PROFESSIONAL & FINANCIAL RISKS EMPOWERING YOU WITH OUR EXPERTISE

PROFESSIONAL & FINANCIAL RISKS EMPOWERING YOU WITH OUR EXPERTISE

YOUR GUIDE TO CLAIMS.Commercial Crime Protection from RSA

Pantone 268 FLAT SIZE: 297MM H 420MM WFINISHED SIZE: 297MM H 210MM W

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It is hard to believe that somewhere between a quarter and a third of all companies suffered some kind of fraud in the last year but recent and detailed surveys attest to this fact. In a depressed economic climate an increase in fraud is not unexpected, but fraud on this scale hints at a persistent and entrenched problem.

Worse still, the average size of loss is around 1.3% of turnover for smaller companies and for larger enterprises 1 in 10 reported losses are in excess of £3.5m. That is only half the problem. Additional expenses incurred in dealing with the loss, lost business opportunities, brand and reputational damage, not to mention lost management time, are the usual consequences of fraud.

Good risk management can mitigate the problem significantly and Commercial Crime Protection from RSA is a valuable tool in the Risk Manager’s repertoire.

Unfortunately most companies that suffer fraud will do so at the hands of their employees either acting alone or in collusion with external third parties. The fraudster will typically be a trusted and relatively senior individual with several years of experience and no prior criminal history.

CASE STUdY (SUPPLIER/PURCHASING FRAUd)

The Insured were one of the UK’s largest property management companies involved in various building maintenance and improvement projects. An employee of the Insured in the role of project manager conspired with two external contractors in an invoicing fraud. Invoices were submitted by the contractors for work that had not been done and the employee authorised the payments in return for kickbacks. The loss to the business was a little shy of £2m. The fraud occurred over a large number of sites and invoices were mixed in with legitimate invoices making the quantification of the loss difficult. We were able to agree a series of interim payments as each phase of the loss was quantified, thereby minimising the impact on the Insured’s business.

Supplier fraud (which usually involves collusion) is on the increase. It can go on for a long time without being detected and result in multimillion pound losses. Companies need a rigorous procedure for vetting and appointing suppliers. The supplier list should be actively managed and appropriate auditing is essential.

CASE STUdY (ACCOUNTING FRAUd)

A large local authority discovered a significant fraud perpetrated by a financial controller. The department in which he worked employed over 500 people and was responsible for the provision of various social services. Some of these services were outsourced to local suppliers who received payments for their services. Investigations revealed that the financial controller had amended payment runs and inserted additional fictitious payments to these suppliers, but these payments were made into a personal bank account he controlled. During a five-year period he stole in excess of £500,000. The loss was a significant amount of money for a local authority providing front-line services to vulnerable people. A quick investigation allowed us to pay the loss in its entirety.

A significant proportion of all losses are caused by accounting fraud. Due to the authority levels of the fraudster and their knowledge of accounting systems, they can be difficult to detect. Full segregation of accounting functions should be rigidly enforced and staff rotation should be considered.

THE FRAUD EPIDEMIC THEY bETRAYED OUR TRUST

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CASE STUdY (ACCOUNTS RECEIvAbLE /TEEMING ANd LAdING)

A senior accountant working in the European operations of a global chemicals company had been stealing money from various company bank accounts over a six-year period. He had worked there for well over ten years, was highly trusted and had risen to a senior position in the organisation. He used his detailed knowledge of the accounting systems to process and conceal regular payments into his own account and covered his tracks by transferring money from other company accounts to hide the holes, commonly known as “teeming and lading”. The loss was over €800,000. The claim was paid and we were successfully able to pursue recovery against the fraudster.

“Robbing Peter to pay Paul” is the essence of teeming and lading. because of their trusted position and system knowledge, fraudsters can be difficult to detect in these circumstances. Suspicious transaction monitoring, surprise audits and job rotation can play a significant role in preventing this type of loss.

CASE STUdY (ASSET MISAPPROPRIATION)

A European based manufacturer produces large quantities of scrap metal in its production process. The scrap was sold to a scrap metal reclamation company for reprocessing. The employees responsible for this activity sold the scrap at less than market value or on certain occasions didn’t charge at all. In return they got kickbacks. The loss totalled over €500,000.

CASE STUdY (ASSET MISAPPROPRIATION)

A manufacturer of mobile phones noticed that its revenue from a certain territory had diminished rapidly. On investigation it found that cheap non branded mobile phones were being sold in large quantities and that the functions and features were identical to their phone. It turned out that the chip sets in the non-branded phones were in fact theirs. These were traced back to the plant where they were manufactured and several employees were found to be stealing them and selling them in the black market. The loss was well over £1m.

Asset misappropriation is still one of the main frauds perpetrated and attractive stock with a ready black market will always be at risk. Strong inventory and stock check controls allayed to robust audit procedures are essential to reduce the likelihood of asset theft. Specific fraud risk assessments can also be very effective.

As every risk manager knows, you can avoid risk, reduce it or transfer it. In real life, companies will aim to use all three strategies to minimise losses and maximise profits. Understanding how fraud is detected gives valuable insight into what strategies should be employed.

dETECTION

Corporate controls which include: internal audit, fraud risk management, suspicious transaction monitoring, corporate security and regular rotation of personnel in key roles, account for 50% of all frauds detected.

Corporate culture which includes; whistle-blowing hot lines and other provisions for allowing and encouraging tip offs accounted for 23% of frauds detected.

Factors beyond management control, including the activities of law enforcement agencies accounted for 17% of all frauds detected.

PREvENTION

bearing in mind how frauds are detected, companies should:

• Have comprehensive and relevant internal controls and procedures and a clear code of conduct

• Have a strong internal audit function

• Carry out regular fraud risk assessments

• Ensure they have effective whistle-blower mechanisms

• Have an effective communications and training strategy to address the issue of fraud.

RESPONSE

If the worst happens what is the appropriate course of action?

1. The insurer should be advised as soon as possible.

2. A well planned and thorough investigation should be carried out.

3. Remedial actions should be taken, including identification and correction of any control weaknesses. Appropriate personnel procedures should be followed and adequate communication needs to take place both internally and externally as appropriate.

4. Risk management needs to be reconsidered. Can the risk be avoided or mitigated in the future?

5. Adequate insurance needs to be purchased. If certain risks cannot be avoided, risk transfer via insurance can provide significant protection for the balance sheet. Commercial Crime Protection from RSA is all the policy you will ever need. See the product brochure and fact sheet for details.

FRAUD RISK MANAGEMENT

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Royal & Sun Alliance Insurance plc. (No. 93792).Registered in England and Wales at St. Mark’s Court, Chart Way, Horsham, West Sussex RH12 1XL.Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. UKC04616A 03/14

Our Professional and Financial Risks team is supported by a market-leading claims operation that offers unrivalled experience, service and technical expertise.

EXPERIENCE

Our clients have the support of a dedicated claims team with over 40 members of staff, 300 years of combined professional and financial risk experience, 600 years of combined insurance experience, and over 80% hold professional insurance qualifications. Our development programme ensures they’re on top of all insurance and legal developments as well as matters which affect your clients’ businesses.

SERvICE

We aim to respond to new claims and interim advices within five working days although we’re usually quicker. Urgent matters will be dealt with immediately, so you can be confident that we’ll meet the requirements of you and your clients. We’re also happy to agree bespoke arrangements and sign up to the Insurer Service Levels detailed. Claim settlements are paid within five days of agreement and we continually monitor our service standards, ensuring we’re giving the highest level of service to you and your clients.

CLAIMS HANDLING

We work in partnership with your clients to achieve the best solution as quickly as possible, making sure we’re doing everything we can to keep them moving. We provide a dedicated claims contact at notification that will be responsible for the management of your client’s claim throughout its lifecycle.

If there’s anything else you need to know, we’re here to help. Contact your local specialist who will be able to give you the answers you need.

PAUL GARNER

Horsham 01403 233341 paul.garner@uk.rsagroup.com

This is a summary only. Please refer to the policy wording for full details of the cover included. For more information on our wide range of products and services, please visit www.rsabroker.com

OUR CLAIMS PHILOSOPHY HERE TO HELP

Find us online at rsabroker.com

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