The UK is in the grip of a silent epidemic. Recent analysis1 reveals that over £1 billion was lost by financial institutions due to payment fraud in 2023, with these figures remaining stubbornly high over the last four years. Yet the true scale of the problem is far greater; the National Crime Agency2 estimates that only 13 percent of frauds are reported, and a study by the Association of Certified Fraud Examiners suggests that organisations lose 5 percent of their revenue to fraud.3 In respect of the FTSE 250, this would amount to more than £19.2 billion. And, according to the National Audit Office, the amount of fraud in government expenditure alone rose from a total of £5.5 billion in the two years before the pandemic (2018-19 and 2019-20) to a total of £21 billion in the following two years.4 Of that £21 billion, (only) £7.3 billion relates to temporary COVID-19 schemes.
By any count, the plague festers, largely overlooked and eluding both media comment and political action, while eroding public confidence and inflicting deep wounds on its victims.
We need to roar into action to combat the crisis. But so far, the response has been insipid, with the number of arrests for fraud offences plummeting from 14,609 in 2015/16 to 4,956 in 2022/23.5 Delays in bringing these cases to justice have doubled in the past eight years, with the average case now taking an agonising 497 days to complete from charge.6 What's more, fraud receives only 2 percent of police resources, despite it being the most common crime in England and Wales, accounting for two-fifths of offences.7 Thorough investigations into criminal fraud serve as a powerful deterrent, reminding potential perpetrators that such actions will be met with swift and sure consequences.
In Autumn 2023, Nick Ephgrave took up the role of Director of the Serious Fraud Office ("SFO"), intent on a strong response. The first Director not to have a background as a lawyer, he draws on 30 years' experience in policing and has set out a bold vision for the SFO. In his first six months, he has launched more investigations than the former Director in the final two-years of their tenure.
How Can the UK Tackle the Fraud Problem?
First, we should incentivise whistleblowers. A successful model for this exists in the United States: The Federal False Claims Act, which dates back to 1863. This includes a "qui tam" provision – literally "who as well" — whereby those who assist a prosecution can, if it succeeds, receive part of the sum recovered. Under an amended version of the Act in 1986, whistleblowers may receive as much as 30 percent of the award in a successful suit, and they are protected from retaliation.
In the UK, there is scant enthusiasm for empowering individuals to act as watchdogs. Ironically, "qui tam" provisions applied in English law as long ago as the fourteenth century and continued for 600 years. But the whistleblower is commonly stigmatised — if you want to gauge public opinion, look up its synonyms: "weasel", "turncoat", "squealer", "snitch" and "grass".
Nevertheless, the logic of the U.S. model is compelling. It leads to more investigations, increases the scope for recovering stolen funds, and compensates informants, who may otherwise be deterred from blowing the whistle for fear of snuffing out their careers. In 2023, US$349 million was paid to whistleblowers in respect of cases with a value of US$2.68 billion.8
Mr Ephgrave also believes that offenders "should be encouraged to assist investigation". Again, there is an ingrained resistance to this in the UK, but it is likely to result in swifter resolutions and recoveries. The new SFO regime looks set to be pragmatic as well as proactive.
Reward is certainly a mechanism for bringing fraud to light, and there is a clear argument for embedding more effective whistleblowing procedures in corporate culture. But a comprehensive strategy calls for fresh thinking about retribution and restitution.
Harsher sentences for fraudsters would act as a deterrent. Many currently perceive the law's treatment of fraud as lenient; the consequences of detection don't seem discouragingly punitive. At the same time there needs to be less reliance on Deferred Prosecution Agreements ("DPAs"), which can amount to little more than a slap on the wrist. Holding company directors directly accountable for fraud through prosecution would underscore the message that no individual, however powerful, is above the law. Recent legislation has introduced a new offence, "failure to prevent fraud",9 which attributes criminal liability to a company if those 'associated' with it act fraudulently.
Justice extends beyond punishment, and restitution has a vital role to play. Recovering funds from fraudsters has a triple benefit, since it simultaneously punishes the offender, repairs the financial harm to victims and conveys a positive message. It's a symbolic act which, in evoking balance and fairness, resonates with the public.
Other innovations beckon. Fines obtained as a result of fraud cases brought by the SFO should be shared with the SFO, which is underfunded. Establishing a National Fraud Squad would increase capacity while streamlining the process of investigation. A public-private partnership to tackle fraud, whereby civilians could carry out some criminal investigations, would free up valuable police resources. One last important step is to improve the measurement of fraud, as its true costs are poorly understood.
Curbing the UK's fraud epidemic calls for a multi-pronged approach. By fostering open discussions, stakeholders can work together to develop the means to confront this threat and ensure a safer financial environment for all. The silent epidemic can be exposed, impeded and defeated.
Footnotes
1: UK Finance Annual Fraud Report 2024.
3: Association of Certified Fraud Examiners, OccupationalFraud 2022: A Report to the Nations.
4: Link.
5: "Fraud and the Justice System", House of Commons Committee report, 18 October 2022.
6: The Guardian, 11 June 2023.
7: "Fraud and the Justice System", House of Commons Committee report, 18 October 2022.
8: "Fraud and the Justice System", House of Commons Committee report, 18 October 2022.
9: Link.
Originally published on June 06, 2024
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