The risks and penalties of money laundering for charities and how to guard against it
Corporate fraud is prolific in our society. What are the most common types of corporate fraud and how should they be dealt with?
According to the Office of National Statistics, in the year ending December 2013, 207,252 fraud offences were recorded by either the police or Action Fraud in England and Wales, representing a volume increase of 25% compared with the previous year and an increase of 191% compared with 2007/08. During 2013, Action Fraud recorded 1,657 reported cases of corporate fraud.
There are many varieties of fraud, some of the most common of which are described below.
Examples of fraud within a company
False accounting fraud happens when an employee or director of a company (or other organisation) deliberately cooks the company books. He or she may manipulate financial results data during the course of business for the purpose of concealing losses; bloating share prices or fabricating profits in order to entice new customers and business; securing enhanced dividends and bonuses; covering up funds that have been unlawfully removed from the company; falsely showing compliance with regulatory requirements; or, obtaining higher loans from a bank.
False invoicing fraud occurs when false, bogus or overinflated invoices requesting payment for goods or services from real or fictitious companies are submitted by an employee or supplier. The “extra monies” are then paid into the wrongdoer’s own pockets.
Fraud in the supply chain can take various guises. This type of fraud may be practised by an external supplier, with or without the collusion of internal employees.
One example is bank mandate fraud where the details of an existing supplier are altered by some internal or external fraudsters so as to direct payment to a fraudulent bank account. A ghost supplier is disguised as a legitimate organisation and tricks the company into remitting payment into their account for instance by bogus emails, false invoices and telephone calls.
Carousel fraud, and its sister with the slightly less glamorous name, Missing Trader Intra-Community Value-Added Tax fraud (MTIC), occurs when fraudsters pocket tax monies. The fraudsters import VAT-free goods from an EU country and sell them on, with the VAT uplift included, to unassuming domestic buyers and companies. The fraud is committed as fraudsters fail to give the levy to the Government. The goods then may go round ‘the carousel’ in the so named fraud, passing from company to company, each paying VAT, until they are exported. As exports to the EU are VAT-free, the exporter claws back the entire VAT sum from the Government, despite the Government never actually receiving the tax monies in the first place.
Bid rigging takes place when a company opens a bogus tender process for a commercial contract even though that contract has already been promised to one of the bidding parties. Cover bidding occurs where the bidders collude so that one of them secures the contract. By way of example, the others may not make the cut because they have deliberately failed to meet a specified condition or presented an uncompetitive proposal. In either case, as the tender process is rigged, the company may fail to give the contract to the best/most competitive bidder.
The importance of investigating potential fraud
Once you have an inkling that a fraud may have been committed within your company or by a related party, it is essential not to delay in starting an investigation. The nature and breadth of the problem may not be obvious from the outset. The fraud may have gone undetected for years, notwithstanding the scrutiny of the company’s auditors. A simple digging around into what you may have initially thought was an employee manipulating the stock figures could unravel a complex network of fraud involving multiple suppliers and internal players, not to mention millions of pounds of your hard earned money.
Reaction to the discovery of a fraud
You or your company are under no obligation to report a possible fraud to the police before or following the conclusion of an internal investigation but you may wish to do so to deter similar behaviour in the future. For the same reason your company may consider taking civil action to recover any losses from employees or other companies who colluded to commit fraud at your expense. Although some companies may have the financial capacity to write off any losses if they so wish, unfortunately, smaller companies may find themselves with insolvency on the horizon as a result of the fraud.
If you’re interested in the topic, look out for part 2 of my series of blogs on corporate fraud, where I will discuss covert internal investigations conducted by companies suspecting that fraud has been committed by an employee, manager, director or related third party.
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