Corporate Fraud & Corruption 2016
June 2016 | FRAUD & CORRUPTION
No matter how diligent companies and organisations try to be with cracking down on fraud and corruption, they remain a constant risk for groups of all sizes. This past year has seen monumental stories of global corruption exposed, as well countries and international bodies taking great strides toward investigating, punishing and preventing fraud. According to anti-fraud professionals the average organisation loses 5 percent of its annual revenue to fraud; when applied to the 2014 estimated gross world product of $74.16 trillion that results in a projected potential total fraud loss of up to $3.7 trillion worldwide.
Bradley J. Preber
“In the US, a number of stakeholders are taking proactive steps to reduce enterprise fraud, waste, abuse and corruption. The broadly visible actors include investors, lenders, boards of directors, management, insurers, regulators and activists. Never before has there been such a convergence of interests focused on fraud and corruption. Focusing exclusively on organisational proactivity, a number of pre-emptive actions can be taken. First, shrink risk appetites. Second, expand, fund and hold accountable risk management roles such as the chief risk officer. Third, prepare robust risk assessments by identifying, rating and ranking risks, as well as associated risk responses, through policies, training, internal controls, monitoring and whistleblowing systems.”
“The global priority nowadays is combating corruption, as this type of fraud is a major impediment to economic growth. In this sense, companies in Mexico are adopting the best practices stated by the SEC and the DOJ by developing and implementing anti-bribery and anticorruption controls to reduce the incidences of corruption in their regular operations. Although these controls are more likely to be developed in Mexican subsidiaries of US or UK controlled companies, boards and senior executives of emerging or large Mexican corporations are following these practices and demonstrating their concern in having complaint mechanisms that allow companies to reduce fraud incidences including hotlines, training, risk assessments and due diligence, among others.”
Liudmila Riaño G.
“In Colombia, some boards and senior executives are starting to take action to actively prevent corruption or fraud by implementing ethics and compliance programmes in their companies. However, the compliance culture still has room for improvement, specifically in implementing effective monitoring procedures to mitigate those risks. There is a more profound anti-fraud and anticorruption regime in local Colombian companies tied to the larger offshore headquarters where these regimes are implemented due to internal company policies and compliance with global anticorruption laws and regulations.”
“There have been some positive steps in this direction over the last two years in Brazil. This has been fuelled by three key drivers. First, the introduction of the Brazil Clean Company Act (BCCA) which became effective in January 2014. Second, the impact of increased FCPA enforcement, which has affected some Brazilian companies during this period. And third, the fallout arising from some high profile corporate scandals which has drawn massive publicity locally and indeed globally in some cases, with Petrobras being the most notorious. In aggregate, these drivers have meant that the issues of fraud and corruption in Brazil have been widely discussed within society and more specifically within boardrooms.”
“According to our 2014 survey of executives at the top 250 companies in Peru, 43 percent of respondents believed that their organisations had implemented a fraud prevention programme, 48 percent felt that the heads of their companies were committed to fulfilling it, and 50 percent had standard procedures and protocols to answer allegations and cases of fraud. Additionally, 54 percent of respondents indicated that their organisations already had some form of internal channel to receive reports in the form of a whistleblower hotline, which is a key mechanism for employees and helps to detect situations that could be a violation of the company’s policies and procedures. These are all proactive steps taken by top management which help them to face fraud and corruption, nevertheless the percentages are still low.”
“Latin American tone-at-the-top very much depends on the sanction track record of the company in question. If a US regulator imposed penalties at the parent company level in the past, it is likely that local management will have a proactive mindset. In the case of multinational companies that have not yet been under scrutiny or local companies that usually have weaker compliance programmes – or no programme whatsoever – it is common that boards and senior executives are focused on the minimum effort to meet requirements. In such an environment, no investments are made in prevention plans; rather, companies wait to react in the event a fraud or corruption scandal surfaces.”
“The UK Corporate Governance Code says that establishing the culture, values and ethics of the business and setting the correct ‘tone from the top’ is one of the key roles for the board. Our 2015 Corporate Governance review reported that for the UK FTSE 350 companies, the number of chairmen who mention culture and values in their primary statement has more than doubled to nearly 13 percent compared to the equivalent survey we conducted in 2013. Beyond the rhetoric, we have observed an increase in action. Large UK based corporates have taken steps to address fraud risk and the requirements of the UK Bribery Act (UKBA) by investing in compliance programmes, particularly data analytics and integrity due diligence solutions.”
“When comparing the results of our EMEIA 2015 Fraud Survey for the Netherlands with those for other countries in Western Europe, fewer companies in the Netherlands, at 46 percent, have anti-bribery or anticorruption policies and codes of conduct in place than companies in other Western European countries, at 59 percent. One of the reasons for this may be that corruption risk in the Netherlands, despite a number of major corruption cases in recent years, is still considered low. Only 6 percent of survey respondents believe that corruption occurs on a broad scale in the Netherlands. This is significantly lower than in the rest of Western Europe, where 20 percent of respondents stated there was a risk of corruption and bribery in their country.”
Filipa Marques Júnior
Morais Leitão, Galvão Teles, Soares Da Silva & Associados
“Compliance is increasingly seen not only as a legal obligation but also as a business strategy. With increased media coverage and the interest of authorities in scrutinising companies’ economic activities, companies need to arm themselves with mechanisms that allow them to anticipate risks and prevent situations where legal non-compliance may arise. Boards and senior executives in Portugal are now placing a greater emphasis on fraud and corruption, viewing it as a major concern, which leads to cautious preparation, implementation and maintenance of compliance policies and programmes in order to safeguard a company. In addition, in those companies where such programmes already exist, there has been scope for their enhancement and review.”
“The awareness of fraud and bribery as key risks to a company’s business has clearly increased in recent years. This is particularly true with regard to corruption related risks where media coverage of the crackdown on bribery has led to a rethink in the corporate world. While most multinationals have been paying close attention to fraud and bribery risks for a number of years, we are increasingly seeing small and medium sized enterprises focus on these topics as well. Under Swiss criminal law, the board is responsible for compliance with anti-bribery laws, and this responsibility cannot simply be delegated to management. Unsurprisingly, therefore, the board and top management are taking active steps to prevent fraud and corruption from occurring in their company.”
“The boards of Italian private companies started some years ago to manage fraud and corruption risks through the adoption of compliance programmes according to Legislative Decree 231/01. The compliance framework usually provides for a fraud and corruption risk assessment, the design and implementation of a programme, including the development of policies and procedures and of employees training, and a monitoring phase with periodic reassessment and programme modification. At present, compliance programmes are more sophisticated and new processes have been implemented by the senior executives of big companies, including compliance steps such as the third-party due diligence and whistleblowing management.”
EY Russia & CIS
“Historically, large companies in Russia relied on their internal economic security departments to address fraud and corruption risks; boards and senior executives were not seen to be proactively involved in addressing these issues. Today, boards and senior executives of large public companies listed on foreign stock exchanges and subsidiaries of multinational companies are taking more proactive steps and are assuming greater responsibility for countering fraud and corruption. They do realise that an effective and sustainable integrity and compliance programme requires significant investment, and compliance is not perceived as a barrier to growth. However, those companies that are less exposed internationally still see compliance as a burden, thinking that monitoring and enforcement of anti-bribery policies would harm their competitiveness.”
Karanjawala & Co.
“The participation of independent directors in fraud risk management has increased because of the introduction of the new corporate governance requirements mandated under the new Companies Act, 2013. As per Schedule IV of the new Companies Act, independent directors are required to assist the company in implementing the best governance practices. Companies are now obligated under law to satisfy themselves as to the integrity of the financial information they provide and to ensure that their systems for anti-fraud mechanisms are robust and effective. Also, the statutory auditors of the company are now obliged to report to the central government, within a prescribed time limit, any offences involving fraud being committed against the company by its officers or employees.”
HONG KONG & CHINA
“Since the launch of China’s anticorruption campaign in 2012, there has been a heightened focus by boards and senior leadership on understanding key fraud vulnerabilities affecting their operations and ensuring that a robust compliance programme is in place to mitigate these risks to the fullest extent possible. While tone at the top continues to be a key proactive measure, boards and senior executives are increasingly becoming more engaged in understanding what their organisations are doing to support their zero tolerance messaging. We have seen boards and senior executives become more interactive with management, requiring key information and metrics about compliance programme elements and regularly engaging in dialogue about the information provided, such that they are an integral part of creating and promoting a sound corporate governance culture.”
“The lack of senior management commitment has been the biggest problem in fraud and corruption management in this part of the world. Only a limited number of companies – primarily US multinationals due the strictness of FCPA and UK Bribery Act – have the processes in place to ensure they can pass the checks required by legislation. So the lack of senior management commitment has had a negative impact on companies’ ability to manage their progress in these environments. Only a small number of local companies are able to formally manage instances of fraud compared to other, more developed countries, because there are no proactive measures being taken and only minimum action to cover the regulatory aspects of risk management.”
UNITED ARAB EMIRATES
Corporate Research and Investigations LLC
“The business climate in general seems much more attuned to the risk of fraud, and the damage it can do, than was the case just a few years ago. High-profile corruption scandals have dominated news cycles and encouraged executives and directors to be more vigilant in protecting their profits and investments from fraud. However, most companies can still do better – from implementing an ethical code of conduct, training their employees on fraud and corruption, instituting an anonymous reporting method – all of these methods can help defend a company from fraud. Audits are important, but they aren’t the end of the story. The latest research shows that more fraud is discovered through employee tips than through other methods, including audits.”
“Boards and senior executives in South Africa have increasingly been taking proactive steps to reduce incidents of fraud and corruption. Tough economic conditions have admittedly also been a catalyst to reinforce the focus on fraud and corruption reduction and to take proactive steps. The extent to which proactive steps have been taken differs on the one hand between the private and public sector and also across different sectors and sizes of businesses. The private sector appears to have been more committed and successful than the public sector, primarily due to the fact that we have greater challenges with ethical leadership in the latter. Proactive steps taken by boards and senior executives range from implementing tip off facilities, more robust recruitment procedures, adopting and executing a combined assurance approach, taking fraud risk assessments more seriously and enhancing internal audit and compliance capacity.”
Corporate Research and Investigations LLC
Karanjawala & Co.
Morais Leitão, Galvão Teles, Soares Da Silva & Associados