Interviews

Fraud survey 2016

by Mark Rowe

An audit firm reports a worldwide clamour for enhanced transparency at a time of increased geopolitical tensions and heightened volatility in financial markets. The escalating threats of cybercrime, terrorist financing and, more recently, the revelations regarding widespread possible misuse of offshore jurisdictions, have increased pressure on governments to act and companies to identify and mitigate fraud, bribery and corruption issues, according to EY’s 14th Global Fraud Survey 2016: Corporate misconduct – individual consequence.

Conducted between October 2015 and January 2016, the global survey of nearly 3000 senior business leaders from 62 countries and territories highlights corporate support for enhanced beneficial ownership transparency. Some 91pc of executives said that they recognised the importance of establishing the ultimate beneficial ownership of entities with which they do business. The UK findings show executives are more concerned than many of their counterparts elsewhere in the world about the need for transparency in company ownership, as 98pc supported such calls.

Bribery and corruption remain. Globally, 39pc of respondents believe that bribery and corrupt practices happen widely in their country, little changed from the 38pc seen in 2014 and 2012. The percentage was highest in the emerging markets, however even in the UK the figure is 28pc. With the UK home to the headquarters of many multinational companies, the fact that the majority of respondents in 20 of the 62 countries and territories covered believe that bribery and corruption happen widely in their countries represents a challenge to business, the auditors suggest. Those countries include some of the UK’s most significant trading partners in Asia, Europe and South America, highlighting the risk to business about dealing with corruption around the world.

Jim McCurry, EMEIA and UKI leader of EY’s Fraud Investigation & Dispute Services practice, says: “Our survey finds that more than one in four executives in the UK believe that bribery and corrupt practices happen here, a worryingly-high number in a country that prides itself on its strong corporate governance. With the continuing enforcement of anti-corruption measures, coupled with recent revelations about the possible misuse of offshore financial structures, business leaders here need to be focused on securing a deeper understanding of their clients, partners and suppliers. Enhanced transparency is only likely to rise up the political and public agenda, both here and in the rest of the world.”

Regulators recognise the threat that bribery and corruption pose to a financial system already under stress, and are increasingly cooperating across borders to hold individuals accountable for illegal acts. Such enforcement efforts appear to be heavily supported by survey respondents, with 88% in the UK agreeing that prosecuting individuals will help deter future fraud, bribery and corruption, compared to a global level of 83%. However, with 36% of respondents admitting that they could justify unethical behavior to meet financial targets, those executives responsible for ethics and compliance appear to be facing a significant challenge if they are to keep their organisations clear from the scrutiny of prosecutors.

Turning to the wider global economy, the survey also identified a perception in emerging markets that individuals responsible for corruption are not being held to account, with 70pc of respondents in Brazil and 56pc in Africa and eastern Europe believing that although governments are willing to prosecute, they are not effective in securing convictions.

David Stulb, EY Global Leader of the Fraud Investigation & Dispute Services says, “Increased levels of global cooperation between law enforcement agencies are making it harder for fraudsters and bribe-payers to evade prosecution. However, with respondents indicating that such misconduct is showing no sign of abating, companies continue to be exposed to major risks driven by the illegal actions of a small minority of employees. Better use of technology is certainly part of the answer. More can be done to leverage forensic data analytics to manage these risks and improve compliance and investigative outcomes.”

There are some positive indicators in markets where governments and regulators have taken steps to crack down on impropriety. In India, for example, where steps to increase transparency and crackdown on corruption have been taken by the government, the proportion of respondents from this country believe that bribery and corruption happens widely in the country declined from 67pc in 2014, to 58pc this year. In China, 74pc of local respondents report that enforcement is effective, indicating apparent effectiveness of the Chinese Government’s commitment to tackle corruption.

Expanding into new markets is essential for most companies, yet such expansion brings new and less familiar risks. The research shows that companies are frequently failing to take appropriate steps to respond and reduce their risk exposure:

– One in five do not identify third parties as part of their anti-corruption due diligence
– One in three do not assess country or industry-specific corruption risks before making investments
– Only half utilise technologies such as forensic data analytics to identify and mitigate risks

Responding to risks

Whistle-blowers remain a critical source of information on alleged misconduct. According to this year’s survey, 55pc of companies globally have whistle-blower hotlines in place. Regulators welcome such tips, and in some jurisdictions, including the US, whistle-blowers are offered monetary rewards.

McCurry says: “Some employees, with widely varying motivations, are prepared to misappropriate – or enable others outside the firm to have access to – the confidential data of their companies. The balance between data privacy and security creates further complications. Dealing with such cyber and insider threats should be a top priority for management and boards. The good news is that in the UK, businesses understand the seriousness of the issue: 80pc of executives view cybercrime as a high risk, more than anywhere else in the world.”

Comment

John Lord, managing director at identity data intelligence firm GBG, says: “Today, those with malicious intent are not static individuals – they move around – and unless free-flowing access to real-time information is possible across multiple countries, their criminal history cannot be effectively tracked and they’re free to commit fraud again. As fraudsters increasingly hone their skills to take advantage of the innocent, company boards need to consider how they can stay one step ahead to protect their customers’ valuable identities, their data and IP.

Data transparency can be an incredibly effective way of battling fraud. When data is shared freely between the public and private sectors, across geographical boundaries and amongst international bodies, a more accurate picture of global fraud patterns can be established. Being able to use accurate data to connect the dots, predict algorithms and identify behaviour patterns are all crucial to building out an intelligent view of global fraud and stopping the bad guys in their tracks.”

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