Fraud: A Perspective from ‘Down Under’

In 1997, a senior manager of a major Australian financial services firm systematically misappropriated more than AUD$750,000 over the period of a year using forged bills of exchange. His crime was discovered when his personal assistant – and co-conspirator – reported the fraud to the company’s vice president because she could no longer live with her guilty conscience. When the vice president confronted the senior manager, he readily admitted the fraud and offered to repay the monies in full. The vice president accepted his offer – as well as his resignation – and decided not to report the matter to the authorities. Within a week, the “wayward” senior manager was working in a similar position at another financial organization.

The company’s shareholders and regulators would’ve never known about the incident if not for a leaked external auditor’s report. When asked why the company didn’t press charges against the senior manager, the vice president replied, “Well, the man is 45 years old with a family. A criminal conviction would have seen the end of him. And besides, he promised not to do it again. I took the view that it would work itself out in time.” The senior manager who “got away” has since retired to an affluent coastal suburb just north of Sydney.

Unfortunately, the vice president’s laissez-faire attitude toward fraud is fairly representative of the way white-collar criminals traditionally have been treated in Australia. Consequently, fraud has proliferated “down under.”

On average, fraud costs each household in Australia AUD$2,660 annually. It accounts for more than 69 percent of the cost of all crime, and has an estimated national price tag of AUD$13.7 billion – or 3.4 percent of our gross domestic product (GDP). Considering that Australia only spends 1.8 percent of GDP on defense, these figures are disconcerting to say the least.

Several professional organizations in Australia have also tried to put a figure on fraud. The Australian Federal Police (AFP) estimates that between AUD$3 billion and AUD$3.5 billion is lost to fraud annually. In 1997, KPMG surveyed more than 1,800 large Australian businesses, which reported a total of AUD$104 million in fraud losses from 1995 to 1997. It’s estimated by the Australian Computer Abuse Research Centre (ACARB) that “…as little as 10 percent of commercial crimes are actually reported to the police.”

Community Perceptions 

It could be argued that the Australian public is its own worst enemy. The “she’ll be right, mate” laid-back attitude – for which Aussies are renowned – might be largely to blame for the abundance of white-collar crime.

The perception of fraud in Australia is that it’s a victimless, relatively innocuous crime perpetrated against large, faceless organizations, which, in the eyes of the embattled consumer, probably deserved it anyway. This ill-conceived idea of fraud has, in the past, been perpetuated by a corporate culture that prefers not to report fraud because of the perceived damage it causes to both individuals and companies.

Compounding this problem is the lack of adequate law enforcement resources dedicated to fighting white-collar crime in Australia. It’s not unusual in the white-collar crime units of law enforcement organizations to find large caseloads of serious fraud allegations, each requiring an average of six to 12 months’ worth of work per investigator. And appropriately trained and experienced personnel to staff these highly specialized units are scarce. For instance, the Commercial Crime Agency (CCA) of the New South Wales Police Service hasn’t been able to meet its authorized staffing level of 66 employees. The CCA’s strength in January 1998 merely stood at 32 employees, which finally increased to 51 in June 1998 after an extensive internal advertising campaign.

Of the estimated 19,000 frauds reported to the NSW Police Service each year, only a small percentage are investigated by the CCA. In 1997 the CCA received 342 cases for assessment, but investigated only 62 of them. These matters just represented the most complex and serious frauds, the remainder of which was referred elsewhere within the service or externally to other law enforcement bodies.

The Way Ahead 

Australian corporations, however, are slowly changing their easygoing attitudes in the face of long-term business viability and the trend to be a “good corporate citizen.” The emergence of dedicated fraud investigation departments in businesses serves as a benchmark for this trend. The new emphasis is on prevention through fraud awareness training for staff, specialized fraud risk management services, and continuing professional education for fraud examiners from all sectors.

Partly behind this anti-fraud movement is the Australian/New Zealand Standard on Risk Management (ASNZS 4360:1999), which has been adopted by many large Australian and international companies. It defines the steps to better understanding the risks that face organizations and the potential impacts of those risks on the organization. The standard provides a useful, step-by-step process for developing a viable and effective fraud risk management program. It involves: (1) establishing the organizational and risk management context – what is suitable and acceptable for the organization?; (2) identifying the fraud risks that threaten the organization; (3) quantitatively or qualitatively analyzing those risks – how big is the problem or the potential for problems?; (4) evaluating the fraud risks against pre-determined organizational benchmarks – what is the company’s fraud tolerance level?; and (5) treating the risks by implementing holistic fraud control programs. These steps are carried out with the stakeholders’ continuous monitoring and consultation.

The life insurance and financial investment industry also has jumped onboard and adopted stricter policies. In 1995, the Life Insurance Code of Practice was adopted, which sets specific requirements in education and experience for all financial advisers. The code is voluntary; however, if advisers don’t adhere to it, they can’t give financial advice in Australia on behalf of a life insurance company. In addition, the Australian Securities and Investments Commission, the industry’s regulator, administers the Corporations Law, which has legislative requirements for giving financial advice on certain types of securities and investment products.

The story of Mr. X and True Blue Financial Services is a prime example of an Australian company embracing the proactive movement. For more than 10 years, Mr. X had been a financial adviser for True Blue Financial Services. In that time, he had built up a great deal of trust with his clients, so much so that he was regarded by most as more of a friend than a financial adviser. He regularly attended dinners and social events at his clients’ homes, and even coached a soccer team, on which many of his clients’ children played. During this period, Mr. X had written superannuation – or self-funded retirement – plans for more than 70 clients.

Despite his apparent success, Mr. X grew increasingly disgruntled with True Blue, especially after it embraced the new Life Insurance Code of Practice in 1995. The company insisted that all its financial advisers meet the stricter education and knowledge criteria. “I won’t be told what to do by a boy manager who is still wet behind his ears,” Mr. X was heard exhorting to colleagues. After all, he had been in the industry for more than 15 years and resented being told that he had to sit for newly implemented continuing professional education exams. Mr. X, consequently, decided to resign, but not before taking a list of the 70 clients he had served over the years as insurance for – as he later was to put it so eloquently – “his retirement.”

Over the next year, Mr. X became an agent for True Blue’s competitors, with which he also had some personal investments. During that time he contacted his 70 clients and convinced the vast majority to rollover their superannuation savings into what he claimed were “safer and better performing” funds with the companies he now consulted. The clients, showing their implicit trust, authorized Mr. X to take full control of their financial investments. He even filled out the withdrawal forms and rollover documentation for his clients, who then signed without reservation or question.

Mr. X executed these documents on True Blue and the funds checks were sent directly to the post office box that Mr. X used for business correspondence. The checks written by True Blue naively were made payable to the competitor financial institutions with no further endorsement or reference to the clients or surrendering fund. Once received, Mr. X either deposited the checks into his own investment products with the competitors or fraudulently endorsed the backs of the checks over to his personal savings account.

Mr. X’s scam might have gone undetected if it weren’t for True Blue’s proactive audit, conducted every six months by the company’s fraud investigations department. The audit revealed that a certain post office box and Mr. X were common to a number of clients who had recently rolled over their superannuation funds. From the outset, it appeared suspicious to the investigations manager because all the funds had been rolled over after Mr. X’s resignation. Traces were conducted on the proceeds checks and Mr. X’s nefarious activities were discovered. Although approximately 25 clients were affected with total losses amounting to more than AUD$ million, the damage could have been much greater if True Blue didn’t actively monitor its internal controls.

Responding to the Proactive Movement 

The Australian Federal Police and the Australia Bureau of Criminal Intelligence are doing their part to support the anti-fraud effort among businesses and under-resourced law enforcement fraud units. The two groups recently launched the National Fraud Database, which provides up-to-date information on crime trends and emerging fraud techniques. Although the database is geared primarily toward law enforcement, it’s increasingly being made available to corporate investigators.

Fraud is pervasive in Australia and demands to be treated from a contemporary perspective. A new approach is called for – a holistic, preventative, and collaborative approach by both government and the corporate sector. The typical reactive model of responding to fraud in Australia – mainly by under-resourced government bodies and the police – will no longer suffice. Mr. X was caught with his hand in his clients’ pockets because True Blue moved toward a management model of fraud control. Until a holistic approach is adopted by the majority of Australian organizations, fraud will continue to thrive.

Australia is slowly coming of age and realizing that the relative geographical isolation of the country doesn’t make it immune to fraud in today’s global economy. This adjustment in perspective is vital if Australia is to remain the “lucky country down under.”

Scott Williamson, CFE, is a senior fraud investigator in the Legal, Compliance & Investigation Division of AMP Life Limited in Australia. He is a member of the Australian Institute of Management and the Australian Institute of Risk Management.  

1. A bill of exchange is an unconditional order in writing requiring the party to whom it is addressed to pay a certain sum on a fixed date in the future. Bills of exchange are negotiable instruments, usually maturing within six months, and sold at a discount to face value. http://www.tradingroom.com.au/help/dictionary/dict_c.html
2. Sullivan, P., (1998). JST412: Fraud Prevention: Study Guide. Charles Sturt University, Bathurst, Australia.
3. Access Economics Five Year Business Outlook: September Quarter, 1999. http://www.ozemail.com.au/~aeweb/publicat.html
4. KPMG. (1997). 1997 Fraud Survey. Sydney, Australia.
5. Sullivan, P, (1998). JST412: Fraud Prevention: Study Guide. Charles Sturt University, Bathurst, Australia.
6. Anecdotal evidence gained through personal experience and discussions with senior members of these units over a number of years.
7. The Audit Office of New South Wales. NSW Police Service: Police Response to Fraud 1998. http://www.audit.nsw.gov.au/pdfrd98/response.htm
8. Ibid. Agencies include, but not limited to, the Australian Federal Police (AFP), state & territory police services, the Australian Securities & Investments Commission (ASIC), the Australian Prudential & Regulation Authority (APRA), the NSW Independent Commission Against Corruption (ICAC) and Department of Consumer Affairs.
9. Thisstandard was prepared by the Joint Technical Committee OB/7 - Risk Management. It was approved on behalf of the Council of Standards Australia on April 2, 1999 and the Council of Standards New Zealand on March 22, 1999. It was published on April 12, 1999. It is a voluntary standard, but increasingly is being mandated by many government and corporate organizations as a generic risk management structure.
10. A series of Acts of the Australian Parliament regulating companies and the securities and futures, life insurance, superannuation and other industries in Australia. The Corporations Law is administered by the Australian Securities & Investments Commission (ASIC).
11. Identities hidden because the case is scheduled for trial in the Australian court system.
12. The Australian Government is involved in a concerted push for Australian citizens to self fund their retirement. This is in no small part due to the aging Australian population and the realization by the Government that the current pension (welfare) based retirement regime will not be able to cope with this added pressure in the future. The National Strategy for an Aging Australia provides a blueprint for this direction. See Bishop, B. (1999). Keynote Address to the Australian Financial Review Health Congress ’99. The Government’s Vision for Australia’s Health Care System Into the New Millennium. Sydney, Australia, 1999 Unpublished.
13. These included Eligible Termination Payment forms and Application for Withdrawal forms as well as Letters of Authority and Powers of Attorney.
14. Computer Assisted Audit Technique (CAATs).
15. Doneman, P., and Murray, D., (2000) National Move to Fight Fraud. The Courier Mail. March 6, 2000.