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The research showed that fraud involving business in the UK is increasing dramatically (up 42 per cent on same period last year) and has diverged into two distinct categories:

1. Multi-million pound VAT frauds. These are typically conducted by gangs with criminal links who are being prosecuted after lengthy investigations by HMRC (Her Majesty’s Revenue & Customs). However, the potentially huge rewards sadly mean that these frauds are still becoming ever more attractive to criminals and others.

BDO Stoy Hayward predicts that recent legislation to reduce these VAT carousel frauds will not prove effective as gangs will re-apply the methods used to commit these frauds – initially involving mobile phones, tobacco, alcohol, fuel and cars - onto other easily transportable high-value items. So far in 2007, just 23 VAT Carousel frauds accounted for ₤468million, more than in the whole of 2006.

2. Frauds against businesses. These typically involve employees or directors abusing a position of trust, often in conjunction with an outsider. With these frauds the larger the sum stolen, the less likely the fraudster is to be prosecuted! In most cases business fraud victims primarily focus on recovering the assets, preventing future frauds and minimising publicity . Only the unlucky few end up going to prison, where they will face a typical sentence of two-five years, even for involvement in multimillion pound deceptions. Research for BDO Stoy Hayward indicated that only 15 per cent of such frauds discovered lead to a criminal prosecution, although its own experience is that the proportion is even fewer.

Simon P. Bevan, the national head of BDO Stoy Hayward’s Fraud Services Team, said: "Sadly crime does often pay at the moment if you are a fraudster, which explains why large frauds are on the increase – this is a crime driven by greed, not need."

“Professional criminals have been quick to notice the millions that can be made from VAT carousel frauds. While there has been a crackdown I am sceptical it will halt this avalanche of huge frauds against the taxpayer. If you make tens of millions, and then succeed in keeping even a few per cent hidden when you get caught, then you will end up with a small sentence and a large amount hidden in an offshore bank.”

Simon Bevan added: “When it comes to frauds against businesses, if you are discovered there is only a small chance of being prosecuted. When a fraud is discovered, all but the very largest are not a priority for the police given their limited resources. Businesses, not surprisingly, focus on getting the money back and protecting their reputations – so few of such cases, less than 15 per cent, result in a prosecution. In this case, the worst a fraudster will face is losing their job and having to repay most of their ill-gotten gains.

“Many fraudsters are laughing all the way to their offshore tax haven. Fraud is set to keep increasing as long as others see it is a safe route to making large amounts of money illegally, particularly in the case of VAT frauds, where a couple of years in an open prison is not going to deter anyone with a criminal mindset.

Recent increases in the mortgage rate are likely to drive people who have borrowed highly into financial problems, and this may tempt some to commit minor frauds. However, this will not materially affect the number of larger frauds – ultimately people commit large frauds to feed greed, addiction or other major problems: people do not need to steal hundreds of thousands of pounds just to cover an increase in their monthly mortgage.”

Other findings from BDO Stoy Hayward’s FraudTrack’s include:

• Business fraud has increased by 42 per cent to ₤538million, caused by 141 frauds over ₤50,000 in value. This compares to £379million from 139 frauds in the first half of 2006.
• The main driver of this increase is the growth of VAT carousel frauds, whose value has increased to ₤468million for the first half of 2007 – already higher than the whole of 2006 (₤458million) and 220 per cent above the whole of 2003 (₤135million).
• The Midlands has become the UK’s fraud hotspot with ₤312million (nearly 60 per cent of the total) being undertaken by businesses and people based in the region – typically through VAT frauds. In terms of the number of reported frauds, London had the most (a third), followed by the North East (16 per cent), the Midlands (14 per cent) and the North West (12 per cent).
• Fraudsters can expect a light sentence. The average sentence (not time served) for frauds of over ₤50,000 is 3.05 years (1.98 including those who get non-custodial sentences), while the average sentence for the largest frauds (over ₤50million) is just over 6 years.
• Greed is the main motivator – nearly three quarters of frauds are motivated by the desire for money or a lavish lifestyle (where a motive was disclosed).

Examples of frauds reported in first half of 2007

Typical fraud cases included:

Elaborate carousel fraud – sentenced 12 June 2007

Six men were sent to prison for a total of nearly 48 years for an elaborate carousel fraud that cost the taxpayer ₤85m and involved nearly 100 mobile phone traders. Raymond Cox from Staffordshire; Brett Issitt and Michael McNeill from Lancashire; Paul Sweeney, who lived in Amsterdam; Peter Glover of Warwickshire, and Colin Jones from Cheshire were jailed for between five and 12 and a half years.

"This was a conspiracy which overall cost the taxpayer a colossal sum of money," said Judge Swift as he handed down the sentences. "There was nothing genuinely commercial about any of it. It was fraud on a vast scale."

The men were directors of companies that imported mobile phones free of VAT, sold them on and disappeared without paying the VAT. The fraud went on for several years, with phones repeatedly imported and exported and the VAT stolen each time. Revenue & Customs investigators began tracking the trades across Britain, Germany, Ireland, Belgium, Spain and the Netherlands in 2000. The court heard how the number of trades expanded so rapidly that those involved had trouble following what they were doing. Source: The Guardian.

Building society team leader operated mortgage scam – sentenced 26 April 2007

A building society team leader from Northampton was jailed for seven years after trying to steal more than £700,000 from her employers in a mortgage scam. Louise Nelson, 37, admitted two counts of theft from her employer Nationwide, stealing £503,000 and then £209,000.

Nelson, a convicted drugs mule, had stolen the money to pay back a former boyfriend, known only as 'Ray'', after their plot to bring £70,000 of cannabis into the UK from Jamaica was stopped by Customs officers. She carried out the thefts while on bail for the drug smuggling, for which she was eventually jailed for two years. The first theft, in August 2004, saw the money transferred via London and Latvia to Dubai where it was withdrawn in cash and has never been traced.

Nelson's accomplices only managed to withdraw £20,000 from the second theft before the money was frozen. She was team leader of the Northampton-based remortgaging department of Nationwide, responsible for setting up new customer accounts and paying off their previous mortgages with other lenders. Using colleagues' passwords she diverted funds meant to pay off those other lenders into accounts controlled by her or others linked to her. Those two colleagues, the court heard, were interviewed by police and sacked during the initial investigation. Source: PA

Unusual fraud cases this year included:

London teenager inspired by a Leonardo Di Caprio character operated internet sales scam – convicted on 5 May 2007

A Chiswick teen who conned victims out of £250,000 through a series of internet scams was jailed for more than 100 counts of deception. The 16-year-old, who began his criminal career aged just 13, admitted breaching his bail conditions - including a ban on selling goods - after being arrested at his home. The boy was remanded by magistrate Michael Gibbins into secure accommodation.

Despite having previously been told he faced jail, Balham youth court officers had discovered that the boy was still trading - posing as the head of multinational companies selling stationery, office supplies and vacuum cleaners - from an office in central London and had employed another person. He had also tried to place adverts for his business in two national newspapers and had checked out new offices for his business last Wednesday. The boy was said to have been inspired by Leonardo Di Caprio's flick Catch Me if You Can in which a young con artist makes millions.

He lived a life of luxury, quaffing vintage champagne and travelling only by chauffeur-driven limousine, spent his cash on escorts, horse-riding lessons and drinking in some of the capital's most exclusive clubs. The boy, who hired his own personal bodyguard and flew abroad on "business trips", lived with his gran in Chiswick before moving to a succession of different offices. Source: The Independent

Example of fraud where company did not prosecute:

February – Welsh slate mine closes after managers cook books

On 26 February 2007, Alfred McAlpine announced that it had uncovered serious financial irregularities at its Welsh Slate division, which ran the three quarries. It was not clear exactly what had happened; McAlpine said only that managers had since 2003 “misrepresented” sales and production figures.

Building magazine reports in its current edition that: ″Alfred McAlpine believed it had discovered that its slate products had been underpriced, leading to a shortfall in its revenue. It concluded that this was concealed by means of false invoices, which inflated the number of sales it had apparently made and created a financial deficit in the accounts. However, to maintain cash flow, managers are alleged to have discounted prices if customers bought their slate earlier than they were needed. Although this brought in enough money to keep the business going, it meant the selling price was far below the value of the slate. Together with the earlier underpricing, it is understood that the products were being sold for as little as half the cost to make them.

″It is not thought that anybody gained personally from the underpricing, and Alfred McAlpine did not call for a police investigation. The police started one anyway… the complexity of the case is such that detectives expect to take months or years to reach a conclusion.

″The slate division’s pre-tax profit took an immediate £13m hit, and the cost to Alfred McAlpine’s eventual balance sheet is now expected to reach about £40m.″ Source: Building magazine website.