic expert, it was apparent that many of the transfers from the business to the defendant’s personal credit cards were used to repay balances relating to the purchase of equipment and services for the company. We also looked at a number of the supplier companies and were able to trace transactions back to genuine invoices addressed to the training business for goods that were delivered. Following the disclosure of our witness statement, the Crown dropped the charges in relation to these companies.

We were instructed by the defendants in an action for breach of warranty, following the sale of a leisure business. It was claimed that the value of the acquired company was less than the consideration paid, which had allegedly been based on warranted management accounts for a short period before the sale. Using a co-ordinated approach to quantify the realistic valuation effect of a restatement of the warranted management accounts, we were able to reduce the implied damages substantially. This led to a favourable settlement for the defendant before the trial.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.