We'll make those whistle-blowers squeal

You use small fish to catch big fish in fraud, writes John Knox
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The Independent Online
Serious fraud is usually carried out by the controllers of organisations. Although junior clerks may be aware of what is going on, they are not the perpetrators of fraudulent trading, investor fraud, share manipulation, deceptions of banks, result-rigging and tax fraud. This has long been recognised and was pointed out recently in the ICA Auditing Committee's booklet Towards Better Accounting: "There are countless examples of significant frauds or manipulated accounts which are the work of a dominant proprietor."

There have been many attempts to introduce safeguards such as "corporate governance" nostrums of non-executive directors, audit committees and separate posts for chairman and chief executive. But these measures are not sufficient. After all, non-executive directors have been in office in several well-known cases. Perhaps attention should focus on how fraud is discovered, either by regulatory action in specialist areas or when fraud is revealed as a result of insolvency. Many large frauds, however, require the co-operation or tacit acceptance of others below the level of "dominant proprietor", and fraud is often revealed by someone within the organisation.

In theory, whistle-blowers are protected by law against unfair dismissal, but for many it is a risky business. Having said that, the hotlines introduced by the DSS to identify benefit fraud have received a huge response, indicating the extent to which many are prepared to disclose dishonesty if protected by anonymity.

What about those who do not blow the whistle but go along with the boss's instruction? Should they not be more at risk? Often they have committed minor offences, even if on someone else's orders. There are two reasons why such people are not prosecuted.

First, they are needed as witnesses. They can disclose the activities of the main fraudsters against whom it would be difficult to bring an action if the minor offenders were also in the dock remaining silent. Second, the Code for Crown Prosecutors expects cases to be limited to serious offenders.

These are persuasive arguments, but this view is not universally held. In March, the director of the Serious Fraud Office (SFO) said in the Journal of International Banking and Financial Law: "There is a real danger that by casting the net too narrowly

It would seem desirable to shift from a situation where the whistle-blower has everything to lose and the collaborator faces little risk. But how? Perhaps minor offenders who witness serious crime but are not charged with complicity should face lesser charges in a separate action, such as failing to comply with the requirements of the Companies Act. No custodial sentence need result, but the offender would face prosecution and the risk of a custodial record. The SFO should be able to bring such cases to court, regardless of whether they are related to serious fraud. Moreover, the Code for Crown Prosecutors should be amended to encourage such prosecutions that are in the public interest. The argument against pursuing minor offenders is that it wastes public money, but if such a measure was a successful deterrent, surely it would be a cost-effective solution? Employees who are aware they are at risk could help prevent fraud by disclosing it or by declining to co-operate with those who initiate it n

The author is a former deputy director of the Serious Fraud Office and is now a consultant to the accountants Pannell Kerr Forger.

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