Monday, 30 June 2008

57% of all reported fraud is inhouse

Here are some Statistics which raise some issues but should be kept in the context of the world's largest financial city:

* Reported fraud cost the UK £705 million in the last six months an increase of 74% of the same period a year ago.
* Of that £636 million was in the finance and insurance sectors.
*London and the South East account for £634 million of the total.
* Management fraud accounts for 46% of fraud reported.
* Other employee fraud is up from 2.5% of the total a year ago to 11%.
* When the employee fraud is added to the management fraud we get a total of 57% of all fraud is in house or £402 million.

I rang the company who provided these numbers, BDO Stoy Haward, to ensure that I had understood them and to understand what the difference was between management and employees - employees are people, according to BDO Stoy Haward, who are not managers.

The report only covered frauds in excess of £50,000 and I guess the insurance and banking sectors being tightly regulated are more likely to report than other sectors of the economy.

What is clear is that in a recession some people become more likely to take the risk of committing fraud in order to fund a lifestyle, a credit card or a mortgage. This probably applies to minor fraud, shoplifting, burglary and mugging too. It will become worse if unemployment grows and there will doubtless be headlines to worry us when it does.

Just to cheer you up the report also mentions that the cases of fraud against the inland revenue is £22million which compares rather favourably with the same period last year when it was £336 million, unless, of course, they have left the records on the train.

Saturday, 28 June 2008

Chance hardly affects the wise

"Chance hardly affects the wise; the really important and serious things are under control of their own deliberation and reason. No more pleasure could be derived from a lifetime of infinite span than from a life we know to be finite."

Cicero quotes ,with approval this remark of Epicurus , translated by Rapahel Woolf. Seems to me to be what all risk managers might aspire to.

However on the subject of the infinite Richard Donkin in Thursday's FT pointed out that Einstein once remarked "Two things are infinite: the universe and human stupidity: and I'm not so sure about the universe."

Wednesday, 25 June 2008

Are there lessons from the Sarin Gas attack?

Very low probability, high impact risks are difficult to identify, unless like the New Madrid fault they have been closely researched and some idea of their impact and probability has been estimated. Lloyd's, I was once told, consider the New Madrid Fault to be the greatest risk on their books and the probability of a 8.0 strength earthquake in that area occuring in the next 50 years is put at between 7 and 10% , as stated in the June 23rd 2005 issue of the magazine, Nature.

If it was to occur it might be trigger a number of similar quakes. In 1812 there were 4 earthquakes in2 months ranging from 7-8 on the Richter scale caused by the New Madrid fault which runs from just south of Indianapolis down to Memphis.

My most unlikely high impact, low probability event was the 1995 Sarin Gas attack when I was living in Tokyo and one of the Sarin canisters passed on a train within 100 meters of my apartment. No one in my family was affected, not even my brother visiting from England who with two other professors from Sheffield University was wandering around Kasumigaseki, the Whitehall area of Tokyo and main target for the attack , wondering why there were so few people! However 12 people died and several hundred were injured.

In reviewing what I might have done differently I can see no lessons to be learned for me as an individual, which is one of the problems with this type of random high impact event. The Tokyo authorities learnt some salutary lessons regarding the readiness of their hospitals to deal with an emergency and the police learnt that they should act more forcefully when there is evidence of terrorist activity ( there had been a similar Sarin attack seven months earlier and 7 people had died) . The New Madrid earthquake , being of higher probability will find the US Mid West better prepared than Tokyo that day in March 1995.

Thursday, 19 June 2008

Martin Sullivan's journey

Not many of the CEOs who have lost or will lose their job this year will leave behind so many of their colleagues feeling bereft as does Martin Sullivan of AIG. After 35 years with the company he has made his mark as a very capable and humane leader. It was always a risk to take the reins of an organisation which had been so closely identified with its two previous leaders, but I cannot imagine that he regrets having had his hand on the tiller. For someone to work from the age of 17 for 35 years with the same company is not as common as it used to be. For that person to make it to the top of the world's largest insurer is a very great journey indeed.

For us in the UK there was especial pride in Martin's leading one of the Global 100 companies. When I introduced him at an AIRMIC breakfast forum in London two years ago I pointed out that only Lindsay Owen-Jones at L'Oreal, Howard Stringer at Sony and Martin had done that with a non UK company.

We wish him well for whatever he wants the future to hold.

Sunday, 15 June 2008

Identity trashing

There is a lot of concern about identity theft. The BBC often reports on the sort of defensive procedures you need to adopt and credit cards providers offer to protect you in event of a loss.

There is far less concern about identity trashing on the internet, but a thoughtful piece in the weekend Financial Times by Christopher Caldwell sets out the risks of having your reputation damaged online.

First the internet is a very unforgiving medium. You get trashed on it once and it remains forever, regardless of what you do in the meantime. (Not completely new, of course, there is the story of the nobleman who broke wind when bowing to Elizabeth 1st and when he returned to court twenty years later the Queen said, " You are welcome ,my lord, we have quite forgot about the fart.")

Secondly a search will be able to find malevolent material and this could affect personal, business and employment relationships.

Thirdly there is far more protection for intellectual property than for privacy, especially in the USA, where it is hard to get redress.

Fourthly, the barrier to managing huge amounts of data on people has now been overcome by computing power and therefore people could be open to greater personal surveillance than ever before.

Caldwell points out the importance of the low evaluation by the public of these risks, "Privacy is the realm in which personal convictions ripen into public engagements - no privacy, no democracy. To judge from the amount of information shared online people are not yet terribly worried about privacy. That is another way of saying that they are not terribly worried about liberty."

David Davis who resigned his Parliamentary seat this week over the obtrusiveness of the State in survelliance matters and its assault on human rights in the name of security is tilting at an important windmill.

Wednesday, 11 June 2008

Sir Howard and the Toxic Products

Anthony Hilton in his City Comment column in the Evening Standard on Monday June 9th 2008 pointed out that the authorities were not unaware of what the bankers have been up to over the last few years and that Sir Howard Davies, when head of the FSA, delivered a speech in which "he clearly and explicitly warned about the invention of collaterised debt loan obligations and credit default swaps and described them as toxic."

He went on to say " Nor did you have to attend the dinner to hear the speech. His remarks were reported in this column".

In fact it wasn't a dinner it was the AIRMIC Lecture of January 29th 2002 at the RAC Club. Go to the link below for Roger Miller's report and the quotes on the second page in italics.

Anthony Hilton points out that nothing the FSA could have done would have prevented the current turmoil, the bankers were uninclined to listen and quite capable of moving to more compliant regimes if the FSA had attempted to rein them in.

How we got Sir Howard to speak I will leave for another blog.

Zen and the Art of Risk Management

I have Geoff Tudor of the FUJI Club in Tokyo to thank for the following quotes, where he got them from I am not sure., they were entitled "Important Zen Teachings." I have selected the ones that relate to risk for your enlightenment.

"Never test the depth of the water with both feet."

"If at first you don't succeed, bomb disposal is probably not for you."

Wednesday, 4 June 2008

"Bungling,confusion,misplaced power"

Richard Overy in his remarkable book "Why the Allies won" describes how the Germans frittered their technical lead and their scarce resources away during World War 2 ;

"The German armed forces pursued technical excellence for its own sake..... The military domination of production had mixed effects. There is no dispute that Germany developed weapons of very high quality...but the pursuit of advanced weaponry came at a price. Instead of a core of proven designs produced on standard lines the German forces developed a bewildering array of projects. At one point in the war there were no fewer than 425 different aircraft models.

' Nobody could seriously believe that so much bungling, confusion, misplaced power, failure to recognise the truth and deviation from the reasonable could really exist.' complained a group of German engineers."

Well today we have news that the National Audit Office has discovered 8 Chinook helicopters which have been so specially modified to the requirements of the British military establishment that they are unsuitable for use seven years after original delivery, despite them being badly needed, and the modifications to bring them back to service will double their original cost.

In trying to get certainty you often miss achieving your objective.

Sunday, 1 June 2008

Peeing on the electric fence

"There are three kinds of men. The one that learns by reading. The few that learn by observation. The rest of them have to pee on the electric fence for themselves."

Will Rogers who wrote the above, died in a plane crash in 1935, and triggered the biggest outpouring of popular grief in the US between Lincoln and Kennedy. He deserves better acquaintance.