The responsibility of banks to prevent fraud

In 2015, the government put on hold plans for a failure to prevent fraud offence, championed by the Serious Fraud Office, on the basis that sufficient legislation already existed to prosecute corporations for wrongdoing, and there had at the time been no prosecutions for an offence under section 7 of the Bribery Act, the failure to prevent bribery offence. For more information see Blog, Failure to prevent economic crime fails to get off the ground.

The government has subsequently opened a consultation on an offence of failure to prevent tax avoidance (see Legal update, New tax offences in the Finance Bill 2016) even though the reasons given for the abandonment of failure to prevent fraud offence continue to apply.

A case concluded this week illustrates the case for a reconsideration of the failure to prevent fraud offence. On 4 May 2016, eight individuals were sentenced to terms of imprisonment for defrauding pensioners of more than £1 million. The court heard the gang called more than 3,700 phone numbers as they trawled for victims, focusing on the places with a high proportion of retired people. The victims were in their 70s, 80s and 90s.

Frauds that target particularly vulnerable individuals always provoke an emotional response. In this case, there were 140 reported victims, one of whom lost £130,000 of her savings. The scam was reported to have involved a fraudster posing as a police officer calling victims by telephone to “investigate fraud at their banks”. The fraudster would then dupe the victims into calling 999 while staying on the line, ensuring that when the victims thought they were reporting crime they were actually speaking to the fraudster. The victims would then be instructed to go to their banks and move thousands of pounds in savings.

One victim was reported to have made eight transactions of between £20,000 and £12,500, transferring money from accounts held with Santander and NatWest to the scammers’ accounts, held at Lloyds and Barclays. The victim reported that banks said they are not responsible as the victim willingly moved the money. Money was also obtained from other victims by persuading them to withdraw sums of money in cash, which was then collected by couriers from their home addresses.

Although a number of banks have suggested that the correct procedures and regulations were followed, the plain facts are that more than £1 million in cash was defrauded from vulnerable victims and the various compliance procedures of banks neither detected a fraud nor protected their client’s money. This is a clear indication that a tick box approach to compliance is wholly inadequate.

This case raises the following issues:

Victim blaming is something that must be eradicated from fraud cases, in the same way that attempts have been made to eradicate it from other crimes. One of the main characteristics of fraudsters is the exploitation of the most vulnerable, be it individuals, systems or jurisdictions. Fraud detection systems should be sufficiently sophisticated to prevent fraud against the most vulnerable individuals against the most determined fraudsters.

Secondly, the effectiveness of the anti-money laundering regime must also be called into question. HM Treasury recently published a consultation on the Anti-Money Laundering Supervisory Regime, and the Home Affairs Select Committee heard evidence from a range of specialists on 3 May 2016. Robert Barrington, the Head of Transparency International UK, stated that the current system is clearly not working. It is hard to disagree when fraudsters can seemingly set up bank accounts, persuade elderly victims to transfer their savings and not raise any red flags.

Although the fraudsters were subsequently caught and convicted, more than £1 million was lost before the police were alerted. This is in contrast to a case reported on the same day (R v Miah [2016] EWCA Crim 509) where the bank did become suspicious when an elderly customer sought to withdraw £5700 cash, and having made proper enquiries, contacted the police. This was from a small number of young individuals making phone calls, who although no doubt persuasive were hardly the most sophisticated fraudsters. The inability to identify concerns on such a simple series of transactions does not inspire confidence that attempts by corrupt public officials and serious organised crime to launder the proceeds of crime will be prevented by the current system.

Thirdly, the notion that the success of legislation can only be measured by the number of prosecutions must be abandoned. Section 7 of the Bribery Act 2010, which recorded its first conviction in December 2015 (see Legal update, Sweett Group plc sentenced for first conviction under section 7 of the Bribery Act 2010) created a criminal offence, but was also responsible for companies with a connection to the United Kingdom implementing a series of strict compliance procedures to help prevent bribes being paid.

A consultation on the failure to prevent offence should be opened alongside the failure to prevent tax evasion. Properly drafted legislation, backed by an adequate procedures defence setting down appropriate compliance procedures, ought to ensure that sums of money held in the bank accounts of the most vulnerable are less easy targets for fraudsters.

There has been much talk of partnership between the private sector and law enforcement in recent times. Separately, statements made by officials at the City of London Police and National Crime Agency have directly referred to this, and the idea features in the Home Office’s action plan for anti-money laundering and counter-terrorist finance. One of the proposals in the plan is to deliver “Prevent campaigns” to raise awareness among professionals in the regulated sector of money laundering risks and the actions needed to mitigate them.

Finally, it has been reported that some of the money obtained in the fraud funded travel from the UK to Syria, raising concerns that it was ultimately used for terrorist financing. Section 19 of the Terrorism Act 2000 requires businesses to report any suspicion they may have that someone is laundering terrorist money or committing any other terrorist property offences. For more information see Practice note, Terrorist financing offences: reporting requirements. Although there is no suggestion any party involved in this case had any reason to believe or suspect that another person had committed a terrorist related offence, the case must raise concerns as to what checks were made on accounts receiving large transfers from other accounts with no previous connection. That defrauded funds may have been used to support terrorist activity indicates the harm that can be done by failing to prevent fraud.

Practical Law David Bacon

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