Fraud booms in East Anglia & Yorkshire push UK bill to £2 billion

21 June 2017 Consultancy.uk

East Anglia has seen an 802% increase in reported fraud over the past year, while Yorkshire experienced a similar wave of expensive scams, pushing the national fraud toll to £2 billion for the first time in 5 years, BDO has found.

The total value of reported fraud in 2016 hit a five-year high, increasing 31.5% to £2.0 billion, according to new analysis by professional services firm BDO. The alarming spike comes in spite of the number of reported cases falling slightly from 519 in 2015 to 504 in the most recent data available, as the average value of fraud cases rose 35.4% to a five-year high of £3.9 million, according to BDO’s FraudTrack division, whose sample traditionally excludes cases of less than £50,000 in the UK.

Regional hotspots

In the 2015 figures, London accounted for the highest portion of fraud in the UK at £599.8 million, but while the UK’s financial hub is understandably still one of the top victims, the cost of fraud in the London and South East region has decreased to £381.4 million in the latest results. The biggest case in London involved a £79.5 million Ponzi scheme, in which three men claimed their electrical wholesale business had won a contract to supply electricals to the London Olympic Village, in order to persuade victims to invest hundreds of thousands of pounds into the fictional project. Mirroring London, the West Midlands remain another of the biggest hotspots for fraud in the UK, in spite of a 16.6% decrease in such crimes.

Number and value of fraud in United Kingdom

Bucking this trend though, while contributing significantly to the national increase in fraud costs, Yorkshire and East Anglia both boomed. Yorkshire, strikingly, rose 388.1% to £1.02 billion, of which a huge proportion was contributed to by a single £1 billion VAT, which researchers attributed to a woman from the city of York. While this singular occurrence might be something of an anomaly, suggesting that the costs of such activity will most likely stabilise and decrease in the region next year however, East Anglia saw an 802% rise in the cost of fraud, which was spread over a 186% increase in the number of cases to 20 in the locale in 2016. While the cost of £15.1 million is significantly smaller than the other key regions then, the boom is a clear cause for concern, particularly with the region playing home to high proportions of citizens most susceptible to con artists.

In 2016 there were 153 reported cases of fraud targeting individuals, which accounting 30.4% of all reported cases are the most common of this brand of crime. While the number of these cases only fell by 1, the total value of these cases shrank by over £100 million, falling to £172.3m from £276.7 million in 2015, the first value fall in this kind of fraud since 2012. An analysis of these frauds shows that the majority of cases continue to target the elderly and vulnerable, with striking examples highlighted by BDO’s report including a £9 million fraud perpetrated by four businessman who conned victims into signing up for satellite TV warranties they did not need, or bullying them into mis-sold deals with nuisance calls, and a £3 million scam operated by five fraudsters which saw pensioners and young families buying homes on land in Warwickshire that could never be developed.

Kaley Crossthwaite, Head of Fraud at BDO and author of the report, said, “Looking beyond the anomaly of the £1 billion VAT fraud, the good news is that the value of fraud has fallen in many key areas and sectors. Unfortunately, volumes continue to remain high at over 500 cases a year suggesting that, while people are picking up on frauds before they spiral too far out of control, there is still plenty of fraud out there."

Sector peaks and troughs

Public administration was the industry sector with the highest level of reported fraud, accounting for £1.4 billion of the UK total, an increase of 204.7% from the £450.9 million reported in 2015, due in large part to the previously mentioned £1 billion VAT case in York. Beyond this anomaly though, the volume of fraud in public administration also rose, climbing from 114 cases in 2015 to 150 cases in 2016.

Value of fraud in the UK by fraud type

With the public and regulatory spotlight continuing to scrutinise financial services ever more closely, both the volume and value of reported fraud in the sector fell during 2016.

The value of reported fraud in financial services fell more than 62.1%, from £567.2 million in 2015 to £214.9 million in 2016. The volume of reported fraud also fell, dropping from 70 cases in 2015 to 58 cases in 2016.

Within the sector, money laundering showed the biggest decrease in the value of fraud, falling from £201.6 million in 2015 to £98.9 million in 2016. The volume of cases, however, rose from 15 last year to 20 cases this year. A key case involved a man arrested by City of London police on suspicion of money laundering. The arrest was made following the investigation of a UK bank account thought to be linked to an organised crime ring. Police discovered £30 million worth of banker’s drafts during a raid on a home in the Welsh valleys in what is thought to be the biggest money seizure by UK law enforcement. 

Types of Fraud

Number and value of fraud by sector

Mortgage fraud and third party fraud also showed a significant year on year decline both in terms of value and volume. Mortgage fraud fell from 13 cases costing £151.1 million in 2015 to £54.8 million in 2016 for 4 cases, while third party fraud fell from £209.7 million in 2015 with 26 cases to £47.6 million in 2016, and just 17 cases.

While warning that the comprehensive figures still don’t paint a full picture, as many high profile victims of fraud prefer to handle matters privately without involving courts to evade public scrutiny on their own end, Kaley Crossthwaite further commented on her findings, “It is extremely encouraging to see that the public and regulatory scrutiny within financial services is starting to gain some traction in reducing the volume and value of reported fraud. In particular, we have seen a marked decrease in the level of insurance fraud as firms in the sector adopt ever more stringent systems and controls to address fraud.

“Fraud in public administration shows a significant spike due in large part to a £1 billion single VAT ‘carousel’ tax scam, however stripping this out the sector still shows a sharp increase in the volume of reported fraud, most of which involves various types of tax fraud.

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An 8-step framework for banks to prepare for FRTB changes

02 April 2019 Consultancy.uk

With FRTB expected to come into force in 2022, it is critical that banks implementing necessary changes remain on track for their compliance timelines. Whether a company is aiming for the mandatory Standardised Approach (SA) or the voluntary Internal Models Approach (IMA), the programs often represent a significant investment, requiring process, systems and cultural change. 

Drawing from its experience in helping banks meet the milestone set in their compliance timelines, Capco – a management and technology consultancy for the financial services industry – has developed an eight-point prioritisation framework for FRTB preparation and implementation. Natasha Leigh Giles, a Managing Principal at the consultancy, outlines the main dimensions of the framework: 

Prioritisation framework for FRTB

1. Front office operating model

For those who have already implemented the Volcker rule, the desks are well defined with monitoring and governance frameworks. However, for companies that have not been required to adhere to the U.S. regulation, there may be additional work involved in implementing desk-level controls as required under FRTB. The trading desk structure is especially important for banks planning to implement IMA, as this regime is applied at the desk level and requires that the full flow of the selected desk is able to pass the IMA requirements (including the modelability test for the risk factors). Key business decisions may be required if a desk trades complex products that are more aligned for SA treatment. 

2. Product scope

In order to reach the IMA status, products are required to be supported with additional data sets including historical market and reference data as well as risk factor pricing evidence. The opportunity for 2019 lies in refining the assessment on the feasibility of each product type to ensure a clear scope is agreed for the IMA environment. If the challenges are too complex or costly to overcome, such as access to historical market data, availability of price verification for the risk factors or significant enhancements to support computational capacities, then these products should be scoped out of the IMA program as soon as possible in order to save time and effort on continuing analysis. 

3. Client & trading activities

There is no need to wait until the FRTB implementation timeframe to undertake a holistic review of client and trading profitability – including the capital impacts. For example, running training and awareness campaigns within the front office can help the traders to understand the impacts of their activities and encourage changes in the way that they trade. By considering this holistically as a business and operational change, it can help keep the focus and resources on the primary (profitable) business in preparation for the compliance deadline. 

4. Internal controls

Methodology, reporting, auditability, and process governance for internal controls also need to be monitored in detail. We recommend having clearly defined processes accompanied by effective training across front-to-back office. For some banks, it will be beneficial to audit existing capital adequacy processes to ensure that findings are highlighted in advance of the implementation timeline and the appropriate focus is achieved within senior management.

5. Data & metrics

Financial institutions need to consider their overarching governance and ongoing management for the data (including ownership, quality control, golden source storage solutions, etc.) and the ongoing control framework for ensuring the data remains accurate and relevant for capital adequacy modeling. If there has not been a data lineage exercise already applied, this is a great opportunity to deliver business benefit, even in 2019. By creating agreed definitions, preferred sources, ownership and workflows for managing data quality, the benefits of more accurate data can already be applied to existing capital calculation models. 

Framework for FRTB

6. Model management & validation framework

In preparation for the FRTB regime, an opportunity for 2019 is to understand if there are gaps or control concerns to manage immediately. Model enhancements across SA and IMA will need to be productionized for output accuracy and refinement, however, these need to be maintained alongside existing Basel 2.5 BAU models and other concurrent changes e.g. LIBOR Transition. Business process optimization, testing environments and automation tools, documentation and model validation can all be reviewed for immediate benefits and prepare the process for a smooth implementation of the future FRTB models. 

7. Technology platform & testing environments

With regards to technology planning, the opportunity in 2019 is focusing on gaining agreement of the front-to-back FRTB future state architecture including the use of vendors as applicable. By ensuring a disciplined focus upon design and solution definition across all requirements, it provides a clear baseline for implementation planning and scheduling. Establishing a technology architecture which allows for FRTB data feeds, model enhancements, control definitions and accurate capital calculation outputs will provide the program with essential data and metrics needed for decision making. 

8. Leverging synergies

Once a baseline plan has been established, it is possible to identify synergies across other programs – such as the SA-CCR (Standardized Approach for Counterparty Credit Risk) or the IMM (Internal Models Methodology) – that could deliver overlapping benefits at reduced effort. Understanding requirements, defining the future state architecture, and implementing the change in a complex environment requires a mix of strategic principles and program management. Therefore, we consider it an opportunity for 2019 to take a centralized approach for data lineage and requirements gathering as this would be beneficial for optimizing capital costs across both the market and credit risk environment.

Conclusion

By considering each topic strategically in 2019, benefits such as data quality enhancements, strengthened internal controls and flexible test environments will not only bring immediate business value, but also set a solid foundation for a comprehensive FRTB implementation in the years to come. 

For more information on Capco’s model and the its approach in helping banks plan for FRTB, download the full whitepaper on the firm’s website.