‘Economic Downturns’ Make Frauds, Scams More Likely Lloyd’s Warns

November 17, 2009

“Economic downturns are often linked to increases in fraud and crime,” notes an article on the Lloyd’s web site (www.lloyds.com). “In desperate times people are said to be more likely to turn to fraud, and scams are more likely to be discovered as they unravel.”

Lloyd’s also noted that “insurers, regulators and law enforcement organizations are getting better at detecting fraud, but the need for careful due diligence has never been more important.”

While the depression of the 1930’s spawned a number of bank robbers, the most recent economic downturn has increased the number of more sophisticated scams – most notably Bernard Madoff’s cheating investors out of £14.5 billion ($24.37 billion) through a Ponzi scheme.

“Huge scams such as the one perpetrated by Madoff have helped reinforce the conventional wisdom that economic downturns increase levels of fraud,” said Lloyd’s. “But the true picture of financial crime in times of economic hardship is far more complex, according to risk consultants Kroll.

“Thirty percent of respondents to Kroll’s Global Fraud Report say that the global financial crisis has increased the levels of fraud at their organizations. However, the overall incidence of fraud is largely unchanged, despite the financial crisis.

“The average cost of fraud per company in the 2009 survey was £6.1 million ($10.25 million) compared with £5.6 million ($9.41 million) in 2007, Kroll said. While the crisis may not have led to an identifiable increase in overall levels of fraud, the risk profile has changed.

“For example, with less money coming into a company, and more oversight of spending, the opportunity for crime is more limited. However, pay cuts in the face of lower revenues, for example, provide a motive for fraud, and perhaps even turn employees to crime, according to Kroll.”

Madoff’s scheme certainly predates the current recession, similar types of financial crime have climbed the agenda in recent years, with regulators and the industry have stepping up their efforts to catch fraudsters.

“The UK’s Serious Fraud Office, which is currently investigating 88 cases of fraud worth £6 billion [$10.08 billion], says that it has become much more proactive in its approach to combating serious fraud.”

The insurance community has also reacted. As companies become more concerned about rising levels of fraud, they’ve been stepping up initiatives to fight it.

The Association of British Insurers (ABI) currently estimates that fraudulent general insurance claims cost the industry £1.9 billion [$3.2 billion] a year, up 24 percent from previous estimates. But insurers are detecting more of the fraud committed. Last year, frauds worth £730 million [$1.226 billion] were detected and prevented, a 30 percent increase on 2007, the ABI said.

The insurance industry is getting much better at spotting fraud, and has invested in data mining and claims analytics in a bid to combat claims fraud, said Bobby Gracey, Vice President of Global Counter Fraud Solutions at loss adjuster Crawford & Co. These developments are no “silver bullet” but they do help general insurers identify potentially fraudulent claims and prioritize them, he added.

Steve Payne, Head of International Regulatory Affairs at Lloyd’s explained that, as the Lloyd’s market writes complex specialist risks, and little personal lines business, it is not as affected by the large volumes of claims fraud that afflict the general insurance market.

However, he added that the market is still a target for a wide range of financial crime. He cited past incidents, where the Lloyd’s brand has been used fraudulently to entice people into scams, even though no Lloyd’s insurer is involved. And fraudsters have tried to insure unusual assets at overinflated prices, using the Lloyd’s policy to defraud lenders.

As example, one company trying to secure a loan recently listed an £11 million [$18.48 million] ruby among its assets. A quick check with Christies would have shown that the highest price achieved for a ruby at auction was just £2.6 million [$4.368 million].

Fraud often starts at policy inception, Gracey explained. Almost 40 percent of proposal forms are filled in under a false pretext as policyholders seek to get better rates, even though this is material non-disclosure.

Fraud and financial crime is a major problem for financial institutions, and is taken very seriously by Lloyd’s and the insurers and brokers that operate in the market, said Payne. Lloyd’s has been strengthening its ties and cooperation with regulators and law enforcement, including the SFO, the City of London Police and overseas organizations, he said.

In the current economic climate, people are now far more cautious about what they buy or invest in, and Lloyd’s has had more enquiries from 3rd parties that want to make sure they are getting the genuine Lloyd’s product, he added.

It is vital that all parties carry out due diligence, especially in the current economic climate, said Payne, adding: “Insurers and consumers should know who they are dealing with, and make sure that what is said is genuine.”

Source: Lloyd’s of London

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