Marc McAuley from the CIPFA Counter Fraud Centre discusses the issue of cross-border fraud and the impact Brexit may have on it.
We all know that fraudulent activity occurs across sectors and organisations. However, it’s less commonly known that fraud also occurs across borders, with individuals exploiting differences in international regulations, levies and security standards to illegally gain or move money.
With the UK set to leave the European Union (EU) at the end of October, many public finance professionals will be questioning the impact Brexit will have on cross-border fraud. Trends could shift in a post-Brexit UK, and this presents both threats and opportunities for wider national counter-fraud efforts. It’s critical that those occupying public finance and enforcement roles understand this changing landscape.
Today, the majority of cross-border fraud takes place online. We’re all too familiar with spam emails that attempt to deceive us into ‘updating’ our private payment information on a fraudulent site. The same is true of public services, where the focus may be on the payment details of a locally contracted service provider or supplier. Fraud is also prevalent in the management of public grants, where funds at the national or supranational level are misappropriated for a particular project or fees are charged at a disproportionate level.
The physical transportation of goods in the private sector can also lead to fraudulent accounting practices to avoid taxation or enable VAT fraud. The diverse nature of fraud requires an integrated counter-fraud strategy across government departments and enforcement agencies that effectively targets fraudsters operating internationally.
A number of EU mechanisms support collaboration on cross-border fraud prevention. For example, in the EU, institutions, companies and organisations hold the right to compete for public tenders in any EU member state.
While in practical terms, public procurement is at risk of fraud through kickbacks or corrupt payments, billing fraud, bidding manipulation or even conflicts of interest, the European Public Contracts Agreement promotes competition and market access across member states. The agreement has established thresholds for higher public contract amounts, requiring them to be registered and published via the EU’s online public tender portal. This transparency initiative makes it more difficult for criminals to conceal their efforts to manipulate or influence public contracts.
However, once the UK leaves the EU, we will be entering into uncharted territory, which poses numerous threats to counter-fraud operations. Fraudsters will be looking to take advantage of any ambiguity or loopholes in regulatory frameworks, as the UK pulls out of a vast web of EU regulations. Whether the European Public Contracts Agreement, adopted as UK law, will continue to be the guiding framework for public procurement remains unclear.
EU data protection regulations were also adopted into UK law as part of the Data Protection Act 2018, strengthening the controls preventing criminals accessing data illegally. UK authorities’ ability to counter fraud relies heavily on shared access to data and good collaboration with other security services. The flow of data, guidance, tips and effective enforcement on both sides of a border are key to combatting all types of fraud. For example, HM Revenue & Customs (HMRC) estimates £1.2bn in public funds is lost to the illicit alcohol market each year. In the case of alcohol, ‘inward diversion fraud’ means untaxed products are illegally transported to the UK from the near continent, avoiding the UK government’s levy. HMRC has worked hard to strengthen its links with other enforcement agencies in Europe to confront this particular type of fraud. The UK’s withdrawal from the EU and its collaborative structures only adds stress and uncertainty to these vital relationships.
International trade is a further area of concern. As trade patterns change after Brexit, enforcement professionals will inevitably face a monumental challenge in identifying and preventing cross-border fraud in the new commerce landscape. Facilitating international trade, while proactively mitigating accompanying illicit activities, will be a significant obstacle.
However, although the Brexit-related threats are clear, it’s not all doom and gloom. Once the UK is no longer an EU member state, we will be at liberty to revise our existing counter-fraud regulations to strengthen measures further from those in the EU. Regardless of political opinion, Brexit is in many ways a ‘fresh start’ for the UK – an opportunity to re-set the national tone for how the UK deals with fraud. Now is the perfect time for open discourse and consultation with counter-fraud professionals to see how existing legislation can be improved and where new policies should be introduced.
In Great Britain and Northern Ireland, this could mean new regulations that include different public procurement thresholds or new reporting systems. Since organisations and companies in the EU will no longer hold the automatic right to compete for public tenders in the UK, the risk of cross-border procurement fraud in the future may be much lower than it is today. Furthermore, as the UK begins negotiating new international trade agreements, preventative counter-fraud measures could be designed and implemented prior to trade commencing – a uniquely beneficial position for those working with counter-fraud issues.
Brexit may not change where the UK’s borders lie, but it will undoubtedly change how international goods and services are delivered. Fraud will always be an issue, regardless of borders and, as cross-border fraud evolves, the prevention, detection and enforcement of fraudulent activity will have to follow suit. The UK’s departure from the EU will unearth some new risks for those of us committed to confronting illicit behaviour – it’s what we make of this political and economic transition that will determine how effective our counter-fraud efforts will be in the years to come.