In his famous book “The Great Crash of 1929”, John Kenneth Galbraith wrote, “To the economist, embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or years may elapse between the commission of the crime and its discovery. This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss.” Mr Galbraith argued that during times of economic growth, “People are relaxed, trusting and money is plentiful….But even though money is plentiful, there are always many people who need more…In depression all this is reversed. Money is watched with a narrow, suspicious eye.”
In the aftermath of the spectacular crash of that year, a can of worms was revealed. Countless examples of corporate fraud were uncovered.
It is always thus. The last major recession in the early nineties was followed by the emergence of frauds such as Polly Peck, Maxwell and BCCI. Over £1bn of fraud was recorded in 1993, second only to 1995 when a second wave of BCCI-related fraud pushed the value to the highest ever recorded by KPMG’s barometer, at £1.2bn.
Then in the noughties there were these two companies called Enron and WorldCom.
Mind you, it’s not like banking excess, where, as we argued above, banks get away with their excessive behaviour and repeat the trick a few years later. In the world of corporate fraud it is not uncommon for the fraudsters to end their days in the clink.
And so all eyes turn to the here and now.
According to KPMG, “An economic slowdown in 2008 as the result of the credit crunch could result in a rise in the emergence of high-value corporate frauds.”
In recent years there has been a dramatic increase in the number of frauds committed in the UK, and this trend shows no sign of reversing. In the four years between 2003 and 2006, over 800 frauds of £100,000 or more came to court – more in four years than in the previous 12 years put together. But whereas twenty years ago the great majority of frauds took place in London and the South East, during the last several years around two thirds have taken place elsewhere in the country as the fraud threat has spread in all areas.
Alex Plavsic, Head of Fraud Investigations at KPMG, said, “Our analysis shows that in times of economic slowdown, when belts are tightened and processes are committed to greater scrutiny, more high-value frauds have tended to be uncovered. If the current credit crunch does lead to a slowdown through 2008, we may therefore see the detection of some high-value frauds in its wake,”
KPMG says some frauds have been perennial ‘favourites’ through the years, and occur over and over again. Accounting frauds – fictitious invoices, ghost employees, revenue manipulation – are common, as are attacks on banks in the form of fraudulent borrowings and account takeovers.
Other frauds have emerged more recently. Carousel frauds (VAT fraud on high value, highly portable items, such as mobile phones and computer chips) have become a particular problem, and represent a large proportion of the frauds against Government over recent years. Technology has given rise to a new raft of frauds, such as email hoaxes (phishing), ID theft, and skimming.
Mr Plavsic concluded: “The truth is that one reason fraud levels have been increasing recently is that technology has enabled more frauds to be committed. Where there is opportunity, there is fraud.”
