David Hicks, KPMG, Counter Fraud

You sir, are a fraud!
12 March 2012
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation
2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Agenda
How much does fraud cost? Current and emerging fraud types Profile of a fraudster What can you do to manage fraud?
Quiz famous alleged fraudsters
UK Fraud Annual Comparison

3,750 3,500 3,250 3,000 2,750 2,500 2,250 2,000 1,750 1,500 1,250 1,000 750 500 250 0
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
360
300
240
180
120
60
Value m
No. of Cases
UK Fraud Annual Comparison Key events

2011 360 UBS
3,750 3,500 3,250 3,000 2,750 2,500 2,250 2,000 1,750 1,500 1,250 1,000 750 500 250 0
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
300
240
1993 - BCCI 2006 IMPERIAL 1998 PETER YOUNG 2005 RBG RESOURCES
180
1992 MAXWELL
120
60
0
2010 2011
Value m
No. of Cases
How much does fraud cost?
Rising Cost of Insurance Fraud

Insurance Fraud 2006-2011
2.5
Insurance Fraud ( billion)
2.0
1.5
1.0
0.5
0 2006
Source: Association of British Insurers and National Fraud Authority
2008
Year
2010
2011 (estimated)
How much does fraud cost?
Impact of the Recession on the Insurance Industry

Key Indicators An increase in very amateurish claims An increase in the proportion of suspect claims An increase in the proportion of claims referred to investigation that are proven to be fraudulent An increase in calls to the Insurance Fraud Bureaus (IFB) Cheatline An increase in walk-aways
Changing Behaviour The economic climate could be creating a more lax attitude to fraud RSA research in March 2008 showed 3.6 million Brits think its wrong to lie on an insurance claim In January 2009 they found that 4.7 million do not think making a fraudulent insurance claim is wrong
Impacts of Cuts Police resources are set to decline over the next few years and in particular resources dedicated to financial crime An erosion of middle management This necessitates a much greater need for the industry to be vigilant towards fraud going forward
Recession
Motivators Desperation and Lifestyle fraud Financial difficulties is naturally a key motivator
Excessive pressure from within your organisation
Source: Association on British Insurers 2009 Research Brief, RSA Research (2008, 2009)
Current and emerging fraud types
Common types of Insurance Fraud
Non-disclosure fraud False claims Claims overstatement Duplicate claims Ghost brokers Supply-chain fraud Internal fraud
Profile of a fraudster
External fraud: Example

Organised Crime Groups (OCGs) are collaborating with a growing number of professional enablers including doctors, lawyers and vets who are all benefitting from advances in technology to widen their fraud operations One typical example is a Staged Accident, where two or more individuals deliberately crash their vehicles into each other, resulting in various claims. (Cash for Crash)
Garage and Engineer Overcharge for vehicle parts Recovering Company Supplies damaged car for staged accident/provides invoice for recovered car
Accident Management Company Helps stage accident
Staged Car Accident
Salvage Company Underpays insurer for scrap metal from cash
Solicitor Represents victim
False Victim
Medical Treatment Service Provides treatment for nonexistent ailments
Credit Hire Company Claims to provide victim with substitute car
Collusive Doctor Supports alleged injury
Internal
Male 36 to 45 years old Holds a management position within the finance function or in a finance-related role Has been working for the same company for more than ten years Commits fraud against his own employer Operates in collaboration with other offenders
Source: KPMG Report Who is a Fraudster June 2011
10
The Fraud Triangle: Internal fraud
Opportunity
11
Fraud triangle: Pressure
Meet budgets/ expectations Debts Addiction drink, drugs
Results at any cost
Coercion or blackmail
Family pressures
I need the Money Illness
12
Fraud triangle: Opportunity
Poor controls/lack of monitoring
Fraud can be hidden in complex transactions
Exploiting errors
Abuse of authority
Lack of segregation of duties
Lack of effective oversight/ resource
13
Fraud triangle: Rationalisation
They do not pay me enough!
Rules are made to be broken
Everyone else does it
Who cares?
Im the boss!
Its only a small amount Its a victimless crime
They can afford it Ill never get caught!
Its a cost of doing business
14
Warning signs Accounts manipulation / Fraudulent Financial Reporting
Lack of trust / poor auditor relationships
Dominance / lifestyle issues
Undue secrecy
Illegal unethical practices
Significant director share sales
High analyst or other pressures
Declining industry / earnings
High hope value
Aggressive forecasts
Highly-leveraged rewards
Aggressive accounting policies
Unique products unique risks
Cash / funding gap
Results exceed market trend
High management turnover
Profit warnings / credit warnings
Complex corporate structures
Related party arrangements
Multiple banking arrangements
Remote operations
15
Warning signs Employee behaviour

Lifestyle / Income mismatch Refuses or does not seek promotion Overextended personal finances Resists or refuses new positions
Addictive behaviour
Relationship issues
Rarely takes holidays
Poor motivation or unhappy
Stressed, pressurised
Unreliable, prone to mistakes, poor performance
Shifts blame for errors, denies responsibility
Overly secret
Egotistic
Bullies or intimidates colleagues
Ability and performance not in tune with CV
Has favourites or is surrounded by yes men / women
Personal pay and reward could be manipulated
Cannot produce notes / records of business meetings
Vendors and suppliers will not speak to anyone but this person
Cuts corners or bends the rules!
16
Employee-Related Red Flags: 2010 and 2008

Percentage of red flags displayed by perpetrators of fraud according to according to members of the Association of Certified Fraud Examiners (ACFE)
Living beyond means Financial difficulties Control issues, unwillingness to share duties Unusually close association with vendor/customer Wheeler-dealer attitude Divorce/family problems Behavioral red flag Irritability, suspiciousness or defensiveness Addiction problem Refusal to take vacations Past employment-related problems Complained about inadequate pay Excessive pressure from within organization Past legal problems Instability in life circumstances Excessive family/peer pressure for success Complained about lack of authority 0.0%
Source: Association of Certified Fraud Examiners (ACFE) Report to the Nations 2010
38.6% 36.4% 34.1% 18.7% 15.2% 22.6% 22.1%
43.0%
6.8%
19.2% 20.3% 17.6% 17.1% 14.1% 13.6% 11.9% 13.3% 10.2%
Percent of cases 2010 2008
9.3% 7.9% 7.9% 7.3% 7.5% 6.5% 6.3% 8.7% 5.6% 4.9% 5.1% 4.2% 4.6% 3.6% 10.0% 20.0% 30.0% 40.0% 50.0%
17
What can you do to manage fraud?
How do you prevent and detect fraud?

Control Preventative / Detective Effective systems and controls Audit and Assurance Segregation of duty Data analytics Preventative Detective Preventative Detective Non disclosure of details Motor and personal details are put through the CUE system to check previous claims history Audits of underwriting/claims function Cheques are not returned to the claims handler Claims payments just below self-authorisation limit Payments made close to the expiry of a cover Training Oversight and Governance Ongoing monitoring Preventative Preventative and Detective Detective Regular training of fraud coordinators and front office staff Whistleblowing hotline Adequate reporting process in place Claims which are in a re-opened state at a particular point in time Claims fraud software Client onboarding Information and intelligence sharing Preventative Preventative Details captured at application stage to determine whether multiple attempts have been made to lower premium Sharing of information to wider industry e.g. names of individuals, suspect bank accounts etc. will assist in preventing further frauds and wider criminality Example
18
What can you do to manage fraud?
Managements role in detecting fraud

Occupational frauds are much more likely to be detected by whistleblowing than by any other means
Whistleblowing Management review Internal audit By accident Detection Method Account reconciliation Document examination External audit Surveillance/monitoring Notified by police Confession IT controls 0.0% 2.6% 1.8% 1.0% 0.8% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 6.1% 5.2% 4.6% 8.3% 15.4% 13.9% Percent of cases 40.2%
Source: Association of Certified Fraud Examiners (ACFE) Report to the Nations 2010
19
Future predictions
20
Questions?
21
Thank you
DAVID HICKS Partner, Risk Consulting Financial Services Email: David.Hicks@kpmg.co.uk Tel: +44 (0) 20 7694 2915
2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.

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You sir, are a fraud!

Quiz famous alleged fraudsters

UK Fraud Annual Comparison

UK Fraud Annual Comparison Key events

How much does fraud cost?

Rising Cost of Insurance Fraud

Insurance Fraud ( billion)

How much does fraud cost?

Impact of the Recession on the Insurance Industry

Excessive pressure from within your organisation

Current and emerging fraud types

Common types of Insurance Fraud

External fraud: Example

Accident Management Company Helps stage accident

Staged Car Accident

Salvage Company Underpays insurer for scrap metal from cash

Solicitor Represents victim

Medical Treatment Service Provides treatment for nonexistent ailments

Credit Hire Company Claims to provide victim with substitute car

Collusive Doctor Supports alleged injury

The Fraud Triangle: Internal fraud

Fraud triangle: Pressure

Meet budgets/ expectations Debts Addiction drink, drugs

Results at any cost

I need the Money Illness

Fraud triangle: Opportunity

Poor controls/lack of monitoring

Fraud can be hidden in complex transactions

Lack of segregation of duties

Lack of effective oversight/ resource

Fraud triangle: Rationalisation

They do not pay me enough!

Rules are made to be broken

Everyone else does it

Its only a small amount Its a victimless crime

They can afford it Ill never get caught!

Its a cost of doing business

Warning signs Accounts manipulation / Fraudulent Financial Reporting

Lack of trust / poor auditor relationships

Dominance / lifestyle issues

Illegal unethical practices

Significant director share sales

High analyst or other pressures

Declining industry / earnings

High hope value

Aggressive accounting policies

Unique products unique risks

Cash / funding gap

Results exceed market trend

High management turnover

Profit warnings / credit warnings

Complex corporate structures

Related party arrangements

Multiple banking arrangements

Warning signs Employee behaviour

Rarely takes holidays

Poor motivation or unhappy

Unreliable, prone to mistakes, poor performance

Shifts blame for errors, denies responsibility

Bullies or intimidates colleagues

Ability and performance not in tune with CV

Has favourites or is surrounded by yes men / women

Personal pay and reward could be manipulated

Cannot produce notes / records of business meetings