The Nature, Extent and Economic Impact of ... - Cardiff University

The Nature, Extent and Economic Impact of Fraud in the UK
above-noted reduction in the use of online banking services (assuming that online banking commands
lower marginal costs). Another might be where a corporate and/or national reputation for making or
demanding corrupt payments for contracts leads to other firms or countries avoiding doing business with
the suspected bribe-payer or bribe-demander. This falls into the category of fraud (as well as corruption)
because where a bribe to an agent leads to the deception of the ultimate ‘beneficial owner’ (citizens,
taxpayers, shareholders/private business owners), this is fraud. Furthermore, there is usually some false
accounting that accompanies the bribes.
It should also be noted that costs may be estimated by ‘bottom-up’ and/or ‘top-down’ methods. Annex 3
explores some of the technical hurdles faced in applying the ‘top down’ approach in three areas where
fraud is recognised to represent a significant risk: in the credit card industry, in the insurance industry and
in relation to state benefits. 22
5 A ‘bottom up’ approach seeks to evaluate the costs of fraud from the perspective of the producer or
defrauded organisation. An example of the bottom-up method might be the use of administrative data
on payment card fraud reported to APACS (in which the annual volume/value terms simply represent
the sum of all reported frauds).
5 A ‘top down’ approach seeks to estimate the economic implications of fraud from a national
perspective. An example of a top-down method might be as follows: X percent of cheques appear to
be fraudulent (perhaps determined through some sort of audit), the mean loss per fraudulent cheque
is Y GBP, and Z cheques are used in the UK annually, so X*Y*Z would yield the cost of fraudulent
cheques. 23
Additionally, the issue of ‘who bears the cost’ is often a complex one. It is also one reason why the
likelihood of double counting is a major concern in the fraud field. An individual who has been victim of
an investment or pension fraud may understandably relay this fact in the course of a survey on fraud, but
so too will any body that provided all, or part of, compensation to that individual for associated losses.
This presents a significant challenge to aggregating the costs of fraud to the UK economy (discussed later
in the present study).
Further, determining the true costs of goods and services obtained by fraud can present difficulties. There
is little consensus, for example, on whether goods obtained by fraud should be counted at their
wholesale price or retail price (with or without VAT). Published data on the opportunity costs of frauds –
and publicity about frauds – to businesses, individuals, and ‘the public as taxpayers’ are rare or largely
anecdotal, yet one might expect some such costs to be substantial. Moreover, certain types of fraud – for
example those that facilitate terrorism or electoral impersonation/intimidation of postal voting – may
produce immense collateral damage, but their estimation will be exceedingly difficult without rafts of
22
The benefit of the top-down approach is that it conceptually recognises that there are other 'hidden' costs (i.e. externalities)
associated with fraud. That is, parties other than the fraudster and the victim are affected by fraud. For example, a fraud risk
premium is borne by the population at large as a result of a small proportion who have been subject to fraud, such as
payment card fraud. In the case of public sector fraud, the externality is the opportunity cost of the resources defrauded (i.e.
fraud affects the incentives and choice set of all taxpayers). Three significant conclusions arise from this review. First, the top
down approach includes (or should) additional costs that must be added to bottom up costs. Second, simulation is one
way of attaching a monetary value to these externalities (subject to data availability and data quality). Third, the analysis
provides an indication of the externality cost per GBP of fraud in any given sector, so it helps to indicate where resources
should best be focussed on crime reduction.
23
If the costs of the fraudulent cheques are initially met by banks, they would want to recoup such costs by charging more for
cheque services or levying a wider interest rate spread (competitive conditions permitting). In both cases, customers end up
paying more. This is an externality.
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