Tight economic times call for desperate measures – both honest and dishonest. Nina Fowler asks if fraud in New Zealand is on the rise and, if so, what can be done about it.
Photograph by Isaac de Reus

YOU’VE got it all: family, friends, a decent job and a house in Remuera or Epsom. You send your children to private schools; you have a taste for European cars and fine wine. Then you land an unlucky roll of the dice – a redundancy, perhaps, or some unexpected bills. You make a bad investment or two; the recession plunges your business into the red. As your debts grow, so does the temptation to break the rules – reroute an invoice or distort a financial statement, just enough to get a new line of credit. You decide to risk it just this once – and maybe once or twice more if you don’t get caught.

“Often with your white collar criminal, they don’t believe – at least initially – that what they’ve done is wrong,” the Serious Fraud Office’s fraud and corruption general manager Nick Paterson says. “They believe themselves to be fundamentally honest individuals who got themselves into a ‘spot’ which they didn’t really want to be in.”

As the economy tightens, so will the chances that people will find themselves in just such tight spots. But is it fair to say that fraud in general in New Zealand is on the rise? “Probably,” Paterson says, though it’s difficult to know whether the rise is actually due to an increased awareness of fraud and better efforts to detect it. “Financial pressures have given people motive for seeking more money, whether honestly or dishonestly.”

Deloitte recovery and forensics partner Barry Jordan agrees. He points to an upsurge in complex fraud in the $100,000 to million dollar range – “the SME of the fraud sector” – over the last year and suggests this can be traced back to the impact of the global financial crisis 12 to 18 months ago. As cash flows tightened, he says, people were probably stealing in order to maintain their accustomed standards of living – but are only now being caught.

Jordan says there’s a perception among some white-collar criminals – however false – that fraud is a victimless crime. “No-one physically gets hurt; no-one’s going to chase you down the street with flashing blue lights and guys with guns,” he says.

Investors who lost collective millions from collapsed finance companies where evidence of fraud has been found would disagree with the “victimless crime assumption” – as would National Fire & Security director Steven Mahoney, left with a $1 million debt after his employee and former neighbour Martyn Scott was jailed for stealing $1.4m from his family business. “I should be able to repay that amount [$1m] in 19 years, so I should be able to retire at 73,” Mahoney told the NZ Herald at Scott’s sentencing last January. “What he stole is my children’s inheritance and our retirement savings. It leaves a very bitter taste in my mouth.”

As well as cold hard debt, staff fraud may leave an organisation with unwelcome media attention, particularly if they operate in the financial or public sector. ASB Bank hit headlines last year after former employee Stephen Versalko was jailed for running what was effectively a $17.7m Ponzi scheme using clients’ money. An ASB spokeswoman declined to speak to IN-Business about the case, as did Versalko himself.

More willing to speak was Ministry of Social Development chief executive Peter Hughes. In June 2003, he faced a public sector boss’ worst nightmare: Lisa Clement, a ministry financial administrator, appeared to have stolen what turned out to be nearly $2m of taxpayer funds.

His first step was to set up a “war room” in his boardroom. For the next few weeks, officials led by Hughes and his deputies literally worked through the night to investigate the offending. During the first week, the media picked up the story. “They just had a small bit of it,” Hughes says, “but we made a decision to put everything that we knew out.”

“One of the things that happens, in government departments in particular, people get sick to death of us ducking and diving and spinning stuff and on this, because it goes to the heart of the integrity of the organisation, it’s really important to be upfront and open and accountable.”

As media coverage ballooned, the full picture gradually emerged. Creating four business entities and using multiple identities, Clement – a 36-year-old married mother of two from Wainuiomata – had filed false invoices, forged signatures and manipulated budgets, forecasts and reports to defraud the ministry of $1.9m over nearly three years. By the time she was caught, just over a million of that had been spent, including $275,000 on cars, $102,000 on travel, $60,000 on jewellery and $86,500 given to friends and family.

“It was in a different league altogether to what we would normally see,” Hughes says. “It was very sophisticated and all internally consistent and you know, gone to great lengths. This is why people are quite shocked, because usually these are very valuable employees. They’re good at their jobs; they know what they’re doing. They’re not the sort of people you suspect.”

There are several basic steps that organisations can take to reduce their exposure to fraud. “It sounds a wee bit like Alcoholics Anonymous,” the SFO’s Nick Paterson says – but the first step is to “acknowledge that there is a problem”.

Second, check what internal controls are in place to prevent fraud, define who has responsibility for looking for fraud, and check what is actually being done to detect it. “If you run through those three or four things and do them well, it probably puts you – and I’ll make the numbers up at this point – but in the top 20-odd per cent of organisations in New Zealand,” Paterson says. “Most people aren’t doing them well enough.”

Since taking on his role, MSD’s Peter Hughes has made tackling staff fraud one of his top priorities – apparently with some success. Ministry data shows that staff fraud cases as a percentage of total staff numbers have declined relatively steadily since 2001, from 0.28 per cent in the 2001–02 financial year to 0.15 per cent in 2009–10.

“We probably have comparatively quite low levels of internal fraud,” Hughes says. “If we were running this as a commercial enterprise in the private sector, there’s a level at which we’d just say ‘well, we’re going to live with that because the cost of reducing it further is uneconomic’.” But when it comes to taxpayer funds, he says, any level is unacceptable.

Hughes says while good, tight internal controls are essential, there are limits to what can be achieved with internal controls and audit processes alone. “If you just focus on internal controls, it’s impossible to have an internal controlled environment tight enough to prevent all internal fraud, especially if somebody is IT-enabled, IT-literate and colluding with other people.

“You absolutely need to do all that but I’m strongly of the view that one of the primary ways of controlling for this is the cultural stuff that you do in your organisation.”

For Hughes, head of an organisation with 10,000 staff and responsible for handling about $21 billion of taxpayers’ money each year, this means a zero tolerance approach to fraud – every case will lead to dismissal, prosecution and all possible steps will be taken to recover funds. “The zero tolerance policy was one of the turning points,” he says. “From when we started to do that and socialise it within our organisation, our numbers started coming down.”

THOSE spoken to by IN-Business agreed monitoring overseas trends and working closely with sister organisations offshore is an important part of fraud prevention, staff fraud or otherwise.

The SFO works with its counterparts in the UK, Australia, Singapore and Hong Kong to stay informed on trends and activities, and tools used to support investigations – whether that’s legal tools or electronic and IT tools, such as specialist forensic and data analysis software.

For Paterson, the only trend that might be worth a mention is new bribery and corruption legislation in the UK to make it easier to arrest and charge nationals who pay bribes to overseas officials. The SFO is largely unaware of similar bribes being paid by New Zealand nationals offshore but Paterson says he’d “be surprised if it wasn’t happening at all”.

While surveys currently carried out by the “big four” accounting firms are a good start, Paterson says the true levels of fraud in New Zealand remain unknown. “I’m a survey carried out in New Zealand specifically relating to fraud which has got a statistically relevant number of samples – or a statistically meaningful number of respondents.”

The SFO hopes to carry out a national fraud mapping exercise to put some solid numbers around the problem – which can then be used to drive targeted prevention in different industries.

Deloitte’s Barry Jordan says that, at a basic level, fraud in New Zealand will remain the same as it ever was. “Fraud is fraud,” he says. Computers, internet banking and modern complicated accounting systems may have made it easier for fraudsters to hide their tracks in a mire of data but the types of perpetrators, motives and basic business of investigation remain the same.

“It used to be like looking for a needle in a haystack,” he says, “but the needle was red and it was a relatively small pile. Now the haystack is as big as a large building and the needle is no longer red.” The good news? “We’ve now got much better tools for looking for needles.”

How common is fraud in New Zealand

Of the 85 New Zealand organisations in the last PricewaterhouseCoopers global economic crime survey, 42 per cent said they experienced some form of economic crime in the year to November 2009. Types of reported crime included asset misappropriation, financial statement fraud, bribery and corruption, IP infringement, money laundering and tax fraud.

The average cost of fraud to an organisation in that time was $491,596 – a figure skewed by one unlucky unnamed respondent who suffered over $7m worth of fraud that year.

More recently, a KPMG survey of fraud in Australia and New Zealand found that 53 per cent of respondents experienced at least one incident of fraud in the two years to February 2010.