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Sticky fingers in the public purse

Levels of fraud inevitably rise in a recession, but not always in the way that councils expect. Azadeh Khalilizadeh looks at the latest trends.

In times of economic distress, local authorities need to keep their eyes and ears open to the increased risk of fraudulent activity. A recent report released by the Audit Commission revealed that fraud is likely to rise in a recession as there is not only more incentive to commit fraud, but with councils coming under pressure to cut costs it is harder to prevent and detect.

The Commission's 2009 report, Protecting the Public Purse, highlights housing tenancy, council tax and recruitment fraud as the key risk areas. According to the its head of governance and counter-fraud Derek Elliott, there are at least 50,000 council and housing association properties which are under housing tenancy fraud scrutiny. "There is a high level of housing tenancy fraud," he says.

Siobhan Lomasney, a public sector specialist and dispute resolution partner at DMH Stallard, agrees. "The rise in rents in the private rental sector in London means that there can be a large illegal profit to be made from sub-letting council properties," she says.

Lomasney adds that the firm has also been actively involved with recovering money lost to authorities through unlawful use of public land and highways for commercial advertising. "The lost license fees can be very substantial, and non-payment of business rates on advertising hoardings is widespread," she says. "The practices we are uncovering may not always amount to fraud, but they are certainly unlawful and costing the public purse dearly."

Adding fuel to the fire are small-scale but recurring fraudulent acts, according to Stephenson Harwood fraud tracing specialist, Tepo Din. "For example, fraudulent employees may be overstating their expenses by relatively insignificant one-off amounts, people may avoid parking charges through the use of disabled badges or they may inflate benefit claims by minor sums," he says. "Over time, if done on a widespread basis, such activities can result in substantial financial costs."

Paul Worth, a partner in Eversheds' fraud group, says there are also very real issues of insider fraud to address. "The Serious Fraud Office investigation into the South Yorkshire Trading Standards Office suggested £14m of accounting irregularities, so the numbers can be very significant," he argues. "In the current economic climate employee fraud is on the increase and councils need to ensure their whistleblower and internal audit procedures are operating effectively to maximise the prospect of detection."

Worth says the public sector has always been at risk of bribery and corruption issues, particularly considering local authorities award significant contracts across a wide range of services. "Although European procurement regulations provide a framework for such contract awards, it would be foolish to suggest that bidders are not occasionally tempted to use 'creative' approaches to the bid process," he says.

When it comes to tackling fraud there are many tools available to lawyers, says Elliott, including those provided by the Fraud Act 2006 and the Proceeds of Crime Act 2002. "There are lots of areas where lawyers can help and a lot of firms are starting to market this," he says. "In situations involving tenancy fraud, for example, lawyers can help local authorities by way of redress, restitution and regaining possession."

Lomasney says her legal team wants to make tackling fraud a source of revenue generation for councils, rather than "just another expense”. "For example, when councils take back possession of illegally sub-let properties, there is no reason why they cannot at the same time claim back the illegal profits made by the sub-letting tenants," she says.

Although there is a plethora of guidance available, Din says a tougher issue is ensuring anti-fraud mechanisms are part of councils’ organisational culture, one of the best being whistle-blowing. "This relies on vigilance and the effective identification of fraud, an understanding of the value of reporting a fraud and solid support to anyone that does come forward with a report," he suggests. "Such a combination can only be achieved through a substantial commitment by an organisation and, potentially, other stakeholders. Consequently, it can be difficult to attain."

Worth believes not enough is being done centrally to combat fraud and financial crime. "Although fraud costs the UK economy at least £20 billion a year, economic crime is not a policing priority," he claims. "With public spending cuts on the horizon regardless of the outcome of the election, this is not likely to change any time soon."

According to Worth, the Bribery Bill, likely to hit the statute book in early 2010, should encourage companies to take anti-corruption issues more seriously. "There is a proposed new corporate offence of negligently failing to prevent bribery within an organisation," he says. "If an employee of a bidder attempts to bribe a council employee for example, the company can be charged with the new offence, meaning an unlimited fine and the adverse publicity such a charge would bring."

But although it is likely the Bribery Bill and the Serious Fraud Office’s focus on corruption issues will have some impact, Worth believes on a day-to-day basis councils will continue to face fraud and financial crime issues. “Robust internal controls, increased awareness, training and a zero tolerance tone from the top are key parts of anti-fraud policy," he says.

Din notes improving matters may be regarded as difficult in the current economic climate as a lot of these systems and controls rely on resources. Cultural changes can also be tough to implement.

"With finances tight and getting tighter, local authorities will need to think hard about how a limited budget can be allocated most effectively," he says. "Nevertheless, this pressure on resources also means that there is every incentive to prevent money being lost to fraud. As such, fraud prevention should be seen as an important investment."

Azadeh Khalilizadeh is a freelance journalist.

 

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