The SME Business Guide to Fraud Risk Management

Robert James Chapman

• Publisher: Routledge
• Year: 2022
• Print ISBN: 9781032055473
• eBook ISBN: 9781000566147
• Topic: Business
• Subtopic: Business General
• Index: Business

All organisations are affected by fraud, but disproportionately so for SMEs given their size and vulnerability. Some small businesses that have failed to manage business fraud effectively have not only suffered financially but also have not survived. This book provides a guide for SMEs to understand the current sources of business fraud risk and the specific risk response actions that can be taken to limit exposure, through the structured discipline of enterprise risk management.

The book provides:

• A single-source reference: a description of all of the common fraud types SMEs are facing in one location.
• An overview of enterprise risk management: a tool to tackle fraud (as recommended by the Metropolitan Police Service and many other government-sponsored organisations).
• Illustrations of fraud events: diagrams/figures (where appropriate) of how frauds are carried out.
• Case studies: case studies of the fraud types described (to bring the subject to life and illustrate fraud events and their perpetrators) enabling readers to be more knowledgeable about the threats.
• Sources of support and information: a description of the relationship between the government agencies and departments.
• What to do: 'specific actions' to be implemented as opposed to just recommending the preparation of policies and processes that may just gather dust on a shelf.

The book gives SMEs a much better understanding of the risks they face and hence informs any discussion about the services required, what should be addressed first, in what order should remaining requirements be implemented and what will give the best value for money.

Section I Background

DOI: 10.4324/9781003200383-1

Introduction to Section 1

The premise of this book is that the best way for SMEs to combat fraud is by establishing a structured approach to understanding, defining and responding to business vulnerabilities, through the development and implementation of a tailored risk management process. Hence before describing individual types of fraud, an introduction to fraud is provided, followed by an overview of the risk management process and a description of the business context or setting.

The chapters included in Section 1 are as follows:

1. Chapter 1 Layout of the book
2. Chapter 2 Introduction
3. Chapter 3 Approach to fraud risk management
4. Chapter 4 Establish the context

Chapter 2 provides a definition of fraud and the drivers behind why individuals commit fraud. It also describes the nature of SMEs and their importance to the UK’s economy together with the types of external and internal fraud.

Chapter 3 describes a high-level overview of the steps in the risk management process. Its goal is to provide those new to the subject with an outline description of the steps involved in its implementation. In simple terms, risk management centres on identifying potential problems (threats), assessing them, planning and implementing response actions, and monitoring if the responses have been effective. Risk management has developed as a discipline over the last 20 years, now has a very broad base and there is a proliferation of detailed guidance on the subject. So it should be emphasised that Chapter 3 provides an overview only. For those wishing to learn more about the discipline of risk management, further guidance can be obtained from the following structured texts, also by the author of this text.

Enterprise risk management

Simple tools and techniques for enterprise risk management, 2nd edition, published by John Wiley and Sons Limited, UK in 2011. ISBN 978-1-119–98997-4 (hbk).

Project risk management

The rules of project risk management, implementation guidelines for major projects, 2nd edition, published by Routledge, UK in 2020. ISBN 978-0-367–30932-2 (hbk).

Chapter 4 describes the operating context of SMEs in terms of the external business environment within which they strive for sustainable growth, such as the social, legal, cybersecurity and technology elements of society. In addition, it describes the business processes they implement to achieve their objectives while at the same time responding to both constraints and opportunities within the industry and sector(s) within which they operate.

Chapter 1 Layout of the book

DOI: 10.4324/9781003200383-2

Section 1 Background

Introduction to Section 1

Chapter 1 describes the layout of the book as a navigational aid.

Chapter 2 provides an introduction to the exposure of SMEs to fraud.

Chapter 3 describes an overview of the risk management process to provide those new to the subject with an outline description of the steps involved in its implementation.

Chapter 4 describes the context of enterprise risk management for businesses to ‘set the scene’ in terms of the operational environment of SMEs looking at cybercrime in general and the myriad of government organisations involved in both combatting fraud and supporting businesses.

Section 2 External ‘actors’

Describes the types of fraud committed by third parties or ‘actors’ outside of the business which require a specific action to limit their occurrence. Criminals rely on the internet and email as the ‘entry gate’ to businesses to commit the majority of these frauds.

Introduction to Section 2

Chapter 5 Non-delivery fraud

Chapter 6 Ransomware attacks

Chapter 7 Intellectual property theft

Chapter 8 Business email compromise

Chapter 9 Identity fraud

Chapter 10 Social engineering fraud

Chapter 11 Long and short firm fraud

Chapter 12 Counterfeit goods

Section 3 Internal ‘actors’

Describes the types of fraud committed by employees and directors of a business (‘insiders’ or internal ‘actors’) which require a different approach to the fraud committed by external ‘actors’ or ‘outsiders’. Individuals inside a business commit fraud by exploiting weaknesses in business processes and systems which permit the ready concealment, at least in the short term, of activities pursued for personal financial gain.

Introduction to Section 3

Chapter 13 Asset misappropriation fraud

Chapter 14 Financial statements

Chapter 15 Bribery

Chapter 16 Procurement fraud

Section 4 Additional information

Three separate glossaries are included as appendices, as listed below. The book navigates across risk management, cyber security and the government’s response to fraud, and hence the glossaries are aimed at supporting readers unfamiliar with one or more of these key subject areas.

Introduction to Section 4

Appendix 1 Enterprise and project risk management terms and definitions

Appendix 2 Cybersecurity terms and definitions

Appendix 3 Glossary of organisations, government departments, agencies and external organisations together with their roles, terms and acronyms

Appendix 4 Further reading addressing intellectual property fraud

Chapter 2 Introduction

DOI: 10.4324/9781003200383-3

Fraud today

Fraud is omnipresent and highly corrosive. It can result in losses which include customers, market share, reputation, funds, and/or staff. A serious fraud event can result in a business struggling to recover for years, or even lead to its collapse. It surfaces in a myriad of business functions and its perpetrators are constantly evolving new ways to search out company vulnerabilities. Fraud can arise for instance from the flooding of the market with counterfeit goods, the theft of intellectual property or the non-delivery of pre-paid goods. It can be perpetrated by both external ‘actors’ and employees (sometimes referred to as internal ‘actors’ or ‘insiders’). According to Action Fraud,¹ nearly one in five small businesses have been defrauded by an employee at some point during their trading history. The growing prominence of state-sponsored fraud is even more insidious and is often more debilitating.² Fraud is a problem for all companies irrespective of size. Given the time and resources needed to minimise fraud, as a consequence of their size, small and medium-sized enterprises (SMEs) are particularly vulnerable. All businesses have to be very vigilant. They have to be aware of the known methods of fraud, the government agencies providing advice as well as the organisations to turn to in a time of crisis. This book aims to provide a structured risk management approach to tackling these burgeoning crimes.

Definition of fraud

The term ‘fraud’ commonly includes activities such as theft, corruption, false representation, conspiracy, embezzlement, money laundering, bribery and extortion.³ Action Fraud (the UK’s national reporting centre for fraud and cybercrime) defines fraud as ‘trickery […] used to gain a dishonest advantage, which is often financial, over another person’. While definitions vary, they generally centre on these themes. Action Fraud lists many of the common words used to describe fraud as scam, con, swindle, extortion, sham, double-cross, hoax, cheat, ploy, ruse, hoodwink and a confidence trick.⁴ In essence, fraud might be described as using deception to bring about a personal gain for oneself dishonestly and or to create a loss for another.

Fraud Act 2006

The Fraud Act 2006 (the Act)⁵ came into force on 15 January 2007 and applies in England, Wales and Northern Ireland.

The Act repealed the following Theft Act offences (offences which were considered to be too specific, overlapping and outdated):

• Obtaining property by deception[1] (Theft Act 1968, section 20 (3));
• Obtaining a money transfer by deception (Theft Act 1968, Section 15A);
• Obtaining pecuniary advantage by deception (Theft Act 1968, Section 16);
• Dishonestly procuring the execution of valuable security (Theft Act 1968, Section 20 (2));
• Obtaining services by deception (Theft Act 1978, Section 1);
• Securing the remission of an existing liability to make a payment (Theft Act 1978, Section 2 (1) (a));
• Dishonestly inducing a creditor to wait for payment or to forgo payment with the intention of permanently defaulting on all or part of an existing liability (Theft Act 1978, Section 2 (1) (b)); and
• Obtaining an exemption from or abatement of liability to make a payment (Theft Act 1978, Section 2 (1) (c)).

The general offence of fraud, as described under the Act, is as follows⁶:

• Section 1 of the Act establishes a new general offence of fraud, which can be committed in three ways: fraud by false representation; fraud by failing to disclose information; and fraud by abuse of position. These are set out in Sections 2, 3 and 4 of the Act respectively.
• There are two basic requirements which must be met before any of the three limbs of the new offence can be charged. First, the behaviour of the defendant must be dishonest. Second, it must also be his intention to make a gain, or cause a loss to another. However, there is no need to prove that a gain or loss has been made, or that any victim was deceived by the defendant’s behaviour. Each of the three limbs of the offence carries a maximum sentence of ten years.
• Section 2 makes it an offence to commit fraud by false representation in any form. For a representation to be false, the repre...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of figures
• List of tables
• List of case studies
• Foreword
• Preface
• Acknowledgements
• Audience
• Aim of the book
• About the author
• How to read this book
• Section 1 Background
• Section 2 External ‘Actors’
• Section 3 Internal ‘Actors’
• Section 4 Additional Information
• Index