Ways and means – fixing fraud enforcement

The UK Government plans to use a new economic crime levy in part to address fraud but more investment in law enforcement is not of itself the answer, argues Rachel Adamson of Adkirk Law.

Fraud is on a meteoric rise in the UK. With recent figures from the Government reporting a 24% rise in the past year, and consumer group Which? estimating that UK£9.3bn has been lost it’s obvious something needs to be done. If the old proverb “fraud and cunning are the weapons of the weak” is to be believed, then it would appear that fraudsters are resolving their weaknesses with a strength in numbers approach.

In a move to stem the relentless wave of fraud sweeping the nation, the Government has introduced a new Economic Crime Levy. [1] This Levy will apply to medium and large businesses that are subject to money laundering regulations and will seek to raise additional funding for the Government’s efforts to clamp down on serious fraud. However, under the proposed approach, these additional funds and resources would be largely misplaced.

As it stands, there is too great a focus on backend enforcement, whilst the bodies and agencies working on the front line of counter-fraud enforcement are being starved for resources and funding. For one example, this misstep is well demonstrated by the proposed plans to add additional accredited financial investigators to the ranks.

It is important to maintain high capacity for backend investigation, but this is not where priorities should currently lie, as financial investigators are typically only used once an investigation has begun or indeed once a case is finalised and confiscation proceedings are underway. There is limited value to increasing capacity here if the means to uncover and investigate cases are not up to scratch, which is currently the case. If anything, this approach could create a reverse bottleneck, with investigators idly waiting for a case to investigate.

Rather, resources and increased spending is urgently needed at the front-end operation in the counter-fraud effort. This is where regulators are struggling to keep up with the rising volume of fraud cases, as there simply isn’t the funding or manpower to effectively police fraudsters. The additional budget generated by the Levy would be more effectively spent on the bodies that seek out and prosecute cases of fraud and money laundering.

Whilst the Levy will be effective in raising some additional funds, it alone will likely not be enough to achieve the lofty ambitions that the Government has set out for it. Bodies responsible for cracking down on fraud, such as the Serious Fraud Office (SFO) and National Crime Agency (NCA), are as much in need of wholesale structural change as they are additional resources. Funding is only half the battle, and without structural reform, we will only be left with a well-funded machine that still doesn’t function properly.

Happily, there is a good example for the SFO and NCA to follow, in the shape of the way Trading Standards operate. Trading Standards, as a separate local department in each Local Authority, is actively supported by regional teams and ultimately by National Trading Standards (NTS) as they seek to clamp down on fraud. This is done by providing additional support for ongoing investigations. Furthermore, they give local agencies the option to take investigations further up the chain to be progressed by the regional teams supported by NTS, which has proved a highly effective approach.

Adopting similar tactics would enable the SFO and NCA to continue overseeing investigations into the most serious fraud cases, while ensuring that smaller level cases can be dealt with at a local level. In theory, the current model is actually meant operate in this way, but in reality, most local authorities don’t investigate the frauds to begin with. If support at local level was enhanced, this structure would likely operate as intended and ultimately begin to plug the gaps that currently exist.

Furthermore, the National Economic Crime Centre (NECC) in theory has the authority to task local police forces to address fraud. However, until they receive more resources in terms of on the ground investigating, the NECC will fail to properly use these powers. Funding should therefore be funnelled into bolstering the ranks of highly trained fraud investigators, who stand at the front line of fighting fraud, as opposed to accredited financial investigators, who are typically bought in at the confiscation stage.

However, whilst additional resources and structural reform are two crucial pieces of the puzzle, the NCA must also refresh its approach on how it decides the investigations that are worth launching and look to overhaul the Suspicious Activity Report (SARs) regime. At present, most frauds reported to the NCA, or the police are not investigated at all. In particular, those reported through SARs are too often not looked into, even if there is good reason for investigation included in the report. Ultimately, the value of the fraud is often deemed unworthy of following up, and it is usually only when there is substantial value that something will be pursued. Currently, frauds reported to the police are often dismissed as a civil dispute. This is simply not good enough and is perhaps the most essential change needed.

The NCA is also often ambivalent to the SARs that relate to seemingly low transactions, allowing an easy loophole for fraudsters to exploit. There needs to be greater support for businesses under the SAR regime, and funds redirected towards improving and streamlining the process.

Fortunately, SARs reform is already underway, which may make some progress in improving the systems of fraud reporting. If nothing else, the improved interface may streamline the process and provide better ease of use. However, the real issue with SARs lies at the sheer volume of rejections that occur and the lack of guidance and response for victims. For example, if something is not articulated in a particular way, the SAR is rejected, and the practitioner is left to their own devices in deciding whether or not they would have a defence.

The NCA currently sets an incredibly high bar for the SARs that regulated businesses must submit; as such, many of these reports are deemed insufficiently concerning to launch an investigation. Unfortunately, it is highly unlikely we will see change here, as the law commission has previously ruled out any possible reform to defining suspicion. Practitioners, then, will likely continue to face the reality of being required to report suspicion at every level, with the likelihood that the fraud will be deemed unworthy of an investigation. This is where SARs really let fraud victims down, and where improvements and reforms must be made.

Furthermore, the current approach from the NCA makes it very hard to gain permission to progress with any SAR transactions that have already been rejected for investigation. The referrer is subject to a seven-day delay time, regardless of whether the SAR is actually investigated, wherein they are not legally permitted to notify their client of the reason for the interruption. This leaves businesses in a horrible, unsupported limbo where they open themselves up to potential prosecution if they accept the funds but are unable to notify clients as to why they haven’t been accepted.

With HM Revenue & Customs recently reporting that the taxpayer has been defrauded of up to UK£5bn through Covid relief schemes it has never been clearer that we are in dire need of effective action to combat fraud. This change needs to start from within the regulatory and enforcement bodies, and must take the form of better resource management, structural reform, and refreshed parameters on when to launch investigations.

The fraudsters’ weapons may be weak, but they are finding the chinks in the authorities’ armour. Until law enforcement and regulators change suit, we can expect fraud to continue growing in strength and numbers, and at the expense of the law-abiding public.

This article was first published in Fraud Intelligence http://www.counter-fraud.com.