david hicks, kpmg, counter fraud

“You sir, are a fraud!”

12 March 2012

1© 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide

accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No

one should act on such information without appropriate professional advice after a thorough examination of the particular situation


Agenda

■ How much does fraud cost?

■ Current and emerging fraud types

■ Profile of a fraudster

■ What can you do to manage fraud?


Quiz – famous alleged fraudsters

Presenter

Presentation Notes

Clockwise: Darwin – life assurance fraud, panama Ken Lay – Enron scandal 2007 Bernie Madoff – Ponzi scheme 2010 Kweku Adobolli – UBS Rogue trader $2.3bn 2011 (Centre) Sir Allen Stanford - $7bn ponzi scheme 2009 Canoe – Life assurance fraudsters. EXAMPLE: Insurance fraudster was 'under extreme stress' when he committed £680,000 deception. disguised as an old man when he was thought to be dead. In March 2002, Darwin 'disappeared' in his canoe in the sea outside his seafront home in County Durham in March 2002. He spent five years living in Panama. �In 2007 he returned from Panama and walked into a police station in London, claiming to have no memory of the past five years. His lies were quickly uncovered after pictures were found on the internet of him and his wife Anne posing for a photograph in the office of an estate agency in Panama City. ��

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4© 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 4

UK Fraud Annual Comparison

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Value £m No. of Cases

Presenter

Presentation Notes

This graph provides us with a snapshot of the trends since 1987, measuring both the value of cases (bar graph) and the number of cases (line graph) for each year. What is immediately evident is that since the millennium we have had a dramatic increase in the value and particularly the number of cases over £100k being brought to court. Before the millennium the number of cases coming to court remained relatively constant. The high no. of cases has continued in the most recent Barometer issued in January 2011 where there were 314 cases reported during 2010, totalling £1.3bn in value.


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5

UK Fraud Annual Comparison – Key events

1992 -MAXWELL

1993 - BCCI

1998 –PETER YOUNG

2005 – RBG RESOURCES

2006 –IMPERIAL

2011 –UBS

Presenter

Presentation Notes

Now let’s take a look at some of the big high profile cases during the last 20 years. 1992: Maxwell - £140m 1993: BCCI – Over £600m 1994: Harrovian group mortgage frauds - £100m 1995: BCCI – A further £750m 1998: Peter Young - £200m 1999: Far Eastern Betting frauds - £300m 2002/2007: Carousel frauds have had a big impact on the numbers, with hundreds of millions being lost since 2002. Simply put, carousel fraud is an organised attack on the VAT system. Fraudsters exploit the fact that the movement of goods between EU member states is VAT-free – they then charge VAT on the sale of goods in the UK and abscond with the money instead of paying it over to the Government.. This has become such a problem that in 2005 HMRC acknowledged that certain government trade figures were likely to be seriously distorted as a result of the extent of these frauds). Although these frauds have lessened in recent years, there is still a backlog of cases coming through to the courts, and other attacks on the tax system (e.g. tax credit fraud) have grown in recent years to replace MTIC. 2005: RBG Resources - £261m 2006: Imperial Consolidated - £200m


How much does fraud cost?Rising Cost of Insurance Fraud

Source: Association of British Insurers and National Fraud Authority

Insurance Fraud 2006-2011

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How much does fraud cost? Impact of the Recession on the Insurance Industry

Recession

Key Indicators■ An increase in very amateurish claims

■ An increase in the proportion of ‘suspect’ claims

■ An increase in the proportion of claims referred to investigation that are proven to be fraudulent

■ An increase in calls to the Insurance Fraud Bureau’s (IFB) ‘Cheatline’

■ An increase in ‘walk-aways’

Changing Behaviour■ The economic climate could be

creating a more lax attitude to fraud

■ RSA research in March 2008 showed 3.6 million Brits think it’s wrong to lie on an insurance claim

■ In January 2009 they found that 4.7 million do not think making a fraudulent insurance claim is wrong

Impacts of Cuts■ Police resources are set to decline

over the next few years and in particular resources dedicated to financial crime

■ An erosion of middle management

■ This necessitates a much greater need for the industry to be vigilant towards fraud going forward

Motivators■ Desperation and ‘Lifestyle’ fraud

■ Financial difficulties is naturally a key motivator

■ Excessive pressure from within your organisation

Source: Association on British Insurers 2009 Research Brief, RSA Research (2008, 2009)


Current and emerging fraud types Common types of Insurance Fraud

■ Non-disclosure fraud

■ False claims

■ Claims overstatement

■ Duplicate claims

■ ‘Ghost’ brokers

■ Supply-chain fraud

■ Internal fraud


Profile of a fraudsterExternal fraud: Example

■ Organised Crime Groups (OCGs) are collaborating with a growing number of professional enablers – including doctors, lawyers and vets – who are all benefitting from advances in technology to widen their fraud operations

■ One typical example is a Staged Accident, where two or more individuals deliberately crash their vehicles into each other, resulting in various claims. (Cash for Crash)

Staged Car Accident

Accident Management Company

Helps stage accident

Garage and EngineerOvercharge for vehicle parts

Recovering CompanySupplies damaged car for staged accident/provides invoice for recovered car

Salvage CompanyUnderpays insurer for scrap

metal from cash

False VictimSolicitorRepresents ‘victim’

Collusive DoctorSupports alleged injury

Medical Treatment ServiceProvides treatment for non-

existent ailments

Credit Hire CompanyClaims to provide “victim”

with substitute car


Profile of a fraudsterInternal

Source: KPMG Report ‘Who is a Fraudster’ June 2011

■ 36 to 45 years old

■ Holds a management position within the finance function or in a finance-related role

■ Has been working for the same company for more than ten years

■ Commits fraud against his own employer

■ Operates in collaboration with other offenders

■ Male

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Profile of a fraudsterThe Fraud Triangle: Internal fraud

Opportunity


Profile of a fraudster Fraud triangle: Pressure

Debts

Meet budgets/expectations

Coercion or blackmail

Family pressures ‘I need the Money’

Addiction –drink, drugs

Illness

‘Results at any cost’


Profile of a fraudster Fraud triangle: Opportunity

Poor controls/lack of monitoring

Abuse ofauthority

Lack of segregation

of dutiesLack of effective

oversight/resource

Fraud can be hidden in complex

transactions

Exploitingerrors


Profile of a fraudster Fraud triangle: Rationalisation

‘They do not pay me enough!’

‘It’s only a small amount’

‘They can afford it’

‘It’s a victimless crime’

‘Rules are madeto be broken’

‘Everyoneelse does it’ ‘Who cares?’

‘It’s a cost of doing business’

‘I’ll never get caught!’

‘I’m the boss!’


Profile of a fraudster Warning signs – Accounts manipulation / Fraudulent Financial Reporting

Remote operations

Multiple banking

arrangements

Related party arrangements

Complex corporate structures

Profit warnings / credit warnings

High management

turnover

Results exceed market trend

Cash / funding gap

Unique products – unique risks

Aggressive accounting

policies

Highly-leveraged rewards

Aggressive forecasts

High hope valueDeclining industry / earnings

High analyst or other pressures

Significant director share

sales

Illegal unethical practices

Undue secrecyDominance / lifestyle issues

Lack of trust / poor auditor relationships


Profile of a fraudster Warning signs – Employee behaviour

Cuts corners or bends the rules!

Vendors and suppliers will not speak to

anyone but this person

Cannot produce notes / records

of business meetings

Personal pay and reward

could be manipulated

Has favourites or is surrounded by

“yes men / women

Ability and performance

not in tune with CV

Bullies or intimidates colleagues

EgotisticOverly secretShifts blame for errors, denies responsibility

Unreliable, prone to mistakes, poor

performance

Stressed, pressurised

Poor motivation or unhappy

Resists or refuses new

positions

Refuses or does not seek

promotion

Rarely takes holidays

Relationship “issues”

Addictive behaviour

Overextended personal finances

Lifestyle / Income

mismatch


Profile of a fraudster Employee-Related Red Flags: 2010 and 2008

Source: Association of Certified Fraud Examiners (ACFE) ‘Report to the Nations’ 2010

3.6%

4.2%

4.9%

8.7%

6.5%

7.3%

7.9%

6.8%

13.3%

13.6%

17.1%

20.3%

15.2%

18.7%

34.1%

38.6%

4.6%

5.1%

5.6%

6.3%

7.5%

7.9%

9.3%

10.2%

11.9%

14.1%

17.6%

19.2%

22.1%

22.6%

36.4%

43.0%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0%

Complained about lack of authority

Excessive family/peer pressure for success

Instability in life circumstances

Past legal problems

Excessive pressure from within organization

Complained about inadequate pay

Past employment-related problems

Refusal to take vacations

Addiction problem

Irritability, suspiciousness or defensiveness

Divorce/family problems

Wheeler-dealer attitude

Unusually close association with vendor/customer

Control issues, unwillingness to share duties

Financial difficulties

Living beyond means

Percent of cases

Beh

avio

ral r

ed fl

ag

2010 2008

Percentage of red flags displayed by perpetrators of fraud according to according to members of the Association of Certified Fraud Examiners (ACFE)


What can you do to manage fraud? How do you prevent and detect fraud?

Control Preventative /Detective

Example

Effective systems and controls

Preventative ■ Non disclosure of details – Motor and personal details are put through the CUE system to check previous claims history

Audit and Assurance Detective ■ Audits of underwriting/claims function

Segregation of duty Preventative ■ Cheques are not returned to the claims handler

Data analytics Detective ■ Claims payments just below self-authorisation limit

■ Payments made close to the expiry of a cover

Training Preventative ■ Regular training of fraud coordinators and front office staff

Oversight and Governance

Preventative and Detective

■ Whistleblowing hotline

■ Adequate reporting process in place

Ongoing monitoring Detective ■ Claims which are in a re-opened state at a particular point in time

■ Claims fraud software

Client onboarding Preventative ■ Details captured at application stage to determine whether multiple attempts have been made to lower premium

Information and intelligence sharing

Preventative ■ Sharing of information to wider industry e.g. names of individuals, suspect bank accounts etc. will assist in preventing further frauds and wider criminality


What can you do to manage fraud? Management’s role in detecting fraud

Occupational frauds are much more likely to be detected by whistleblowing than by any other means

0.8%

1.0%

1.8%

2.6%

4.6%

5.2%

6.1%

8.3%

13.9%

15.4%

40.2%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0%

IT controls

Confession

Notified by police

Surveillance/monitoring

External audit

Document examination

Account reconciliation

By accident

Internal audit

Management review

Whistleblowing

Det

ectio

n M

etho

d

Percent of cases

Source: Association of Certified Fraud Examiners (ACFE) ‘Report to the Nations’ 2010


Future predictions


Questions?

Thank youDAVID HICKSPartner, Risk Consulting – Financial ServicesEmail: [email protected]: +44 (0) 20 7694 2915

© 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

The KPMG name, logo and ‘cutting through complexity’ are registered trademarks or trademarks of KPMG International.

david hicks, kpmg, counter fraud

Documents

kpmg llp

kpmg international cooperative

subsidiary of kpmg europe

swiss entity

fraud cost

darwin life assurance

number of cases line

value of cases bar graph