Recessionary times require extra vigilance against fraud, whether from internal or external sources

The economic downturn has created challenges for solicitors throughout the profession – reduced business activity, cost-cutting and difficult decisions over staffing. Although relatively rare, fraud can also be a particular issue when businesses are squeezed. Last month, the UK’s Fraud Prevention Service (CIFAS), which represents 260 members spread across various business sectors, recorded more frauds than in any previous year, citing the economic climate as a key factor.

And the Law Society of Scotland’s experience suggests the increase in fraud in other industries was reflected in the legal sector. Last year, the Society’s Interventions Department dealt with four judicial factory cases – the highest annual figure in my 18 years as judicial factor. In addition, an increased number of business failures added to the work of the department.This serves as a reminder to practices struggling in an economically challenging period how vital it is to assess the financial risks of their present business model. Firms not only need to keep a constant eye on the bottom line, but also give serious consideration to how they are achieving their top line.

Internal fraud

One concern arising from the work of the financial compliance teams, the inspection process and some of the recent judicial factory appointments relates to the charging of excessive fees. While firms need to take steps to maximise their income in these tough economic times, they must also be aware of the culture they can create within the office environment, which could lead to overcharging for work.

It is essential that businesses look at how they encourage their employees to increase their earning capacity, and some of the potential pitfalls. Time recording could be overstated by individuals to ensure they are not considered potential candidates for redundancy. Systems to ensure accurate recording of billable hours need to be in place.

There can also be a temptation to increase short-term cash flow by billing clients for work not yet done, or to bill a client where there is money at credit of their ledger, only to repay this at a later date when legitimate fees are paid into the firm. A high frequency of refunds/credit notes appearing in the financial records is an indication that all is not well. Fraudsters can also turn out to have been top performers, so it is worth monitoring top-line income with this in mind.

Redundancies are difficult for all involved. Where firms are considering such an option, all steps should be taken to protect client files and data, while guarding against loss of intellectual property, damage to internal systems and theft of property and other equipment.

A period of staff wage constraint also increases the risk of theft from businesses. Firms should pay particular attention to their cash-handling procedures and the possibility of interference with the payroll. Consideration should be given to whether systems are strong enough to prevent any members of staff, including solicitors, paralegals, conveyancing staff and cashroom staff, from diverting the repayment of client loan funds to their own mortgage accounts or bank accounts.

Firms should revisit the reliance they place on their cashier. If the cashier is the only individual with a full understanding of the firm’s financial position, the firm is relying too much on that member of staff. More rather than less supervision is required in difficult times, not necessarily due to a lack of trust in an individual employee, but because it is important to have a real feel for how the firm is performing and to be able to respond quickly enough to steer it out of financial danger, should this arise.

It is important to remember that recession is not only a time when more fraud occurs: it is also a time when more frauds are uncovered, as firms more carefully review their finances. Care should be taken when employing staff in sensitive positions. On occasions, dismissals are portrayed as redundancies to avoid difficulties for employer and employee alike. Proper background checks should be undertaken to establish why a new recruit left a previous post. Firms should also be aware of the risk of staff colluding with fraudsters, remaining alert to suspicious behaviour or lifestyles.

External fraud

Identity fraud is currently a major issue. Ensuring the proper identification of a client is vital to reducing the risk associated with taking on new business. According to CIFAS, 80% of identity fraud is internet-based, while only 2% results from face-to-face contact. It is worth taking this risk into account when conducting mortgage business.

When checking identity documents, firms should pay particular attention to unique reference numbers (URNs), which are increasingly appearing on government documentation and utility company documentation. These URNs are issued by Ordnance Survey, and are a unique identifier for every specific property in the country. Consequently, if a utility bill and a council tax bill for the same property address show different URN references, one of the documents may be a forgery.

Revolving deposit schemes/rebate schemes are currently one of the main issues affecting the mortgage fraud landscape. These schemes involve an introducer, or company, who approaches a distressed seller, claiming to have access to a large number of potential buyers. The seller then agrees to sell the property to an individual who is known only to the introducer, for a price that may be in excess of the property’s current valuation. In advance of the deal, the seller must agree that part of the sale price, perhaps tens of thousands of pounds, will immediately be transferred to the introducer on settlement.

However, the seller, along with his or her solicitor, may be unaware that the fee paid to the introducer is being passed to the purchaser as a deposit for the property purchase, hence the revolving deposit. Often false or manipulated valuations are employed, which ultimately results in the purchaser having 100% lending on the property, without the lender’s knowledge. Solicitors who encounter clients engaging in such schemes should immediately contact the Society’s Professional Practice Department for advice. Even when acting for the seller in these cases, your firm could be involved in handling the proceeds of crime.

Being vigilant and having robust internal processes in place are the best protections against firms falling victim to fraud.


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The Author
Morna Grandison is director of Interventions at the Law Society of Scotland
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