Global Fraud and Corruption – the results, how businesses are responding and what can we do about it?

As the business world becomes increasingly global, the way in which corruption and fraud is conducted becomes more complex, and harder to combat.  In fact, the recent Transparency International annual corruption perception index highlights lamentable progress, stating that “most countries are failing to make serious inroads against corruption”. We continue to see more governments introducing and enforcing tougher anti-fraud and corruption laws. More than ever, businesses are under significant pressure to implement robust compliance programmes to reduce the risk of fraud and corruption, both internally and externally.  Despite that, according to the PWC global Economic Crime and Fraud Survey 2018, in 2018 some 49% of global organisations said they have been a victim of economic crime, and the figure looks to be increasing.

It would come as no surprise that an increase in technological capability and businesses using technology to conduct business, has created more opportunity for fraud and corruption. Technology has closed the geographical barriers, and businesses are repeatedly finding themselves victims of fraud that has been committed extra-jurisdictionally.   Notwithstanding best efforts to combat this, scam artists seem to consistently up their game and outwit them.  Greater global connectivity has meant that anyone with access to business data, anywhere in the world, can exploit weaknesses in data security. Most recently, we have seen the emergence of the use of cryptocurrencies to launder money and commit fraud.  This is becoming a major issue.  According to a report released by CipherTrace, in 2018, crypto criminals laundered $1.7USD billion using crypto currency, 3.6 times more than in 2017.  For both law enforcement and victims, tracing the funds once they have entered the cryptocurrency world is nearly impossible.

Alongside those external factors, the global nature of companies means that more and more, British companies are doing business in countries traditionally plagued by fraud and corruption.  For many countries, fraud and corruption is a means to do business.  This is dangerous territory for UK businesses.   The courts are increasingly considering overseas criminal conduct as an offence in the UK, so long as there is a sufficient connection to the UK.  As an example, the UK’s Bribery Act 2010 is now among the strictest legislation internationally on bribery.  In addition to the pre-existing offences relating to conduct committed abroad, the act includes a strict liability offence of failure by a commercial organisation to prevent a bribe being paid to obtain or retain business or a business advantage.  The only defence is that the business had adequate procedures designed to prevent persons from undertaking bribery, which in many cases, as is covered below, is much easier said than done.

How global fraud and corruption is affecting businesses

In light of new legislation, and greater focus on fighting global fraud and corruption, it is interesting to consider how this is affecting businesses, and consequently, how they are responding.  EY has recently released its 15th Global Fraud Survey, containing insights from business leaders on the risks and challenges organisations face in fighting fraud and corruption in an era of significant technological advancement.

Between October 2017 and February 2018, EY interviewed 2,550 executives from 55 countries to try and gain an insight into whether current prevention efforts by management and increased government enforcement are effective enough to fight fraud and corruption.

The results are a worrying indicator of the difficulty that businesses face in fighting the fight.  In addition to the external factors affecting the rates of fraud and corruption as identified earlier, internally, there appears to be a mismatch between awareness of anti-corruption policies and employee behaviour; only 22% of respondents viewed behaving with integrity to be a responsible that primarily lies with the individual[1]. Therefore, we have resulting ethical failures, business losses and consequent reputational damage[2].  According to the report, 11% of companies have experienced a significant fraud in the last two years[3].  In reality, we consider that figure is likely to be much higher, and the combination of better technology and smarter ways of committing fraud and corruption, this will only increase.

The following statistics highlight the difficulties faced by businesses[4]:

  1. 11% of respondents stated it is common practice to use bribery to win contracts in their sector.
  2. 38% of respondents stated bribery/corrupt practices occur widely in business in their country.
  3. 13% of respondents would justify cash payments to win/retain business when helping a business survive an economic downturn.
  4. 36% of respondent believe that fraud and corruption pose the greatest risk to their business.
  5. 12% of respondents would justify extending the monthly reporting period.
  6. 7% of respondents would backdate a contract.
  7. 7% of respondents would book revenues earlier than they should be to meet financial targets.

Even more concerning, is the attitudes of the younger generation coming through.  According to the report, respondents under 35 years of age are more likely to justify fraud or corruption to meet financial targets or help a business survive an economic downturn.   For example, according to the report, 1 in 5 respondents interviewed aged under 35 indicated they would justify cash payments[5]; a somewhat higher statistic compared to those aged 35 and over, where the trend (while still high) is lower at 1 in 8 respondents indicating they would justify cash payments.[6]

What businesses are doing about it

Effective compliance is essential for any business in combatting fraud and corruption. However, despite best efforts, many businesses still find themselves in a position where they are the victims of fraud and corruption, as the fraud has been committed either internally or externally, or combination.

The increase in global fraud and corruption, and the extraordinary resource required to investigate and prosecute such conduct, has put an immense pressure on public law enforcement authorities. For businesses, there is generally a desire to seek justice as quickly as possible to reduce the damage to their business, both reputationally and financially. As a result, we are noticing significant growth in the area of private prosecutions.  2018 saw the largest private corporate fraud prosecution to date, resulting a combined sentence of three defendants to 15 years imprisonment.

Private investigations and prosecutions are a useful tool for businesses in circumstances where they have been a victim of fraud and and/or corruption (either as an alternative to public law enforcement, or to work alongside public law enforcement).  In that event, depending on the circumstances, there are number of private options available to businesses and individuals, including:

  • Investigative assistance to determine whether there has been a fraud, or the extent of the fraud or other crimes;
  • Preparing a file for the Crown Prosecution Service or the Serious Fraud Office or another law enforcement body for prosecution;
  • Obtaining orders for disclosure of documents relevant to determine whether there has been a fraud, or the extent of the fraud or other crimes;
  • Tracing assets;
  • Obtaining freezing orders in respect of assets related to the fraud or other crimes.
  • Privately prosecuting perpetrators of fraud or other crimes;
  • Seeking confiscations or compensation from a convicted perpetrator of a fraud or other crimes.

Companies have an ever increasing obligation to take responsibility to reduce fraud and corruption.  With greater focus on the fight by government, businesses and individuals, we remain confident that the figures will eventually begin to decline worldwide.

Jane Guthrie and Mai Holdom

 

[1] Page 20, EY 15th Global Fraud Survey

[2] Page 3, EY 15th Global Fraud Survey

[3] Page 4, EY 15th Global Fraud Survey

[4] Pages 4 and 7, EY 15th Global Fraud Survey

[5] Page 9, EY 15th Global Fraud Survey

[6] Page 9, EY 15th Global Fraud Survey

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