Fraud currently accounts for around 38 percent of total crime in England and Wales, and it cost the UK £2.46 billion in FY 21/22. Instances of Fraud have continued to grow in recent years, representing a huge proportion of criminal activity that is costing the UK economy dearly.
Backed by international criminal enterprises, fraud can take many forms, from individual romance scams to defrauding public funds. Its scale and pervasiveness represent both a reputational and fiscal risk to government agencies and departments.
The opaque nature of fraud presents the biggest challenge however, with a report from the House of Commons Select Committee finding that “large gaps still remain in the Government’s understanding of its exposure to fraud and corruption.” The same report calls for the UK government to see fraud as an “ongoing risk” and invest in it as a strategic priority.
The UK government’s Fraud Strategy has set out to cut fraud activity by 10 percent by the end of 2024. The connection of fraud to other serious and organised crimes, such as modern slavery, human trafficking, and the drug trade, is also a significant threat and is a problem the government aims to address.
Before the end of this year, we have an important opportunity to get to grips with the complexities and scale of fraud today – and empower governments and businesses to act against it.
Splintering in the system
To tackle fraud, the interconnected nature between illicit organisations and legitimate entities must be properly understood. Legal business structures can be used by bad actors to enable fraudulent activity. Shell companies, for example, which can have valid purposes, are often used to disguise crimes such as fraud and money laundering. And this issue is particularly pressing for the UK.
Moody’s research into shell company risk found the UK has almost five million red flags associated with shell company behaviours – the highest in the world, ahead of both China and the US. While the UK’s advanced recording of company data is a factor in this number, legal loopholes in the financial system also play their part.
The only requirements for setting up a company in the UK are a £12 registration fee, one person who is at least 16 years of age appointed, and the requirement that a PO Box is not the director’s address. For bad actors looking to set up an illicit shell company, there are very few hurdles in the UK system.
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The implications of not shoring up these defences can have drastic impacts on the lives of ordinary people. A recent fraud scheme exposed in January 2023 by The Guardian found more than 150 companies registered at Companies House in the UK, many with ties to China, were targeting people worldwide with ‘romance scams’. Scammers falsified their identities and then gradually earned victims’ trust to persuade them to transfer money to illicit companies. Those people who were targeted stated that seeing the fraudulent company listed on Companies House contributed to their perception of its being legitimate.
UK government data highlights that “authorised” fraud, such as romance scams, now accounts for the majority of fraud. Over the past four years, unauthorised fraud, such as withdrawals from bank accounts without the holders’ knowledge or consent, has been overtaken by types of fraud where the victim is duped into approving a transaction, such as a money transfer. This has been largely driven by criminals adapting to new banking technology and changes to processes and communications.
This new reality means the UK government needs to rebuild awareness of evolving criminal methodologies, while also improving enforcement. From a corporate standpoint, businesses need to continually assess risk through third-party risk management (TPRM) and know your customer (KYC) processes, adapt policy, and work with regulators to keep their operations and customers safe.
Defending the system
In response to this growing complexity and threat, there has been a concerted effort to improve the UK’s resilience to fraud. The Economic Crime and Corporate Transparency Act became law in October 2023, in which an organisation is now liable if a specified fraud offence is committed by an employee or agent acting on the organisation’s behalf.
Meeting the UK government’s stated goal to reduce fraud will not be easy due to changing criminal tactics and new typologies, as well as systematic loopholes leaving gaps for bad actors to exploit. More regulation and increased due diligence, including data verification, could help reduce these vulnerabilities, improve transparency, and secure the economy and society from fraud.
Yet regulation takes time to form and can lag behind the technical capabilities of both the financial system and criminal enterprises. Steps can be taken now by the UK government, for example adopting automated, data-driven approaches to tackling fraud at scale, and gaining insights into opaque entities like shell companies through technology.
Government agencies can be empowered to better scrutinise potentially fraudulent individuals and behaviours, and build robust defences against those who wrongfully deceive others for financial gain.
