Record Fraud Cases Against Financial Institutions
While the number of large fraud cases through the New Zealand courts in the second half of 2011 dipped from the last survey period, two large super-frauds committed against financial institutions have resulted in the highest dollar value ($279.7m) of large frauds recorded in a six month period since the Fraud Barometer began.
The latest KPMG Fraud Barometer shows the value of large fraud cases, defined as over $100,000, totalled $279.7m (up from $79.8m in the last period). There were 24 cases in total (down from 29 in the last period), five of which were ‘super-frauds’, being frauds greater than $3.0m.
Overwhelmingly this period has been dominated by super-frauds being brought before the New Zealand courts. Two of these frauds topped $100m and were carried out against financial institutions.
“The focus on the financial sector and restoring the confidence of investors in our financial markets by the SFO and the FMA is reflected in the level of prosecutions in this sector. This trend will continue into 2012 and 2013” says Stephen Bell, Head of Forensics at KPMG New Zealand.
Compared with the same survey period last year (covering the six months to December 2010), the latest KPMG Fraud Barometer shows that the number of large fraud cases going before the New Zealand courts has decreased to 24 cases (from 30). However, the aggregate value of large frauds for the second half of these respective years nearly tripled from $100.0m to $279.7m.
Trend of ‘Super-fraud’ cases
Since KPMG’s fraud analysis began in January 2008 the second half of the year has had a far greater value in prosecutions than the first. This trend is driven by the value of super fraud cases that have been increasing since the second half of 2009.
Conducted twice a year, the KPMG Fraud Barometer is the first of its kind in New Zealand. It monitors the level of reported frauds coming before the criminal courts in New Zealand, and provides commentary surrounding trends, the types of perpetrators, the victims, and the types of frauds occurring. Fraudulent activity must exceed $100,000 and the individuals involved must have made their first appearance in court.
Three of the five super-fraud cases this period were carried out against financial institutions and two of these topped $100m each. The three frauds involved falsifying financial information in order to obtain loan finance.
The other two super-frauds relate to the collapse of finance companies which involved directors using investor funds for their personal benefit and misrepresenting to investors how their investments would be used.
The focus on the financial sector and restoring the confidence of investors in our financial markets by the SFO and the FMA is reflected in the level of prosecutions in this sector. This trend will continue into 2012 and 2013. For example, recent court activity indicates 2012 will again reach record levels with charges amounting to $1.5 billion being laid in the case involving South Canterbury Finance Ltd.
The survey found that the most common victim was the Government (7 cases) and the most prominent victims, by value, were financial institutions at $227.5m (up from the last period of $51.1m).
“The frauds against financial institutions accounted for 81% of the total value of frauds in this Barometer and they all related to obtaining loans based on fraudulent information. This highlights the importance of financial services organisations conducting appropriate customer due diligence and loan underwriting procedures” says Mr Bell.
Investors are also prominent victims as cases relating to finance companies reach the courts ($46.6m).
“We are now witnessing the results of investigations into failed finance companies reaching the courts. The significant amounts involved in these cases are making a significant impact on the results of the Fraud Barometer with ‘Investors’ recorded as suffering the second highest aggregate amount of fraud. ” says Mr Bell.
As with previous Barometer, taxpayers and employees were the most common perpetrators of large fraud with six cases each. The frauds committed by employees were all committed by people employed in the finance function. The frauds committed by taxpayers were split between benefit fraud and tax evasion.
Management were successful in misappropriating larger sums. In the December period, employees averaged $0.6m per fraud, compared to managers who averaged $11.8m
Males accounted for 71 per cent of the cases and 99 per cent in value. Removing the super-fraud cases from the analysis, males account for 63% of the cases.
Types of fraud
The most common type of fraud in the survey period was accounting fraud (in six cases). These cases all involved internal staff (employees or management) as the perpetrator.
“All of the frauds recorded against commercial businesses were accounting frauds. This reinforces the need for all organisations, whatever their size, to consider the strength of their internal and financial controls, particularly in relation to the receipt of revenues and payment of payroll and accounts payable,” says Mr Bell.