Certainly, there has been a raft of new legislation and regulation since those bad old days and the regulatory landscape has changed dramatically. The law around pension fund protection, investment business, auditing and financial statements, internal control, insider trading, market manipulation, money laundering and the proceeds of crime have all been overhauled. We now, finally, have a definition of fraud in English law, enshrined in the Fraud Act 2006, though the full impact of this is yet to be seen. Standards of corporate governance have undoubtedly improved, at least on paper. There is also a greater general awareness — at least in the corporate sphere — of the risks, driven in part by the increasingly onerous nature of directors’ legal responsibilities and the weight of regulation.
And yet, the same old drivers of fraud live on and some of the motivating incentives and pressures will tend to be magnified, as in the past, in a time of economic uncertainty and financial stress. For example:
- Legitimate investors looking to maximise returns in a period when returns from mainstream investments look unattractive or volatile may be tempted by the sort of ‘too good to be true’ schemes seen last time around.
- On the supply side, would-be fraudsters will not be slow to home in on this market, preying on the greedy, unwary or vulnerable with promises of returns unachievable elsewhere.
- Companies and individuals looking to finance or re-finance are already having a much harder time of it, with the inevitable consequence that some will be tempted to manipulate accounts, exaggerate income or asset values, or otherwise misrepresent their financial position in an attempt to meet covenants, obtain loans and so on.
In addition to all this, frauds that have been well concealed during the good times, when there was always money available to fill the gaps and asset values were easier to inflate without attracting attention, will start to come home to roost. What is more, the tools at the disposal of the would-be fraudster have evolved significantly since the last major downturn, when the internet was the dream of a few technical wizards and identity fraud virtually unheard of. Both of these are now big business and are powerful weapons in the hands of those bent on fraud.
Tempting though it may be when money is tight, now really is not the time for companies to start economising when it comes to corporate governance and oversight, risk analysis, strong internal controls and effective monitoring. Lawyers, accountants and other relevant professional advisers should be prompting their clients to review all of these areas and take appropriate steps to remedy gaps. They should also be on the look-out for signs of trouble. Members of the general public for their part should maintain vigilance and resist the blandishments of the snake oil salesmen who will without doubt emerge.
Will Kenyon is a trustee director of the Fraud Advisory Panel and a partner in the forensic services group of PricewaterhouseCoopers.
