George McKillop says firms should be checking up more on their staff

It has been tagged the “victimless crime”, but insurance fraud cost around £16bn in 2004, according to research by Norwich Union. The damage amounts to 1.4% of the UK's entire economic output and the ABI calculates honest policyholders pay about £1.5bn a year subsidising insurance fraud.

Many people's perception of insurance fraud is that it is carried out by individuals inflating the cost of a camera lost on holiday. However, research carried out by MORI, for a syndicate of leading insurance-related organisations, found that up to one in seven claims made by businesses are also exaggerated, while one in three of a cross-section of the UK's biggest firms supplied false information on insurance proposal forms.

Many of the cases uncovered involve collusion between corrupt employees, who are in a position to provide sensitive, confidential information, and external claimants.

In 2004, one UK insurer alone detected 4,000 clear-cut cases of fraud, but because of low take-up rates by the police it presented the authorities with only 41 of these cases – so called “super-frauds” involving significant public interest or organised crime. Of these cases, only 18 were taken to court, although all the prosecutions were successful.

On top of this, the FSA believes internal fraud in financial institutions is a growing problem.

There have been a number of cases in which individuals working for financial services firms have been coerced into providing information on customers to outsiders. They then then used the information to commit fraud. In some cases it is staff who actually initiate the fraud.

This highlights the importance of firms ensuring that they have adequate pre-employment screening checks in place as part of their recruitment processes. In spite of this, some firms are still reluctant to have job candidates professionally screened.

Further, some firms continue to simply rely on audit to uncover ongoing fraud despite the fact that such fraud is often disguised within records and will not be uncovered by normal audit processes.

There is also a common misconception that fraud detection is the responsibility of senior management, but staff should be aware that this is not the case.
Quite simply, it is every employee's responsibility to keep an eye out for fraudulent activity, but this should be supplemented by professional fraud detection reviews as a part of overall risk analysis.

Senior staff should certainly be given training in how to spot the early warning signs that employee fraud might be taking place, such as staff who appear to have undergone a marked personality change, or staff with a tendency to work late and a reluctance to take leave, or those who exhibit a sudden change of lifestyle or are displaying unexplained wealth or living beyond apparent means.

These indicators can act as an early warning system that fraud may be present.
However, it is the in-depth tests of fraud detection specialists which are most likely to uncover the unexpected and more companies are relying on such specialists to carry out internal and external fraud health checks.

This trend is hardly surprising given the fact that the ever mounting pressures on our police forces to deal with street crime means there is little if any time left for the investigation of company fraud.

And of course fraud is a major crime for which the government does not set police targets. The fact that the ABI has a memorandum of understanding in place with the Association of Chief Police Officers in regards to this crime is of little value if there is a reluctance to investigate and prosecute. IT

‘ George McKillop is managing director of Haymarket Management Services