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

The Nature, Extent and Economic Impact of Fraud in the UK
Annex 7 provides a table that summarises these various costs and which suggests the aggregate costs of
fraud are currently, at a minimum, of the order of £13 billion, excluding the costs of responding to fraud
and any externalities.
There are however very considerable problems associated with aggregating these figures to provide an
overall estimate of ‘fraud in the UK’. Some could, for example, dispute the criteria applied to include or
exclude studies from the current review. 60 Added to this, the existing sources of data on fraud are neither
mutually exclusive nor collectively exhaustive. The commentary in this report has frequently highlighted
the problem of double-counting. To give an example, although APACS and CIFAS data are good, they very
likely partly overlap. Equally, many of the cheque and payment card frauds mentioned by members of the
public in surveys may already be accounted for in the data captured by the above bodies, whose
members largely compensate them for their economic costs. Added to this, the existing sources of data
on fraud can be shown to suffer from a range of different shortcomings (some of which are listed in the
next section), so that quite legitimate differences on opinion can exist about the validity of any particular
conclusion drawn. The recent highly-publicised differences between the Treasury, opposition parties and
BBC investigators over the extent of MTIC fraud offers a telling example, as does the disagreement over
the cost of spirits fraud.
It also needs to be pointed out that just because specific types of fraud have not been subject to
measurement, this does not mean they don’t exist. One unintended effect of the present ‘free market in
information of fraud’ may be to emphasise cognitively those types of fraud (like payment card fraud) that
are relatively well analysed, and are committed against articulate ‘repeat victims’, as against the more
diffuse and less well-analysed or predictable frauds affecting other parts of the business community, the
public sector or individuals.
Moreover where fraud figures are available, they tend to focus primarily on the direct (transfer cost) of
fraud: the table in Annex 7 provides a breakdown of the known losses ‘by type’ and the direct costs
comprise 93% of the total. It was pointed out at the beginning of this report that very few published
sources provided information relating to the costs of fraud prevention and/or in response to fraud. No
data are published in the proportion of compliance and regulation costs attributable to dealing with fraud
as contrasted with other crimes or prudential issues. In this sense, again, the figures clearly understate the
true cost, and probably by a substantial margin.
Weaknesses relating to the current data on fraud
In broad terms, the studies that have been reviewed have paid scant regard to adopting rigorous research
methods; they have paid insufficient attention to the problematic interpretation of the term ‘fraud’ and—to
the extent that fraud is a crime targeted on organisations as much as individuals—the survey exercises
carried out share many of the problems associated with corporate surveys (e.g. the CVS) rather than with
the better tested surveys of individuals and/or households (e.g. the BCS). Weaknesses in current fraud
data can be grouped together around several key issues:
Defining ‘fraud’. Questions about fraud often lack specificity. This does not matter greatly in the simpler
forms of fraud, whether against individuals, businesses or public sector. If individuals pay direct for goods
from someone they have encountered on e-Bay, by-passing normal controls, and the goods never arrive
and the vendor cannot be found, then this clearly is fraud; likewise the data collected by APACS on
60
Different decisions could have dramatic consequences on the aggregate total quoted here. One survey of ‘economic crime’
suffered by major corporations, for example, estimated that businesses lost fully £32 bn. in 2003. It cannot be ruled out
that this estimate was of the correct order of magnitude. However, ‘economic crime’ is a far broader construct than ‘fraud’.
This particular survey was deemed to have been based on a small postal survey covering an ambiguous period of time; it
was heavily biased towards major companies which may not have separated out their losses in the UK from those suffered
elsewhere; and the extrapolation methods used to derive aggregate estimates were not explained.
39