COVID-19 creates 'perfect storm' for business fraud in NZ

COVID-19 has created a 'perfect storm' for business fraud in New Zealand this year.

The 2020 KPMG Fraud Barometer has highlighted several cases of fraud, two cases of which were dubbed 'super frauds' that embezzled more than $3 million each.

In the period between 1 August 2019 and 31 July 2020, there were 19 identified fraud cases, with an average fraud value of $3.8 million.

The largest fraud case, valued at $45 million, involved a Ponzi scheme that targeted Japanese citizens looking to invest or move to New Zealand.  The scam, led by East Wind group Tom Tanaka, claimed an 8% return on investment. The fraud was only uncovered after Tanaka's death and the subsequent liquidation of East Wind companies. The report states that more than 200 investors are thought to be affected.

A broader view of investment fraud showed a major increase in fraud values, with investors losing $62 million in total – an increase of $35 million from the year prior.

However, employees were the most common fraud perpetrators, accounting for eight of the 19 total cases, and a combined fraud value of $5 million.

In one reported case, a former employee sold a vintage aircraft belonging to a company associated with Sir Peter Jackson and Fran Walsh. The employee then pocketed the sale proceeds. The employee then used another plane as security to dishonestly gain a bank loan.

"Approximately $2 million in diverted funds were used to clear a debt owed to a trust controlled by the filmmakers," the report says.

Management was also found to be the second most common perpetrator, accounting for four frauds valued at a total of $3 million.

In another case, Software salesman Steven Robertson conducted a fraud totalling $1.2 million after he sold software that claimed to help investors to trade on stock exchanges. Investors found the software difficult to use.  Robertson then asked victims to invest in funds on behalf or for his company, Prosper Through Trading.  These funds were used to fund an 'extravagant lifestyle', and at times he stole money directly from victims' credit cards.

The public sector (government) was most often victim to fraud in terms of proportion (37%), however, the fraud value only accounted for 5% of total fraud value.

Other statistics from the report show that the average age of a fraudster is 57 years old, and more than half (54%) of all frauds were committed by men.

The report states that COVID-19 provides a perfect storm of opportunity, motivation, and rationalisation for fraud.  This is because there is a disturbance in normal business processes, enabling circumvention of normal controls. Further, the uncertainty caused by the pandemic can be used to 'rationalise bad behaviour'.

The report found that 58% of frauds were caused in part by internal controls failure.

"We are not yet seeing fraud cases relating to the wage subsidy, however, due to the magnitude of the amount that has been paid out in COVID-19 relief packages, it is possible that this may change in the aftermath of the pandemic.

The KPMG Fraud Barometer monitors frauds coming before New Zealand courts. To be included in the report, frauds must be larger than $100,000.