Volume 16 | Issue 11 | Year 2013

The number of companies falling victim to fraud has increased considerably in the last year, a recent analysis says, raising red flags to manufacturers and distributors worldwide.

According to the 2013 Kroll Global Fraud Report, 70 percent of surveyed companies were affected by fraud in the last year, a nine-percent jump from the 61 percent reported the previous year. Even more alarming is that every category of fraud covered in the study saw an uptick in activity.

Overall, 81 percent of the 901 senior executives representing a wide range of industries who took part in the survey believe that their firm’s exposure to fraud has increased overall in the past 12 months, up from 63 percent in the previous survey.

“Fraud is up,” Peter Turecek, a Senior Managing Director in the Investigations & Disputes Practice at Kroll, tells Leo Rommel of Industry Today. “The incidents and the costs are both up markedly, which in turn has driven up the number of companies who have a sense of their own vulnerability.”

The sharpest increase was reportedly in vendor, supplier, or procurement fraud, suffered by 19 percent of businesses, a seven-percent increase from last year’s 12 percent reading. Of those who were victimized by such fraud, 30 percent experienced wrongdoing by vendors and suppliers while 11 percent suffered fraud at the hands of joint venture partners.

“A number of respondents were hit with two or more different kinds of frauds, and the costs of these incidents continue to mount, coming up from anywhere between 0.9 percent to 4 percent of revenue, which is a really tough hit in dealing with these incidents,” Turecek says. “When the incident rate rises and the costs rise, it’s also a major distraction among senior management because they have to take their eye off the ball of making money to instead put out these fires.”

What’s Sparking These Fires
In one word: globalization. The survey reveals that as businesses expand into riskier overseas markets and use greater levels of outsourcing, their exposure to fraud is elevating.

In fact, entry into new markets has increased the vulnerability of almost one in three companies to fraud, the survey says.

“As the economy continues to improve, you’re seeing businesses starting to get back to their more normal ways of doing business,” Turecek explains. “That means they’re going back into new markets, which are always riskier.”

He adds: “But as you go into some of these new jurisdictions, sometimes the base level of due-diligence that you might do in the U.S. doesn’t cut it in India or the Middle East or in Africa because there is so little made available in terms of public records. Therefore, there’s more to do in terms of finding out who these folks in this new market are and who they’re connected to. The process needs to be more focused on reputation and insight from reliable sources, which requires more boots on the ground.”

Improvement throughout the global economy, especially the U.S., is playing a significant factor, too, he adds.

“As the economy improves, there’s more opportunity for employees who were dissatisfied to leave,” he says. “That requires you to bring in newer employees who may not be as familiar with your company’s ethics and compliance policies.”

Other More Under-The-Radar Threats
Certain companies may not be doing an adequate enough job of vetting some of their new employees either, Turecek suggests. He turns to the survey’s findings for support.

For instance, taking into account how corruption is up, it’s no surprise given the number of companies who were reportedly rocked by high-profile corruption scandals over the last 12 months. The survey pulls back the curtain on this vile trend some more: the proportion of companies affected by corruption and bribery went up from 11 percent last year to 14 percent this year.

As such, a number of respondents are now dissuaded from doing business in particular markets, namely Africa, Latin America, and India. Also, nearly half of companies surveyed have reportedly refrained from expanding into a foreign market, citing corruption as their primary concern.

Fraudulent activity is also likely to be committed by an insider, the survey reveals. About 72 percent of respondents have been hit by fraud by at least one insider, up five percentage points from last year. Of the victims affected by this type of fraud, 32 percent suffered at least one crime where the main perpetrator was in senior or middle management. Likewise, 42 percent were victimized by a junior-level employee and 23 percent were targeted by an agent or intermediary.

“We’ve seen fraud as primarily being an insider job or through what you would expect to be more trusted relationships like those between vendors and suppliers and procurement,” Turecek says. “This type of fraud is hitting companies across the board.”

And, perhaps, it’s no big surprise taking into account the digital age we live in, cyber-related threats remain a major concern. The study says that more companies are highly vulnerable to information theft – 21 percent, to be exact – than any other category of fraud. In addition, three-quarters of businesses are at least moderately vulnerable to it. It affected more than one in five businesses over the last year, the report says. About 39 percent of reported incidents identified an employee as the culprit.

Approximately 37 percent of respondents say their current IT infrastructure is the biggest factor for increasing their company’s exposure to fraud. More outsiders are taking advantage, the study finds, with attacks by external hackers nearly doubling from 18 percent to 35 percent.

“Tied to all of this is, because we’ve just started to come out of a more recessionary period, a lot of respondents talked about how the cost-cutting measures that have been put into place the previous few years were essentially still in place, so they have an insufficient budget for handling compliance and can’t audit with the robustness that they should,” Turecek says.

Steps To Take
How exactly do you go about preventing all this fraud? Can it be done?

“I’m not sure that there’s a magic bullet,” Turecek says. “But there are certainly recommendations. It begins right from the top management, setting the company tone on ethics and compliance. Develop, impose and train in an environment of ethics and compliance right from the top, so that that runs all the way through the company.”

That includes moving forward with a better risk mitigation strategy including vendor screening, whistleblower programs, and improving employee training.

It also involves crafting better policies and procedures in regards to information protection and vetting vendors, suppliers, and all employees. Keep an ear to the ground. Stay alert by setting up an “integrity program for your vendors and suppliers so that you get them signing off on your code of conduct for how they behave on your behalf,” Turecek suggests. Beef up audit abilities. Even better, conduct random audits and expense reports. Be thorough. Don’t hesitate to sound the warning bells.

“The one key that comes out in a lot of this is that your counter-fraud or preventative measures need to be flexible to adjust for the different places you will operate,” he adds. “You’re going to find a little bit less vendor or supplier fraud in the U.S. than you would in some emerging markets. Adjust the flexibility of your program to take into account that there are different jurisdictions that have different requirements as far as really getting to the bottom and really understanding who you’re doing business with.”

Kroll, the global leader in risk mitigation and response, delivers a wide range of solutions that span investigations, due diligence, compliance, cyber security and physical security. Clients partner with Kroll for the highest-value intelligence and insight to drive the most confident decisions about protecting their companies, assets and people.

Kroll is recognized for its expertise, with 40 years of experience meeting the demands of dynamic businesses and their environments around the world. Kroll is headquartered in New York with offices in 45 cities across 28 countries. The firm has a multidisciplinary team of nearly 4,000 employees globally.

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