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Management

Crime and punishment

Tuesday, 28 November 2006

Robert Miller investigates how much resources finance directors should allocate to fighting corporate crime Finance directors need no reminder of their onerous duties in keeping the company accounts in order and compliant with a raft of new rules and regulations. Now, however, there is another important area of responsibility - protecting the company against corporate crime - which is proving to be just as big a challenge.

To complicate matters further, the chances are that if a firm does become a victim of crime it will most likely be down to 'an inside job' according to one of the City's most senior fraud investigators.

The latest tri-annual security survey by the British Chambers of Commerce (BCC) shows that 64 per cent of companies in the UK have been the victims of a crime (a rise of six per cent from 2001). The typical cost per incident was at least £8,000 and often much more. Theft and damage to property and buildings were among the most common types of crime experienced.

The BCC's president, Isabella Moore, notes: "Crime against business affects firms from all sectors of the economy. Both business owners and their staff are left demoralised by incidents of crime and this damages the productivity of firms." The BCC has called on the government to do more to promote awareness of the local Crime & Disorder Reduction Partnerships, the statutory authorities charged with tackling crime-related issues in their areas.

"By failing to grasp the seriousness of crime against business," says Moore, "the government is putting its enterprise agenda at risk. Every police force should be required to record crime against business as a separate statistic. This would allow police performance on this issue to be monitored while enabling them to build up a more accurate picture of the problem in their area."

Theft and damage to property are both distressing and costly to businesses. They are, however, only the tip of the iceberg in terms of economic and corporate crime. The problem faced by those charged with investigating almost any crime in this particular area is that they are alerted only after the offence has been committed. And it can take days, or even months, for the more sophisticated and costly 'high value' frauds to be discovered. Indeed in the past, many companies - banks and finance houses included - have been reluctant to report fraud cases to the police.

Ken Farrow, Chief Superintendent of the City of London police and one of the UK's most experienced fraud squad officers, observes that the fight against corporate crime and security breaches usually involves insiders: "Around 90 per cent of the cases we look at are, in the end, down to insiders within the company. They either commit the offence itself or at least supply the vital information needed to third parties. I think the level of sophistication and the spread of economic and corporate crime is much more sinister these days."

He continues: "It has got to the stage now where it is quite common to find that someone is planted within a business with a specific task such as theft of information, diverting funds, blackmail or money laundering. It is hard to quantify the losses to business in terms of overall monetary value in this area but the latest government figures suggest it could be as much as £14bn a year."

Farrow argues that the responsibility for protecting a company against any type of crime has to start within: "It begins with the finance director. They generally have control of the budget and it is up to them, for example, to make sure that the human-resources department is well funded and has proper screening methods. As companies grow, so it is more likely that they will sub-contract certain jobs to agencies, whether it is cleaners, caterers, temps or even physical security in the form of guards.

"These days you can't afford to accept people at face value. They have to be checked out thoroughly and references followed up. It's the same principle as the know-your-client rules for banks and other financial institutions. Are people who they say they are?"

As well as rigorous cross checks on permanent and contract or part-time employees, the City of London police officer also recommends: "You should look at the agencies supplying the staff or temps. It is important to find out whether they have a track record in your particular industry and that they themselves have thorough personnel vetting procedures in place."

Guy Rigby, a director of WJB Chiltern, an independent professional services group, says that in his experience "spending on security in general is well organised in the biggest UK companies but outside of that it is very patchy. It is a dilemma for finance directors because when they tell the board of directors they need to allocate more resources to security, the chief executive might ask: 'Is it an issue and do we really need to spend all this money?'"

Rigby concedes: "It can be awkward for finance directors to get their voice heard, particularly in fast-growing companies run by entrepreneurs who just want to get on with business and make a profit. That's why they have to make sure that they have the ear of the independent directors, and particularly those on the audit committee. They can help to re-enforce the message that security and the fight against corporate crime is a serious commercial issue which ultimately carries collective board responsibility."

So what should finance directors do? Rigby advises: "In the first instance it doesn't have to be expensive. You can conduct your own 360-degree review of the company and its activities. Look at all the risks involved from an operational and financial stand-point and include areas such the protection of your Intellectual Property Rights. Ensure that you have adequate stock and cash control systems, internal corporate governance procedures and, of course, the proper information technology with all the right safeguards against internal misuse, viruses and hackers."

So should a prudent finance director take out insurance to protect the company and, if so, how do they justify the extra cost in premiums? Anthony Hall, a director and founder of Specialperils, an online business-to-business portal which acts as an insurance intermediary between commerce and industry, argues: "Finance directors should treat such insurance premiums as a percentage of turnover just like any other item on the annual budget."

Hall, a chartered insurance practitioner and registered insurance broker, says there are three areas of a business that finance directors should consider when insurance is discussed. "The first I have to say is actually not crime-related at all, but I think it is important to mention. It covers Key Personnel who might be injured or die and who would be very hard to replace if you operate in a specialist area. You have to set that in the context of a very tight labour market."

The other two insurance categories Hall recommends finance directors might consider cover loss and expenses through criminal as well as civil incidents. "Fidelity guarantee policies are for items such as loss of stock, cash, computers or data. Commercial legal expenses insurance, which is very often overlooked, insures for contractual disputes, debt recovery and cases involving the protection of intellectual property."

Hall advises: "What finance directors should do is negotiate for specific insurance cover that suits them and their company, having taken into account all their assets and liabilities. It helps to take advice on managing or insuring particular risks before paying out for unnecessary or expensive policies."

Robert Miller is a former associate City editor of the Daily Express, economics editor of the Sunday Express and associate editor of Sunday Business who was a member of the DTI's independent Foresight directorate on financial services for small and medium-sized enterprises. He was banking editor of The Times, personal finance correspondent of The Observer and deputy editor of Money Observer as well as a public-interest committee member of the Lautro regulator. He has been named Personal Finance Journalist of the Year and Investment Journalist of the Year.

Further Information: British Chambers of Commerce: www.chamberonline.co.uk

Crime and Reduction Partnerships: www.crimereduction.gov.uk