The Fraud Cast: Fraud in a Changing World

Transcript

Fran Marwood

Morning, everyone, and thank you all for joining us. My name is Fran Marwood. I'm a partner in our restructuring and forensics practice, and I lead our investigations team across the UK. A very warm welcome to the fourth webcast in our broadcast series. As a quick reminder, our previous broadcasts have focused on the results from our 2022 global economic crime survey or Gx, as we call it, the base consultation and its potential impact on corporate governance, and the changing world of sanctions and compliance. You can watch all of those three sessions again on our broadcast web hub. On to today, I'm delighted that on today's sessions, I'm joined by a panel of experts who are going to be talking us through the rapidly changing world we live in, how it's affecting fraud risk, and how organizations can respond. Throughout the webcast, we're going to be using our polling system, so you can share your thoughts as we go through the session. We'd also love to hear any questions you might have for the panel, and you can ask these by typing them in the box on the screen. The broadcast today is going to be recorded, as usual, and there's a paper on fraud in a changing world that we'll be sharing after this session. So please do share both of those with you, colleagues. With that, I'm delighted to introduce you to our panel members today. I'm joined by Jane Steer Claire Halsted and Alex West, and I'll let the panel introduce themselves. So, Jane, shall I come to you first?

Jane Steer

Yeah. So I'm Jane Steer. I'm a partner in our restructuring team based out of leeds. So with businesses and their stakeholders who are going through periods of change, stress, or distress.

Clare Holstd

I'm Clare Holstd. I'm a partner in our investigations team. I specialize in investigations in both the public and private sectors and also support a lot of our clients around some of the preventative and detective controls that they can put in place as well around Broad.

Alex West

Thank you Claire. Good morning, everyone. I'm Alex West. I'm a specialist in financial crime, and I lead our biking fraud services.

Fran Marwood

Thank you, Alex. Thanks for those introductions. We'll get things started with our first poll question, which we'd like to get your comments on. You should be seeing the question on your screens shortly. For those old times amongst previous attendees, you've got about 20 seconds to answer the questions, so make sure that you quick. The first question covers some of the bigger global themes that we're seeing and really reflect the changing time that this is for business. The question is, what is the top driver for change that's affecting your business at the moment? These themes come from our global CEO survey, which some of you may have seen on the website and cover things like working patterns, changing customer preferences, supply chain disruption, and increased costs around interest rates and inflation. So there's no shortage of changes there. Whilst you're all thinking about those themes, it's clear that these changes to the business world are also increasing fraud risk, things like cost pressures, organized crime moving online, increases in scams are all changing the fraud landscape at a pace that I've certainly not seen before, and we'll be covering that later on. First, though, whilst we're waiting for the poll results to come through, I'll turn to you, Jane. You obviously deal with corporates and stakeholders who are going through challenging times on a daily basis, and I wondering if you could tell us a bit about what businesses are talking to you about?

Jane Steer

Yeah, of course. So As I say, I work with businesses going through change, stress, and distress. Those types of businesses range from national businesses, international businesses, businesses that are privately owned all the way through to PLCs. But what I would say is indiscriminant of the structure or the size of businesses, the common theme in terms of pressure that businesses are seeing, revolve around the changing global landscape, actually. So being more specific on that, F a market perspective, you've got things like interest rates at the highest rate for 14 plus years, that obviously impacts on the cost of borrowing. Similarly inflation. I'd say about the highest rate, they've been over about the same period, impacts on costs of buying goods, but also has an impact on workforce as well. And on workforce, labor markets themselves are challenging, as we all know, and then whilst it's starting to normalize now.

Jane Steer

There's been significant disruption in supply chains as a result of COVID 19, but for the UK specifically, also back resulting from brexit. I think all of those pressures are against the backdrop of we've just come out of a global pandemic, and through that pandemic, businesses had to borrow. They had to stretch their supplier base in order to survive. What that means now is they sat with pretty highly levered balance sheets, actually. It's not just businesses who are experiencing the pressure I don't think from those market factors. You've got high inflation and high interest rates. They have an impact on the purse, don't they and contribute to what's called the cost of living crisis. That changes consumers confidence, their buying patterns, and their disposable incomes, and all of that impacts how they interact with businesses and adds to that pressure. I think then when you look away from just those market factors, there's also just changes in the way that we live our lives, aren't there? And they impact businesses as well. So think about things like our working patterns have vastly changed, actually. You look at things there's far more emphasis on ESG for businesses than there ever has been. And that's not even to mention technology, advances in technology, availability of data, AI, to make decisions. And whilst, I don't want to be all doom and gloom about this, because actually they all present massive opportunities for businesses. But I think what they do do is they attract an amount of investment that you have to put out of the door just to be able to survive and keep up with your competitors.

Fran Marwood

Yeah. It's that pace of change, isn't it? It's very difficult for businesses to keep pace with it. I'm just looking back. We've got the results through from our first question. What's the top driver for change that's affecting your business at the moment? Just clay back your point on technological advances. The number one by a significant way is technological advances at 34%, and we'll come back to that shortly, but we've also got the next highest one is changes in regulation at 25%, and as you might be unsurprised by increased energy costs at 15%. But let's come back to that technological.

Jane Steer

I think that's right, isn't it? And I think that really accords actually with what you referenced the CO survey that we run each year. I think it was 86% of the CEOs surveyed suggested that they were planning over the next 12 months to invest in automating processes and systems. So I think everything we're seeing in the poll certainly accords with what we've seen as well. I think you bring all that together. So bring that requirement for investment, be it in technology, ESG, supply chain, whatever that might be alongside the cost pressures that businesses are facing. I think it's really relevant for what we're going to be talking about today in terms of fraud because all of these have a massive impact, don't they on these financial results.

Fran Marwood The interest thing about technology is that it's a bit of a double edged sword from a fraud perspective. You've got the ability to use it to prevent fraud. But I'm sure as Alex will come on to later, there's the challenges that technology presents as a channel for the fraudster, but for both businesses and corporate. Absolutely. Moving on then, we'll move on to fraud. Claire, why don't I move to you? I wondered if you could give some thoughts on what these changing pressures that we've heard about mean from a fraud perspective.

Clare Holstd

Of course. I think probably most of our audience today are familiar with the concept of the fraud triangle. The concept being that to have fraud you've got three underlying factors being the opportunity, the motive and the rationalization. I think I hearing what Jane was saying there, I think all of those different factors can have an impact on all of those aspects of the fraud triangle. Jane, you mentioned, I think they're around different working patterns and those sides of things. I think you can really see how that might change the opportunity for people to commit fraud within and to the business. I think the pressures that we're seeing businesses on under at the moment, thinking about pressures to hit certain revenue targets, the pressures from stakeholders to perform as a business and thinking about banking covenants and those sort of things. All of those pressures, I think really do increase that motivation for broad. I suppose cost of living crisis is another one that when you're thinking about the rationalization and people justifying why it might be okay to do something that they wouldn't have done before. That rationalization may be around the cost of living crisis, the desire to protect jobs, and those sort of things. All of the things you talked about, there's so many different examples that I could draw on, but I think do really increase that fraud risk against corporates. If I look back at the investigations that we've done in the past, I think there are lot of examples that do draw on those examples of where people have rationalized what maybe feels like a relatively small decision in the moment. But I think what we've seen is how quickly that can escalate. I guess, just to bring a couple of examples to light. A couple of cases I've worked on one around revenue recognition. The pressure around banking covenants and that just this month, we'll recognize that income early. With the intention at the time that that would be unpicked, but actually how quickly that can snowball. And also thinking about KPIs within contracts, and actually, the incentive to maybe overstate performance to get the performance pay element back from within those contracts. So I think so much opportunity and maybe rationalization that comes from the current environment and really for me emphasizes the importance of controls and making sure that we're prepared.

Fran Marwood

I think that revenue recognition point that you made there really resonates with me personally. I had a couple of clients come to me recently with overseas subsidiaries of process businesses and channel stuffing as consumer demand has fallen off is a real problem, where they're effectively recognizing sales that have been made. But certainly an interesting area. Thanks, Claire for that. We'll move on now to our second poll question, which should be appearing on your screens. And I'll just read that one out. To what extent are you seeing the current economic climate impacting on fraud in your organization? We've got five options here, there's a significant increase, some increase, no change, some decrease or a significant decrease. I suspect we won't get many in category five, but it would be interesting if we do. Whilst we're waiting for those answers to come through, Alex, I wonder if I could ask you a question on how the changing pressures that we've just heard about are impacting rates of fraud, but by external parties, including the consumer. Just to cast our minds back to the gx session, we had a rate of 53% of UK companies that were affected by external fraudsters at that point in time, which is nearly a year ago, now, compared to 43% globally. So at the UK, the UK was certainly seeing more of it back then, but Alex over to you. Alex West

Yeah, I think some of the pressures that chains referred to and the Claris referred to have been particularly acute since the pandemic, and that's translated through to very steeply rising rates of reported fraud, particularly in 2021 and in 2022. Organized crime groups, in particular seem to have embraced fraud as a very lucrative and low risk way of carrying out criminality. So we now see that in the UK fraud accounts for 41% of all crime, and since 2020, statistics will tell us that's risen by 25%. If we look at specific industries, we're seeing insurance being particularly vulnerable at the moment around application and claim fraud, but also particular industry sectors like motor finance being particularly vulnerable to organized crime and scams that will come back to have been driving a very significant rise in fraud rates for a longer time horizon, perhaps up to five years. It's not all doom and gloom, I think when you look at particular types of fraud, we are seeing some areas plateauing or stabilizing. So if you think about card payments fraud in particular, innovations like chip and pin and strong customer authentication on e commerce websites are producing measurable and sustained reductions in fraud rates. So it is possible to bring these numbers down, but fraud rates remain very high in the first half of 2021, banks reported that Fraud stole 600 million pounds in just six months, so it's still a significant problem.

Fran Marwood

No. Thank you, Alex. That stat is a worrying stat, but I think all in our non professional lives, we see that in terms of interactions with our banks and whatever else, and certainly criminals moving online is a big theme for us. So we've actually got the results of our second poll question back as a quick reminder, to what extent are you seeing the current economic climate impacting on fraud in your organization. Now, the The main answer, there is some increase in fraud risk with 63%, and I mean, that's the lion's share of the attendees today. Albeit the second highest is no change very close to significant increase. Sort of a suspected significant decrease. We don't have any. I mean, any reflections from the panel on that some increase in fraud risk point based on some of the points that we've just talked about.

Claire Hostd

I think it echoes what we've been talking about, doesn't it? And actually just reinforce that point that in the current environment, we do need to all be really thinking about if that fraud risk has increased, well, what can we do to be prepared and to make sure that we're ready for it, and we're stopping it from happening.

Jane Steer

We're not seeing any change, are we sure that we've got the right robust controls in place to a identified fraud if it's happening.

Fran Marwood

I think that's a really important point. We'll come on to prevention in a second. But the ability of some of the tools out there on detection have moved on at the same pace over the last two years and we certainly seeing that. So on that point, let's move on to prevention. Claire. We're back to you. It's a big question. We've not got that long to answer it, but we'll cover of some of the main moving parts on it. What can organizations do to protect themselves against fraud?

Claire Hostd

I mean, I think that the key thing is having a robust broad risk strategy, and that needs to be owned from the top of the organization, so really making sure that the tone from the top is there in terms of the zero tolerance is something that gets talked about a lot, but really understanding what your strategy is. Because I think investing in that strategy up front is the way to to prevent what could be come some quite significant losses. So I guess the first aspect of that strategy I'd bring out is the flawed risk assessment, really important to understand what the flawed risks are within your organization so that you can then be targeted around what your controls need to look like in response to that. Those controls, a supposed a range of different areas, both the preventative and detective side that we've been talking about already this morning. I think particularly I guess, those are a mix of both manual and automated, but we've talked already about the importance of technology. I think we're increasingly seeing businesses use technology use data to automate some of those processes to detect where there might be fraud in the system. Looking for those red flags so that the manual side of the investigation can be really targeted, so you can detect the fraud when it's happened, you can recover those losses. I suppose increasingly seeing businesses also look at how can you prevent it from happening in the first place, even better if you can prevent that money from going out the door. I suppose in addition to that, it is important to have the robust response plan. Actually, what are you going to do in the instance that you do have a whistleblower claim, or those controls throw something up that needs a further investigation. I think that's really important so that you can understand quickly what's going on. You can minimize the impact of that. You can get the learnings and make sure it doesn't happen again, and also make sure you've got the robust evidence so that you can take further action where that's required. I suppose the last area I just draw out is around the overall piece around the monitoring of those processes. Making sure that you're periodically checking in on how those processes are working. Is there anything else that you need to be doing around that? To the extent that there are themes and trends coming out of what you're looking at, what additional processes do you need to put in place? Suppose the any other point I may be pull out is referring back to one of the previous webcasts that you mentioned Fran in terms of the failure to prevent charge and actually making sure you've got a really robust fraud risk strategy in place is a really important part of being ready for that.

Fran Marwood

That's a really good point material we put out there yesterday on that particular topic, if people are interested, do have a look at John O Home's linked in post.

Jane Steer

Can I just asks question of Claire, because I guess what you've just been talking about there about robust control frameworks to be able to prevent and detect fraud. I work a lot with businesses that sit in maybe the mid market space, and you would probably associate some of those more complex risk frameworks with larger corporates. Do we do a lot of work with mid market businesses or are the things that mid market businesses can do to put in place the sort of commensurate to their size here.

Claire Hostd

Yeah. We work with businesses of all different shapes and sizes. And I think it goes back to really understanding what your broad risk strategy is for your organization and that risk assessment up front of understanding what those risks are and tailoring the response so it can be proportionate to that organization and the risks that they face. It's definitely something that all organizations need to be thinking about, but the responses might be different depending on the risks for them.

Jane Steer

Yeah.

Fran Marwood

Great. Thanks for that. I mean, there was one point that resonated with me as well just when you were talking about the detection and we've touched on the use of technology, but one theme that we're seeing quite a lot of is where obviously fraud risk is company specific and even companies in the same sector will have dud risk profiles, but the importance of getting the tuning of any automated analytical solution to fraud detection is really important. And we're finding a number of clients who've sort of put technology solutions in place, but then coming back to kind of help us tune those systems and bringing in that right sort of expertise. So that's an interesting theme. So thank you, Claire for that. Alex, you mentioned scams. Earlier. It's not a usual topic for our broadcast sessions, but a really interesting one. We've seen a steep rise in that type of fraud in recent years. I wondered if you could just take us through what steps are being taken to protect, well, I guess, both business and the consumer from that type of threat.

Alex West

Absolutely, and Jane your point there about different sizes of businesses being vulnerable to fraud risk and scams is one of those things which affects us as individuals, but also businesses of every size. I would wager if we went and looked at our phones this morning, we would have all had scam messages in the last seven days. It's a real problem in terms of volume. First of all, found, that's one of the challenges. How do you stop something which is so pervasive and produced in such volume? The biggest issue with scams is that the way that plays out is that the individual, the customer who's making the payment believes that it's legitimate. Actually from a banking perspective, it's really hard to stop a transaction when the customer when challenge, will say, yes, this is a legitimate payment and I want to push it through, which is why it's called a authorized push payment fraud. That creates a big problem for a bank, as I say. And the reason that is effective is that scammers are harvesting information that we all willingly put online about our lives. We talked about living increasingly online. And that means that increasingly targeted and sophisticated messages can be sent to each of us that are particularly built and bespoke for us. So gone are the days of, mysterious princes asking for help moving money across borders. These are highly targeted and sophisticated messages now. Actually, very recently, we're now seeing chat bots being used to pump out more tailored messaging to individuals in a way that again increases the volume and then scammer only needs to get one person out of 1,000 to make quite a lot of money. What we are seeing in response to that is banks using increasingly sophisticated detection methods to look at behavioral profiling and to see if the customer is doing something that's outside of the norm and stopping or at least delaying a transaction and challenging a customer. Education is really important. So you'll see lots of media publications around being aware of scams. You'll all receive warnings when you try to make a payment that is a scam payment, although evidence suggests that those aren't always very successful, so there's still more to be done. Big change that's coming down the track is the implementation of mandatory reimbursement for scam victims. If the proposals go ahead as planned, if you are a victim of a scam, you will be entitled to be reimbursed by your bank, except in cases of gross negligence. As a consumer. As a consumer, I won't apply to businesses. Businesses will be expected to have better defenses, which will not always be the case depending on their size. The really interesting part about that mandatory reimbursement regime is that 50% of the cost of that will fall on the receiving bank. That's the bank that holds the account on behalf of suspected fraudster. That's going to drive a lot of attention on KYC and customer due diligence to try and limit the access. Or fraudsters and money mules to the financial system. So lots of interesting development going to come down the track there. But I think the big picture message on scams is that no one group can fix this. Banks can't do it alone. It needs a whole system response with advertisers and telecos and messaging platforms, and social media all having a role to play to tackle what is a really significant societal issue. And it's a scary development, I'm sure. Fran Marwood

Yeah. Most of the that are seen on social media, some of these call centers that are purely focused on scams. Certainly a theme that we didn't see a few years ago, but it's certainly a very worrying one. Just conscious of where we are on time. Let's move on and take some audience questions. And if you've got any that come up last minute, we've got several in, but do pop them up, we should be able to get to them. The first question, what's the next big tail risk we see in investment banking? I mean, Alex, you're probably best place to try and pick that one up.

Alex West What's the next bis big tail risk we see investment banking? I think Broad in financial services, investment banking. The key risk typically is around things like unauthorized trading, and authorized access. That's been a big risk and probably the key operational risk for investment banks. We're seeing banks look at that risk again. It's ten, 20 years on since some of the big failures, but clients are coming to us and thinking about control frameworks and good detection, and it's an area where more technology is being applied. I think that's still a big focus area. That's probably the key one I'd call out at the moment.

Fran Marwood

No, Thank you, Alex. I don't know there are any others before we move on. The next question there, and this is a slightly more general question. How important do you think it is to invest in technology to help and prevent and detect fraud? We'll have picked up some of this earlier on as as part of our earlier questions. I mean, one of the big challenges that a lot of attendees will be facing is just how you put the case forward to make these investments. And one of the things that we're really advocating at the moment is trying to Get to grips with what the ROI might be on those investments because if you can articulate an ROI as part of and rather than appearing like some cost, having the sort of benefit end of the equation in there is a key thing just sort of articulating the arguments. But I'll open it up to to the panel.

Alex West

Perhaps if I just touch on banking for two angles where that point on ROI, you made. I think this transition to banks reimbursing customers for APP fraud will enable a much better measurement of cost versus investment in new technology. I think that's the entire point of the regime to drive investment through that model. I think secondly, in banking, the FCA is becoming increasingly assertive around these kind of controls. So how important is it? Well, it's becoming a regulatory expectation.

Fran Marwood

Very good.

Jane Steer

I think the return investment point is really important as well, actually, I'm working with businesses that are under massive cost pressures at the moment, and actually what they're trying to do is take cost out of their cost base and rationalize supply chains. And so really being able to articulate that act this is something that's preventive, but also value add actually for the bus is really important. So I think the more that we can do with our clients to be able to help them to articulate to their boards, et cetera, is really important.

Fran Marwood

Yeah. I think the you know, the ability of the technology over the last couple of years has increased massively, sort of what would have been I think it's important to look at these things on a regular basis because what would have been a particular investment case two years ago, certainly will look a lot different now.

Alex West

So Well, let's one more I think on that one. If you take the word fraud out of a detection system and think about it as customer intelligence. A lot of these tools have use cases which go far beyond fraud detection. Potential to have commercial value beyond reducing fraud losses.

Fran Marwood

Yeah and even over the last six months, it's a really good point, that you very rarely hear about fraud analytics. You tended to hear a lot more about compliance analytics, which is the sort of certainly an interesting thing going forward. So conscious of time. Before we bring things to a close, I'm just going to go back to the panel and wondered if we could wrap up with some closing remarks or any observations that you've got, Jane. Let's go to you first. Jane Steer Yeah. I think just to say actually that everything we've talked about just feels so relevant at the moment, I think, given the economic environment, structural changes that are happening, It's ever more important, isn't it that businesses have to invest in these robust frameworks. I saw one of the poll questions actually that came up with that we didn't have time to answer was, are we as PDC seeing more fraud in businesses, and from a restructuring team perspective, the answer is yes, we're working with a lot of businesses where there is either suspected or known fraud actually that has masked financial underperformance that we're now that we're now having to deal with. There's big cases that are well known to people like Arena TV. But there's much smaller cases. [I'm working with a far more mid market sized business at the moment where one of the members of the finance team, you know, they weren't disclosing that they weren't paying certain suppliers, and they were amending financial statements, amending letters to, you know, and that was even internally to her board that that she was doing that. So I think it's really important. Just really quickly. What I would say is, I'm listening to this and going as well as working with corporates. I also work with a lot of lenders and investors here as well. And we've focused a lot today. Haven't weed on actually what corporates can do to spot fraud actually and prevent it. I think I'm probably plugging a future webcast of yours actually here is. Thank you. I think what's really important is those investors in those lenders hear about things that they can continue to do to actually spot those frauds in their individual portfolios.

Fran Marwood

Thank you, and Clare.

Claire Hostd And, I think it's been a really interesting discussion, and I think going back to the answer to that poll question we had earlier in terms of are people seeing an increase in fraud risk? I think we had over 75% of people saying, either yes or significantly. I think that for me, it shows how alert we all need to be and really keeping an open mind for when those red flags might be there, and that might be a bit of the business that is performing. It a counter to what you might expect, and all of those kind of things, you think if something doesn't feel quite right, actually holding ourselves to account, to actually go and ask those difficult questions and do something about it. I think if we don't the risk of that being a really significant financial problem down the line, it just exacerbates. I think it's just keeping that open mind and acting on it if you see something.

Fran Marwood That's of touches on something you mentioned earlier on l Having spent a lifetime in looking at fraud. One of key red flags that doesn't seem particularly obvious, is just the quality of the finance team. When you've got a finance team that's undertrained, that's got lots of contractors in it, that's behind on its key reconciliations, whatever else, nine times out at ten, that's a feature when we see fraud happening because the rigor isn't being applied, but there are lots more interesting ones that we'll pick up on a later session, Alex over to you.

Alex West

I think I'll just end on a point of optimism. I think it's easy when you talk about fraud for it to be doom and gloom. The rates have been going up. It's a problem clearly for society, but actually, when you look at specific types of fraud where there's been intervention, card fraud is a good example, you can see measurable reduction. Innovation, technology, cross sector collaboration. I think this will be a problem we can solve. We just need to have the right investment to do.

Fran Marwood

Alex, Thank you. Thank you for that spoke finally from me. I think just reiterating the pace of change if we needed to reiterate that after today's session, but also trying to think of investment in fraud prevention rather than it as a sunk cost and that can be quite useful positioning in businesses when you're seeking to get scarce resources to combat the issue. So Let's bring things to a close then. Firstly, a huge thank you to all our panelists for joining us today. I really enjoyed that session. And to all of you for your great input during the session as well, we've briefly referenced some industry specific insights during the webcast. In a future session, as Jane mentioned, we're going to be looking more closely at fraud in FS. Please do be sure to visit our. We're sort of constantly updating that and getting things on there. And don't forget to keep an eye out for our future broadcast sessions. And let us know if there are any topics that you're particularly interested in hearing about. It's great to have that sort of feedback so that we can keep these sessions as relevant as possible. So thank you all, and we look forward to seeing you all again soon.