“In the 2019-2020 CDPP’s Annual Report, .. reported 106 referrals, with 282 matters on hand, with the top referring agencies including ASIC, AFP, ATO and the ACCC, with ASIC being the largest source of referrals.”
— Assured Support
“Fraud .. an intentional act by one or more individuals, involving the use of deception to obtain an unjust or illegal advantage.”
— Auditing Standard ASA 240, The auditor’s responsibilities relating to fraud in an audit of a financial report
Although fraud is no more prevalent in financial planning than it is in broking, the financial services industry is a vulnerable target and exposed to risks beyond adviser misconduct. According to the Australian Criminal Intelligence Commission, superannuation fraud, investment fraud, financial statement fraud and identity fraud are increasing challenges to the security of our markets and client funds.
$1,106,463 from 10 clients on 125 occasions Anthony Vivian Dick jailed for stealing client’s funds | Commonwealth Director of Public Prosecutions (cdpp.gov.au)
Clearly, Licensees (and advisers) need to do more to detect, prevent and mitigate misconduct but, before we begin to discuss solutions, it’s important to clarify definitions and try to differentiate between fraud and other conduct failures.
Although it’s not defined in the Corporations Act, fraud is the deliberate and wrongful intention to deceive others for personal or financial gain. To be fair to compliance staff, deceit, misrepresentation and misappropriation of funds can be difficult to identify but, even in the absence of specialist compliance systems, small changes can increase the likelihood of detecting fraud and misconduct. One critical step is to increase the role and visibility of your Reputational Intermediaries – those employees and agents focused on risk, reputation and compliance – and explicitly empowering them to:
- Verify, certify, approve and recommend products and services offered to investors;
- Monitor the compliance of entities and their management through their privileged access to information;
- Perform a private supervisory role through the detection and deterrence of misconduct. In some cases, that can include fraud;
- Obtain sufficient and appropriate audit evidence, exercise professional scepticism and don’t unduly rely on the work of other auditors and experts;
- Act with honesty and independence and report suspected contraventions.
Contrary to what apologists might assert, Licensees can never detect fraud or criminal activity, but they’re often slow to act and keen to avoid legal entanglements. These characteristics, and the industry’s public failures to monitor and discipline, was the reason for a raft of new regulation designed to address these deficiencies and restore trust – a new single disciplinary body, mandatory reference checking and a breach regime that mandates increased, and increasingly public, regulatory reporting. It should be expected that these Red October changes – will lead to both increased reporting and increased scrutiny.
You might think this unlikely but after the last financial crisis in 2008, UK’s office for National Statistics (ONS) found that fraud offences increased by 21% in the two years after the GFC. Given the current environment, we think it’s unreasonable to expect anything different particularly if you accept that, according to the Australian Institute of Criminology, fraud occurs as a result of Opportunity, motivating incentives (or pressure) and a capacity to rationalise misconduct.
So, how can you minimise your vulnerability to fraud and misconduct. For a start:
- Interrogate your Compliance analytics to identify those lead and lag indicators that correlate with fraud;
- ensure that internal resources have the courage and capacity to identify, escalate or pursue these matters; and
- train staff and advisers to understand that fraud is not a “victimless” crime.
“In handing down the sentence, Judge Cahill noted that the conduct constituted a ‘serious abuse of trust, involved a substantial amount of money over a long period of time and caused the company to fail’.”
— 21-127MR Former director convicted of fraud and sentenced to four years imprisonment
Dealing with fraud: A regulator’s perspective
“The AFR Weekend made contact with 11 of Scott’s 163 recorded victims. All spoke of their shock and disbelief at discovering she had stolen from them. Many expressed concern for the welfare of [her] children.”
— Sally Rose, “How Melinda Scott befriended clients and stole from them”, AFR
In reality, few Licensees have the measures, processes and integrated data systems that are capable of flagging issues, highlighting concerns and identifying root causes. Still fewer Licensees complement well-structured monitoring and supervision arrangements with formal, consistent and predictable consequence management policies.
So what tweaks could you make to your compliance arrangements to increase their likelihood of detecting fraud?
An initial step might be to ensure that the Monitoring and Supervision framework (however represented) requires and assist staff to to identify, consider and, where appropriate, escalate concerns where:
- a common address is frequently used on client application forms (look for patterns in the submission of applications too);
- there are material discrepancies between the adviser’s marketing collateral (including their FSG) and the Financial Adviser Register maintained by ASIC;
- the Adviser seems to be “living beyond their means” based on the reported remuneration;
- there are repeated (and incremental) administration errors;
- the adviser receives, and on-forwards, statements and correspondence;
- the adviser enjoys long, and frequent, vacations without any service issues arising;
- files scheduled to be reviewed are offsite or unavailable;
- the adviser is reviewed by the same reviewer each year;
- there is an unusually high turnover of the adviser’s support staff (or office relocations);
- the adviser has close relationships with vulnerable or disadvantaged clients;
- there is a sudden increase in “new business” with a similar lapse rate after 1 year;
- the adviser pays clients’ premiums (or claims to do so);
- the adviser’s conduct (or questions) seems inconsistent with their stated qualifications or experience;
“Lying about qualifications aside, these types of frauds are all premised on an (underserved) reputation, too-close personal relationships and a willingness of others to avoid the trouble of enforcing standards. The conduct you accept defines the industry. Hopefully, FASEA will change this.”
— Sean Graham, Linkedin, 25 April 2021
Hot tips for reputational intermediaries (Your call to action)”:
- Review your compliance arrangements/risk framework with a specific focus on exceptions and individual discretion;
- Review your Balanced Scorecard/Incentive scheme both to identify systemic weaknesses and the (actual) strategies used by your high performers;
- Focus attention on your advisers’ contraventions of internal policies and their real (rather than rhetoric) commitment to ‘compliance’. (Acts, not words).
- Emphasise cultural values with your staff and representatives. Even without a conscious intention to commit fraud, small contraventions and compromises create the conditions for rationalising and justifying larger contraventions.