Getting to grips with the enemy within

21 June 2010

It’s one of those unpalatable truths that we don’t like to talk about or even think about. But the harsh truth is that many of us are likely to know and work with someone who is a thief. There are many reasons why an individual might resort to stealing, and in times of economic turmoil the single biggest factor determining the way many individuals behave is despair.

Of course, at the moment a lot of people are facing difficult times and some may be tempted to behave in a way that is out of character. According to bodies such as the Association of Chief Police Officers fraud left a £20bn hole in our collective wallets in 2009.

What has historically been perceived as a white collar crime is now growing at a rate of knots, fuelled by the increasing number of individuals who have fallen on hard times and the reach of organised crime syndicates that see fraud as an area of crime that promises rich pickings at relatively low risk.

Estimates of the amount of money lost as a result of insider frauds, whereby a member of staff steals money and information from the company they work for, vary greatly. Some organisations, including the Serious Organised Crime Agency, believe this type of crime accounted for more than £500m last year. Others - particularly professionals who work in the internal audit and compliance teams tasked with keeping businesses secure - believe the figure is a lot higher.

The problem seems to be much more widespread than we like to admit and I would certainly listen to the views of the audit and compliance professionals mentioned above. Experience has taught me that if they say there’s a problem, there’s a problem.

Corporate reputations are already being battered on a regular basis as more and more cases of insider fraud come to light in the financial sector, highlighting security shortcomings on the part of banks, building societies and investment firms.

Recent research by fraud prevention service CIFAS reveals the changing nature of insider fraud. For example, there has been a big increase in the number of women engaging in the crime. But despite the figures showing that two-thirds of insider fraud is committed by women, it’s still men who steal the largest amounts and pose the greatest threat to the reputations of organisations and their well-being.

Only last month we heard of the case of John White, a senior manager at investment bank Seymour Pierce, who between 2001 and 2006 siphoned off company funds for his personal gain. The money was taken out in small amounts - £20,000 here, £5,000 there. And it was easy to do as he was a relatively senior member of staff and knew all the passwords and protocols.

In total, he helped himself to more than £152,372 via 37 transactions, the money coming from his former employer and a number of private clients. On one occasion he hid £145,000 in a dormant account that had been paid to Seymour Pierce in error. It was so easy.

White was settlements manager at the firm, responsible for entering details of executed trades onto its system. His role also entailed making changes to data including names, addresses, and account numbers on client accounts. This is typical of the type of male manager that engages in insider fraud.
The alleged frauds committed by Jérôme Kerviel almost destroyed his organisation, Société Générale - France’s second biggest bank. His misdeeds are currently being examined by a French court which is looking into deals amounting to more than £51bn.

Since his activities came to light in 2008 SocGen has accused Kerviel of being dishonest, disloyal and a liar. According to the bank he is also single-handedly to blame for it racking up losses of more than £4bn in its last full year of trading.

But while it’s 33 year old Kerviel who is standing in the dock, SocGen’s actions and internal controls are also under intense scrutiny from the people who matter most - its customers, many of which are wealthy institutions. And while Kerviel faces the possibility of a five-year jail sentence the bank is staring a more desperate future right between the eyes because if it is censured or criticised during the hearing it’s likely to take a lot longer than five years to repair the reputational damage caused.

The trial has already hit its once squeaky clean, formidable brand.

And that’s the threat facing big mortgage lenders that may be on the wrong end of scams perpetrated by professional teams of advisers, solicitors or surveyors.

Get it wrong and you could be facing an issue on the scale of SocGen. Don’t believe me? What a short memory you must have - does the name Nick Leeson mean nothing to you?

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