Many of us, and many businesses, have a tendency to under-estimate the risk of being affected by fraud.  The unfortunate reality is that more and more of us are being affected personally, whether by identity theft, cloning of a credit card, or a telephone scam.  Businesses are also being targeted by fraudsters. 
 
This article aims to raise awareness and help reduce such risk.  It contains self-assessment questions and scenarios to consider, helping you assess your own processes and exposure.  It also heightens alert of the external frauds and scams already experience by the profession which have afflicted solicitors in other parts of the world.
 
This communication is not about internal fraud on the part of colleagues.  It focuses on exposure to external frauds and scams; dishonesty and criminality on the part of clients and other third parties.   
 
In the past few years, solicitors have been exposed to the threat, the reality, and the financial and reputational consequences of external frauds and scams.  Awareness of these threats is a key component of minimising the risk of exposure to these frauds and scams and their consequences. 
 
Can't we TRUST our CLIENTS? 
 
We have a tendency to assume that the people we deal with in their personal lives and in business will behave honestly and are not capable of behaving dishonestly towards them.  When the risk of exposure to client dishonesty is raised, the reaction of many is to protest.
 
It is prudent for businesses including law firms to recognize the difference between:

 
We would like to share a number of case studies based on real life examples of frauds and scams perpetrated by third parties, where solicitors, or solicitors’ clients, have been the victims and suffered losses as a result.   
 
Reality Check — Facts Figures and the 10-80-10 PRINCIPLE 

The “10-80-10 principle” is a general rule of thumb in criminology circles.  It reveals that in any given population, 10% of people will never steal and 10% of people are predisposed to stealing if they are given the opportunity. 
 
What do you think the 10-80-10 principle says about the remaining 80%? 
 

(a) They wouldn’t know how to go about stealing money? 
 
(b) They probably have no need to even consider stealing? 
 
(c) They can move in either direction depending on the pressures they are under and how they rationalise a particular opportunity? 

 
The correct answer is (c), and the history of the claims experience of solicitors tends to bear that out.  The claims history, including the scenarios which will follow later, include situations where solicitors have been exposed to claims as a result of: 
 

• Dishonesty on the part of colleagues who were highly regarded and respected, and in a position of trust. 
• Clients using their solicitors to facilitate frauds and scams. 
• Clients pretending to be other people. 
• Fraudsters pretending to be clients. 

 
Experience of Solicitors
 
Regrettably, internal fraud involving misappropriation of client funds, or firms’ own money, does occur, sometimes involving partners or other solicitors, cashroom staff or other members of the practice’s personnel.  However, the controls which the profession has in place by virtue of the financial compliance regime mean these occurrences are relatively rare. 
 
Turning to external frauds and scams perpetrated by third parties, including clients and professional criminals, it is an unfortunate fact that the profession has been exposed to a number of frauds committed by clients, and by professional criminals.  Raising awareness of the known and potential exposures is paramount to protect the business.
 
Fraud and The Economic Cycle
 
Based on the insurers’ experience of claims trends over many economic cycles, they are very familiar with the correlation between adverse economic conditions and increased frequency of claims involving fraud and dishonesty. 
 

Consider the following statement: 
 "Risk and insurance experts warn that, in an adverse economic climate, there are far greater opportunities for fraud to be perpetrated on businesses."
 

Do you think this statement is true or false?
 
False.  It’s not really the opportunities to perpetrate fraud that are greater.  It’s the motivation factor that is likely to be heightened in times of economic hardship because people are facing financial challenges due to redundancy, failing businesses etc.  If someone’s business is failing, they may be more likely to contemplate a course of action that they would never have resorted to otherwise. 
 
Going back to the 10-80-10 principle, what was said about the 80%? 
 
According to the research, for 80% of any given population, their propensity to steal or act dishonestly depends on the pressures they are under and how they rationalise a particular opportunity.  That means, for instance, that someone who would otherwise behave honestly could be tempted or pressured to steal if they are suffering severe financial hardship, putting their business or family or home at risk.  They are capable of rationalising their actions if they take the view that the money they “need” would not be missed by the organisation. 
 
This analysis does not really apply to organised crime/professional criminals, whose activities are part of the subject of this article.  However, it is as well to be aware that the risk of exposure to frauds and scams is not necessarily constant, and that the risks tend to be heightened in adverse economic conditions. 
 
It is also important to realise that the way frauds and scams are perpetrated is not constant either.  Indeed it is limited only by the resourcefulness and ingenuity of fraudsters.  Our individual risk awareness and the risk controls of our businesses need to acknowledge that. 
 
While fraudsters are at the cutting edge of technology attacking banks in the virtual world, for example, at the same time, some fraudsters have reverted to “paper and pen”, as organisations is placing focus in risk management efforts on technology - driven defenses. 
 
Hitesh Patel, UK Forensic Partner at KPMG, says:  
“It is certainly the case that we have seen fraudsters using very clever high tech frauds to attack banks, businesses and local authorities, but we have also seen some of the biggest frauds in more low tech scams. As old forms of transactions, such as cheques, are phased out, organisations are focusing on developing sophisticated lines of defence. Yet, rather than putting criminals off, many fraudsters are ignoring the challenge of triumphing over technology in favour of using simpler methods of deception.”