What those working in pensions must do to avoid being a victim of fraud – or being accused of it.
Official figures from ActionFraud, the national fraud reporting centre, report that £1.2 billion is lost to investment fraud every year in the UK. Pensions is seen as an area where such fraud is increasing.
Part of this is because legal reforms have created a boom in pension liberation. But a worryingly large part of it appears to be due to a lack of anti-fraud measures among many pension funds.
Recent research showed that in 2013, 17% of pension funds had experienced fraud. By last year, that figure was up to 37%. The same research reported that more than a quarter of pension fund trustees did not know that they were responsible for fraud detection and prevention. More than a fifth of those funds questioned admitted they were not “actively considering’’ fraud risk.
This means pension funds are fertile ground for those looking to defraud investors – and that the pressure and responsibility is on those who create, manage and invest on behalf of pension funds.
Every pensions professional has to act in accordance with the wishes of the pension holder. This means carrying out the instructions of the person whose money is being managed. While this may seem relatively straightforward, it is not once you consider the danger of pensions fraud.
Pension funds – and the people who manage them – are attractive targets to those looking to fraudulently obtain large amounts of money or launder their proceeds of crime. Should either of these happen, the pensions professional who failed to prevent it will find themselves under intense scrutiny from the authorities.
Pleading ignorance will be of no use. The dangers of pension liberation have been highlighted at length by HM Revenue and Customs and the Pensions Regulator. And while 37% of pension funds experienced fraud last year, the same research revealed that 40% of pension schemes have not tested their internal controls in the last 12 months - and 47% of pension trustee boards have not received training on mitigating fraud risk.
Should one of those pension funds fall victim to investment fraud, those managing it will find it hard to convince the authorities and their members that they were neither incompetent nor criminal. So what has to be done to avoid such a scenario?
If those managing pensions are to reduce the risk of fraud, they must carry out due diligence. If they are not sure what to do, they must seek appropriate legal advice to assess the danger of criminality and introduce procedures to prevent it.
Investment fraud can take many forms. But regardless of the nature of the “investment opportunity’’ that pension fund managers are being offered, caution has to be exercised on every occasion.
Those managing pension funds need to ask themselves whether the investment opportunity being offered:
* Makes financial sense. Is there evidence that it is a safe, genuine opportunity? Are the potential benefits clearly and adequately explained?
* Has a proven track record. Can the person promoting it produce clear, well-documented records and people who have already benefitted from the scheme?
* Provides guarantees or safeguards regarding profits or returns. And is there clear, verifiable evidence of these returns?
* Is the best possible option. Are there other opportunities out there which are safer and have a better track record?
* Is legal. Business crime solicitors can help devise procedures to prevent a pension fund being vulnerable to fraud but they can also carry out individual fraud assessments on proposals put to fund managers.
The research clearly indicates that pension funds are targets for fraud. Clearly, this is not a situation that all pension funds find themselves in. But even the most diligent fund manager needs to remain vigilant regarding the risk of fraud.
The figures indicate that many of those running pension funds are at least honest about the lack of fraud prevention they have initiated. Their next step has to be taking action to remedy this….otherwise their honesty is likely to be called into question should their fund suffer fraud.