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As the economy falters, UK business fraud is booming. While the law-abiding tighten their belts, Britain’s fraudsters are getting fat. 

This is the unmistakable conclusion of a new report from accountants and business advisers BDO Stoy Hayward. The latest FraudTrack analysis makes for grim reading as fraud figures have increased at an alarming rate to reach new heights.

Whopping increase 

BDO’s research shows that reported fraud cost UK businesses over £705m in the last six months alone. That’s a whopping 74 per cent increase on the same period last year.

The value of reported fraud in April 2008 alone was £317m and there is no sign that there is going to be any let up in the future.

The picture is worst in the finance and insurance sectors. In those same six months, reported fraud cost the UK’s bankers and insurers more than £636m.

This is a phenomenal 90 per cent of the total cost of fraud in the first 6 months of 2008 and a 15 fold increase from fraud levels last year.

Businesses need to be aware that their biggest threat is not organised criminal gangs, but their own “trusted” internal management and people they do business with everyday.

Management fraud accounts for 46 per cent of fraud cases and third party fraud accounts for 32 per cent, costing businesses a total of £541m, which makes up 77 per cent of all reported fraud in the first half of 2008.

Regulatory pressure 

Simon P. Bevan, head of BDO Stoy Hayward’s fraud services team, said, “What we are essentially saying is that management are robbing you blind, suppliers are ripping you off left right and centre and regulators are breathing down your neck.

He added that regulatory pressures will increase and regulators would become more intrusive as the recession deepens and warned businesses to be prepared.

“That’s a triple whammy for businesses. The fraud problem facing all UK business could be bigger still. Our latest figures, while grave enough, show only the value of reported fraud, the fraud we actually know about,” Bevan added.

He pointed out that what was really scary was that these figures did not even include losses that may have been incurred by rogue traders.

“When you add in the fraud that’s not yet been uncovered, or which businesses have discovered but don’t wish to expose, the real cost to UK industry could be much, much higher,” Bevan said.

As economic conditions worsen, the experts at BDO Stoy Hayward believe the problem of UK business fraud is certain to grow. 

Increasing concern 

Bevan explained that the combination of spiralling personal debt and desperate employees spelled real danger for business.

“Sadly, our figures provide clear evidence that commercial organisations of all types and size throughout the UK are currently failing - in some cases quite spectacularly - to get to grips with the fraudulent activity of their staff,” he noted.

He highlighted a dramatic increase in banks, corporate and public sector organisations contacting BDO directly about its fraud investigation and prevention services and said he expected this to rocket further still.

Bevan said that interest was coming from board level as senior executives at British businesses are becoming increasingly concerned about fraud risk as the credit crunch bites.

As well as urging businesses to tighten their anti-fraud procedures, Bevan and his colleagues at BDO Stoy Hayward are keen to see a tougher line on custodial sentencing.

He said that while UK custodial sentences for fraud had increased, from 2.88 years in 2005 to 3.14 years in 2008, these were still low when compared with those of other countries such as the US, where large frauds can result in prison sentences of up to 20 years.

Employee fraud 

“Given the sheer value of reported fraud in this country, our sentences are simply failing to reflect the severity of the crime and its impact on both businesses and individuals,” Bevan concluded.

The FraudTrack shows that employee fraud increased to 11 per cent of all fraud compared to 2.5 per cent in the same period last year.

Fraud is still costing the taxpayer dear, with cases of fraud against the Inland Revenue and Customs and Excise amounting to £22m. This is a sharp drop on the same period last year, however, when the value of reported tax fraud stood at £336m.

London and the South East is the fraud hotspot of the UK with £634m, nearly 89 per cent of the total value of reported fraud in the UK.

Way back in second place is the North West with reported fraud worth £47m.  This trend reflects the density of financial services in the Capital.

Greed is still the main motive for fraud at 36 per cent, however, debt is a close second at 25 per cent followed interesting by gambling at 24 per cent.

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Related links

• BDO Stoy Hayward