Earlier this year, the Government implemented the Fraud Act 2006. Dr Simon Peck investigates the Act's effectiveness in an industry that loses around £1.5bn a year to fraudulent claims
On 15 January 2007, the long awaited Fraud Act 2006 came into force. A key part of the Government's plan to crack down on fraud, the new law is designed to make prosecution easier.
Fraud is a multi-billion-pound business. It is estimated to cost insurance companies in the region of £1.5bn a year. Fraud against insurance companies is often perceived as a victimless crime, but, in reality, everyone is a victim, as every penny lost to fraud adds directly to the premiums being paid. And society pays a higher price, as the proceeds of fraud are channelled into other criminal activity - including international terrorism.
Amazingly, until the advent of this Act, there was no legal definition of fraud and financial crime had to be prosecuted under legislation such as the Theft Act 1968, which was never designed for the technology and complex transactions of the modern age. And not only was the legislative framework inadequate, but the Home Office does not set the investigation of fraud as a police priority, and this, together with the often complex nature of the transactions and the immense burden of paperwork needed to bring a case to court, meant that most fraud and, certainly, most insurance fraud has, to date, gone largely unpunished. The new Act, however, offers an opportunity for this to change.
Deception
One of the most important changes is that it targets fraudulent behaviour and not the consequences of that behaviour. The Theft Act required the prosecution to demonstrate that the perpetrator had dishonestly obtained property belonging to another with the intention of depriving them permanently of it. With the new legislation, it no longer matters whether the victim was actually deceived or whether any benefit was actually received. In deciding whether or not fraud took place, the intention of dishonest behaviour that causes loss to another becomes the deciding factor. Furthermore, the Act introduces the concept of fraud by omission. This is important for the insurance industry where, as often as not, loss stems from what is not disclosed rather than what is actually said.
As a key part of an insurer's business involves paying out money, it is not surprising that insurance companies are a primary target for fraudsters. Although it was well known that there was significant fraud in other areas of the insurance business, until a few years ago the healthcare business was carried out on the basis of trust and statements made by providers of healthcare services were not even questioned. This situation changed in 2003, when Axa PPP conducted an exercise to determine how accurate the bills it received were. With a team of nurses and doctors, an audit was carried out looking at 650 claims from across the country, checking all the information that had been provided and the items invoiced to source documentation.
The results could not be overlooked. Most claims were accurate, but there was a small but nonetheless significant number that gave cause for concern. In every hospital apart from one, the auditors identified an individual (usually a doctor) who appeared to be inflating insurance claims, supplying false or misleading information, charging for the same operation several times, charging for more complicated treatment than had actually been given or charging for treatment that had not been given at all. And there were further examples where claims had been deliberately couched in jargon that was technically true but nonetheless designed to mislead. Furthermore, it was clear that the cost was enough for every policyholder to notice it in their premiums.
As a result of this, a full time counter-fraud unit was invested in, which has had considerable success recovering monies, terminating contracts with fraudulent providers and reducing the loss generally. However, convictions for claims fraud have not been forthcoming, although there are a small number of cases now in the court system. This all looks set to change with the new Act.
Frank Nesbitt, an ex-fraud squad officer and now a consultant with Tait Walker Chartered Accountants, argues that: "In my opinion this Act is long overdue. The Act clearly defines the three main ways of committing fraud and just reading the names of the offences should in itself be a deterrent. Naturally, the Act itself will also assist fraud investigators in their endeavours as it not only creates a statutory offence of fraud as opposed to the previous mishmash of legislation, but on a practical level, they will no longer have to seek evidence to prove that a gain was made. Until a challenge in court sets a precedent, or a judge's ruling changes the parameters of practice, this will be the most important piece of legislation for fraud investigators."
Commenting on the issues in medical insurance fraud, Detective Inspector Phil Butler from Northumbria Police, says:" Fraud has traditionally been a difficult area to prosecute as the offences were very vague or not easily understood. Now we have clearly defined offences outlined in one statute, things should be much easier. Offences of fraud by abuse of position or fraud by false representation, which have been prevalent in the medical insurance area, are now easy and clear enough for anyone to understand.
David Levy, deputy director of the Fraud Prosecution service, agrees. "If you can prove that a doctor with a duty to the insurance company conspired with his patient to give a false medical report to facilitate a claim, this could be a case of fraud by abuse of position. If the doctor submits false information in a claim for medical treatment by him, this could be an offence of fraud by false representation. The majority of fraud offences could actually be prosecuted in some way under the old legislation. For example, the old offences of obtaining property or credit transfers by deception could have applied to the above scenarios and will still apply for any such offences committed before 15 January 2007. However, this Act gives a new and better way of doing things. There is no longer the burden of having to prove gain or that someone has been permanently deprived of property as with the Theft Act. The common law offence of conspiracy to defraud still exists and will continue to be a valuable tool in the prosecution and management of complex fraud offences and may well be effectively utilised in cases of multiple fraudulent claims against insurance companies involving dishonest doctors and claimants."
Richard Davies, fraud risk manager at Axa UK, believes the Fraud Act is a strong piece of legislation drafted in a way that will be favourable to insurers. He has asked the fraud teams throughout the various Axa companies to consider looking at fraud risk outside of the traditional areas such as claims and surrenders where, in the past, a financial benefit was easiest to demonstrate and to look at other areas such as intermediaries and underwriting. He also requested that they review the criteria for referral of cases to the police now that prosecution should be easier; and ensure that all stakeholders, including suppliers of service, business partners and potential fraudsters understand the implications of the new legislation.
So, from the insurers' perspective, the Fraud Act certainly looks like a promising piece of legislation. It is too early to know how effective it will be in practice. However, all the signs and expert views suggest that life looks set to get harder for the fraudster.
Dr Simon Peck, head of provider audit and information in the medical department at Axa PPP
