Charity Fraud Awareness Week 2021

A forensic view of fraud

This year, Charity Fraud Awareness Week takes place from 18 to 22 October. The purpose of the week is to raise awareness of and tackle the increasing prevalence of fraud in the charity sector. Unfortunately, there are several aspects of the structure of charities and their operational activities that put them at high risk of being targeted by fraud. Such factors include:

• Charities traditionally rely on volunteers, some of whom lack financial experience and may therefore fail to implement and monitor measures to counteract the threat of fraud.
• Charities are often run by only a handful of key individuals, making it hard to implement segregation of duties.
• Charities rely on honest behaviour and command high levels of public respect. By associating themselves with a charity, a fraudster can therefore hide their true motives and arouse less suspicion.
• The sector’s reliance on cash-based funding.

It is not just charities that are affected by fraud. There is no area of society that escapes being vulnerable to fraud, more so now than ever before. Sadly, coverage of fraud in the news tends to take a back seat to violent crime, so you could be forgiven for not realising that you are more likely to be a victim of fraud than of any other crime. The Crime Survey for England and Wales has recorded that in the year ended December 2020, there were 4.5m reported instances of fraud, more than any other type of crime. The true scale of the fraud problem is likely to be much larger: the National Crime Agency estimates that fewer than 20% of economic crimes are ever reported to the police.

Source: UK Government 

Various types of fraud have been increasing for several years, but in the past twelve months, fraudsters have been given opportunities on an unprecedented scale as a result of COVID-19. Even the UK government’s responses have been targeted by fraudsters, for example:

• Faked orders submitted by restaurants as part of the ‘Eat Out to Help Out’ scheme (HMRC is currently investigating 4,000 claims).
• Fraudulent furlough applications (estimated to be in excess of £3bn).
• Amounts dishonestly claimed via the government’s Bounce Back Loan Scheme (estimated to be at least £1.85bn).

The fraud triangle

Illustrated in the below graphic, is a framework commonly used to understand why individuals commit fraud, and is particularly relevant when thinking about fraud in a post COVID-19 world.

The fraud triangle comprises three components:

• Opportunity: this highlights the circumstances that allow a fraud to be committed. In the case of COVID-19-related frauds, the government instructed banks and lenders to only carry out light checks on applicants.
• Incentive: this refers to why a fraudster would offend. In the past twelve months, whole industries have been forced to close. The imminent threat of insolvency/bankruptcy may have increased the need to commit fraud.
• Rationalisation: this consists of two elements:
  (1) how the fraudster justifies it to themselves ethically, and
  (2) the balance of reward against the chance of being caught. A fraudster might justify their actions on the basis that it is the government who will suffer the loss, i.e. a large organisation that can afford to be defrauded. Many fraudsters probably believe that the likelihood of them being identified was low in the context of the total funding provided.

By thinking about fraud in the context of the fraud triangle, it possible to learn valuable lessons. It is clear that where an opportunity presents itself, fraudsters will dedicate significant resources to exploit it. A significant portion of fraudulent claims could have been avoided with more rigorous background checks on applicants. Though there will always be incentive to commit fraud, the spike of instances in the last twelve months indicates that when businesses and individuals face hardship, some will turn to fraud.  

Private individuals and businesses have been at greater risk of fraud during the pandemic. A 68% increase from 2019 to 2020 in remote banking fraud is partly attributable to the increased usage of online retail and banking facilities. “Impersonation scams”, where criminals impersonate reputable organisations to con members of the public, are also reported to have risen by 94% in the past year.

So, who can you turn to if you have been the victim of a fraud? In the UK, victims of fraud are encouraged to report the crime to the police via Action Fraud, the UK’s national fraud reporting agency. However, most frauds reported to Action Fraud are not investigated; they are merely recorded.

Cases are only likely to be investigated where there are multiple victims, or where there are links to organised crime or terrorist groups. Many victims feel let down by the response after reporting. Even if a case is prioritised, it is questionable whether the police have the resources and technical skills necessary.

How a forensic accountant can help

An alternative for victims is to instruct a forensic accountant. At Azets our forensic department regularly takes on fraud investigation work of all sizes, both for individuals and companies. Typically, we adapt a four-stage approach:

Prevention: A proactive strategy intended to help an organisation prevent fraud. We recommend considering in advance the areas of risk, and implementing policies to mitigate risk. Systems and procedures should be routinely tested to expose weaknesses. Although a preventative strategy may be more expensive initially, in the long term it is less costly than being reactive.

Detection: A detection strategy assists in stopping a fraud before it grows or even before it starts. We recommend educating staff on how to spot potential fraud risks/warning signs and what to do if they identify them. Common red flags include duplicate payments and the change of supplier bank account details. We can help devise whistleblowing procedures and train staff on the practicalities of how to effectively report a fraud.

Investigation: investigative strategies are reactive, and can become costly; not only has an organisation suffered a loss, management time will be taken up dealing with the consequences. The costs of appointing specialists must also be considered. At Azets we ensure that any investigation is the most cost-effective strategy.

Remediation: It is important to prevent fraud that has occurred from escalating, and to stop it occurring again. We review our clients' systems and controls to identify weaknesses, and recommend bespoke solutions to reduce the risk of a future instance of fraud.

As part of our four-stage approach we can offer the following services:

• Quantification of the scale of a fraud.
• Identifying the timescales over which a fraud occurred and its perpetrators.
• Preparation of a court-compliant report that can be used in legal proceedings. If required, our expert witnesses can attend court to give evidence.
• Practical advice on how to react in the immediate aftermath of a fraud. If legal advice is required, we can recommend legal advisors.
• Utilisation of computer forensic technology specialists, who can image computers and copy electronic data to ensure that electronic evidence is not contaminated and therefore subsequently deemed inadmissible in court.

If you have been a victim of fraud and would like to explore your options, please feel free to contact our team at hello@azets.co.uk for a no-fee initial consultation.