Economic crime

Andrew Gordon & Tony Parton

Andrew Gordon - Partner
This is our fourth biennial Global economic Crime survey and is the largest of its kind involving over 5400 interviews in over 40 different countries. In the UK we interviewed over 300 companies and may of the interviews were in-depth involving analysis of some case studies.

Every other company we interviewed reported one or more significant frauds and that statistic has remained broadly the same for many years, which perhaps tells us fraud is here to stay. Like the Hydra, fraud has many heads - once you cut off one of the heads another grows and it’s difficult to get rid of it completely.

The incidence of fraud has also increased from on average 7 to 25, and here's the paradox - the more anti fraud controls the company puts in place, the more fraud that is detected, and that is partly because it takes time for the anti-fraud controls to work within the company as a preventative measure; and while anti-fraud controls are good they cant exist on their own. It’s very important to have a strong ethical; culture supported by ethical controls and guidelines.

Tony Parton - Partner
This year for the first time we have included a feature on fraud risk in the emerging markets, we interviewed over 1500 country managers who have the responsibility for operational or investment decisions in their territories and we couple that with our own experiences and knowledge of those fraud risks too. It is interesting to note that of the 4 Billion dollars worth of fraud that was reported in total by our respondents, nearly half arose in emerging markets.

UK respondents in particular noted China as being a heightened fraud risk. Many of the frauds they noted arose in China, and so we have look in depth at what is happening there. Given the amount of media interest on the country in recent months, it’s not surprising that respondents reported corruption and bribery and intellectual property infringement as the most prevalent forms of fraud. What is surprising is that only one third of our respondents have actively planned steps to remediate the risks that exist, what’s more only 50 percent of respondents looks at fraud risks when considering investments into places like China.

Two of the cultural differences we have looked at is the way relationships are built up and maintained, and the way governance typically operates.

In those markets - so looking firstly at relationships; it is often the way that they are developed by way of gifts, hospitality and entertainment, and that is perfectly normal in those parts of the world, however in some parts of the world they can be perceived as corrupt acts and therefore potentially fall foul of anti corruption laws and regulations. Secondly, looking at the governance structures, typically they are hierarchal based - in other words, a very strong boss subordinate relationship, unlike the west where we have principal based relationships - unfortunately that can give rise to the circumvention of internal controls.

But the good news is that the fraud risk in those territories can be mitigated, it’s important for companies to identify those risks and take early and robust action to remediate any deficiencies.

Importantly however UK companies have consistently underestimated the risk of fraud. Only one in six companies believe that fraud will be likely or very likely over the next two years, but in practice as Andrew said earlier - one in two companies actually experience it.