Data demonstrates the correlation between GDP declining and recorded fraud offences increasing – after what we’ve collectively been through over the past few years, businesses should be ready for an upsurge in fraud being uncovered.
Very few of us have not felt significant impacts from Brexit, the Covid-19 pandemic, war in Ukraine, the general global downturn, and the resulting inflationary and cost-of-living pressures – not to mention the further instability caused by domestic political infighting and market disruptions in the banking sector, including recent rescue measures for SVB and Credit Suisse.
Fraud flourishes in this kind of environment. An article published in a special Fraud and Financial Crime supplement produced by Raconteur for The Times in March 2023,* contained data from the University of Portsmouth Centre for Counter Fraud Studies. This illustrated the clear correlation between GDP declining and recorded fraud offences increasing. The data, from 2020, showed that fraud went up by 5.6% when GDP dropped by 3% in 1980, and increased by a more marked 7.3% in 2008 versus the 2.1% GDP decline that year.
The Raconteur article, ‘Is your organisation ready for the downturn upsurge?’, also quoted a statistic from fraud prevention non-profit organisation Cifas which showed that the number of cases of fraud committed by employees against their employers had risen by 25% year on year by the end of 2022. The article went on to analyse the types of threats businesses may be facing, both from the inside and the outside. These include invoice fraud, impersonation scams and many varieties of cyber fraud.
This trend is reflected in the perceptions of those on the front lines of business. At the start of 2023, Kingsley Napley shared the results of a survey of general counsel and in-house legal teams conducted on its behalf by Winmark. The majority of those polled predicted that in the year ahead their workload would feature more litigation, debt recovery and fraud issues, more employment disputes and HR compliance matters, and a higher workload in general.
As global turmoil continues, it’s clear that businesses should be aware of the risk and preparing for the inevitable counter-cyclical rise in fraud which goes along with any economic downturn.
Unfortunately, experience has shown that lessons are not always learnt from the troubles of the past: corporate memories can be short, risks continue to be under-assessed, and a reactive approach when a crisis arises often wins out rather than a more considered risk assessment. The fact that fraud is continuing its inexorable rise this year, means that it is a good time to reassess risk.
In January, we recommended that, given the landscape in which we now find ourselves, general counsel should urgently conduct a ‘Downturn Health Check’. This would enable them and the businesses they advise to assess whether their functions have appropriate processes and resources in place to provide an early warning to fend off fraud. Given the way 2023 is panning out, this recommendation continues to ring true – and if anything, companies should be treating this more seriously than ever.
In an environment of almost unprecedented financial uncertainty, it may seem that it would take a particularly brave senior leader who suggests investing in counter-fraud and compliance measures while at the same time dealing with squeezed budgets and worried employees. But specialists agree that the right kind of focused attention now could save a company money – or even ensure its survival – in the future.
Raconteur quoted Tina McKenzie, chair of UK policy and advocacy at the Federation of Small Businesses, on this point. “If business fraud does indeed rise sharply this year, it will happen as trading conditions deteriorate for many companies,” she said. “They must therefore act promptly to ensure that they are as well prepared as they can be for the coming challenges.”