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Tuesday, 2 July, 2002, 07:52 GMT 08:52 UK
City fraudbuster rings the alarm
It's a sultry summer afternoon in the City of London, and share prices are bumping along at their lowest levels in eight months.
With corporate earnings remaining stubbornly in the doldrums despite signs of an economic upturn, an eerie hush has settled across the City's once hectic trading floors and boardrooms.
But amidst the calm, one little-known corner of the UK's financial hub is as busy as ever.
"You have peaks and troughs, and usually in the troughs we know we're going to get some blockbuster cases," says detective superintendent Ken Farrow, head of the City of London Police fraud squad.
Mr Farrow, for the last five years head of the British police service's biggest anti-fraud unit, has had ample opportunity to observe the corrupting effect of economic downturns.
"Once credit lines start to tighten up, organisations come under pressure, and the directors of those organisations can come closer to crossing that white line," Mr Farrow says.
Words of warning
Mr Farrow's warning over the correlation between corporate fraud and economic slumps carries extra weight in the light of the recent financial scandals at Enron and Worldcom in the US.
The two US corporate giants' disregard for normal accounting rules, which helped boost their share prices during the 1990s boom, only came to light after last year's global economic downturn began to bite into their earnings.
Enron and WorldCom's fall from grace, together with allegations of insider dealing and tax-dodging at a string of other respected US companies, have dealt a serious blow to investor confidence in corporate America.
This loss of faith is now a major factor in the persistent weakness of the US stock market, and could even prolong the original economic slowdown.
While corporate skulduggery on this scale has yet to be detected in the UK, Mr Farrow stresses that fraud is a major and growing problem here too.
"[Fraud] in the UK is serious. It is becoming a real concern," he says.
The cost of corporate fraud is thought to run as high as £14bn a year, although Mr Farrow believes that even this estimate is conservative.
Frauds in the City of London range from attempts by conmen to raise bank loans using phoney securities as collateral, to orchestrated internal scams such as Robert Maxwell's plundering of the Mirror Group pension funds.
But firms' reluctance to report fraud, especially when it has been carried out by insiders, makes it difficult to gauge the full extent of the problem.
Recent research by corporate investigations agency Risk Advisory Group suggests that British companies' first instinct is to cover up internal scams so as to avoid bad publicity.
The research, based on a study of 50 recent cases, also found that senior executives were involved in nearly three-quarters of frauds worth in excess of £1m.
And there is anecdotal evidence that professional criminals, who have realised that there are fewer checks on fraud than on their more traditional activities, are increasingly targeting City institutions.
"From a criminal perspective, [corporate fraud] is seen as highly rewarding, low risk, and has therefore become the most productive way of diversifying their business," says Mr Farrow.
In a recent high-profile case, Mr Farrow's men helped to foil a plot to defraud St Paul's Cathedral of £100m by convincing it to put money in a bogus investment scheme.
He warns that the situation can only get worse unless the UK's under-resourced network of anti-fraud agencies is beefed up and brought under a greater degree of centralised control.
"The outlook, unless it's addressed, is extremely bleak. Some radical action needs to be taken if we're to tackle this increasing problem."
Responsibility for bringing corporate fraudsters to book is shared between a number of different organisations in the UK.
The Financial Services Authority and the Department of Trade and Industry investigate mainstream corporate frauds, while the Serious Fraud Office tackles the most lucrative and complex cases.
However, staffing constraints usually force these agencies to rely on officers seconded from police forces to carry out their enquiries.
And many police chiefs, under intense pressure to crack down on high-profile crimes such as street robbery and drug trafficking, are reluctant to divert officers to fraud investigations.
"In the last couple of years, there has been a downward spiral in the number of officers that the police can devote to this kind of investigation," Mr Farrow says.
Mr Farrow's own unit, charged with policing a financial district where over 300,000 people work, has just 65 full-time officers.
Mr Farrow is in favour of setting up a National Fraud Squad, which he says would need to be staffed by 1,200 full-time investigators in order to make a significant difference.
The squad, which would probably be amalgamated with the Serious Fraud Office, would also help define a national strategy for dealing with corporate fraud.
The proposal was discussed by a working group made up of senior figures from all the major fraudbusting agencies earlier this year.
However, in the absence of fresh funding commitments from the government, and with regional police forces continuing to resist moves to divert officers from mainstream duties, the talks came to nothing.
"The indication I'm getting is that there is no prospect of getting a national fraud squad in the foreseeable future," Mr Farrow said.
A veteran of the Mirror Group investigation who talks more like a banker or an accountant than a policeman, Mr Farrow adds that most people underestimate the impact of corporate fraud.
He believes that the lack of political will to tackle corporate fraud stems in part from the public's relatively relaxed attitude to white-collar crime, which is widely seen as victimless.
"But the public should be concerned," he stresses.
"Every single one of us who works and pays taxes are paying huge amounts annually through higher insurance premiums to cover the losses."
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