Annual Edition 2011/12Global Fraud ReportEconomist Intelligence Unit Survey ResultsFraud concerns on the rise globallyInfo...
About the researchThe Annual Global Fraud Survey, commissioned by Kroll and carriedout by the Economist Intelligence Unit,...
ContentsGlobal Fraud ReportContents Introduction                                                                          ...
IntroductionIntroduction                                   Organizations operating in multiple               »	 Corruption...
Economist Intelligence Unit OverviewEconomist Intelligence UnitOverview    Rising Fraud                                   ...
Economist Intelligence Unit Overview                                                                                      ...
Economist Intelligence Unit Overview                                                                                      ...
Economist Intelligence Unit Overview                                                                                      ...
Fraud at a Glance                                                                                                  occasio...
Fraud at a GlanceA Geographical Snapshot                                                                                  ...
Fraud at a Glance                                                                                                         ...
The Regulatory FrameworkFCPA Reform    Help Could    be Coming to    Those Who Help    Themselves By Jeffrey CramerOn Nove...
The Regulatory FrameworkClarification of“Facilitating” PaymentCompanies have justifiably been confused asto what constitut...
The Regulatory Framework     Investing in     the BRICs     Extra due diligence is vital By David Holley and Doug Frantz  ...
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
Kroll Global Fraud Report 2011 2012
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Kroll Global Fraud Report 2011 2012

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Junto0 con el Reporte a la Nación de la ACFE. el reporte anual de Kroll se ha convertido en una de las mayores fuentes de sistematización y producción de información empírica sobre el fraude, su control y sus costos, a nivel global.

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Kroll Global Fraud Report 2011 2012

  1. 1. Annual Edition 2011/12Global Fraud ReportEconomist Intelligence Unit Survey ResultsFraud concerns on the rise globallyInformation theft remains a serious threatLack of preparation for greater regulatory enforcementBusinesses struggle with anti-fraud strategies An Altegrity Company
  2. 2. About the researchThe Annual Global Fraud Survey, commissioned by Kroll and carriedout by the Economist Intelligence Unit, polled 1,265 senior executivesworldwide from a broad range of industries and functions in Juneand July 2011. Where Economist Intelligence Unit analysis has beenquoted in this report, it has been headlined as such. Kroll alsoundertook its own analysis of the results. As in previous years,these represented a wide range of industries, including notableparticipation from Financial Services and Professional Services;as well as Retail and Wholesale; Technology, Media, andTelecommunications; Healthcare and Pharmaceuticals; Travel,Leisure, and Transportation; Consumer Goods; Construction,Engineering, and Infrastructure; Natural Resources andManufacturing. Respondents were senior, with 47% at C-suite level.One-half of participants represent companies with annual revenuesof over $500m. Respondents this year included 23% from NorthAmerica, 24% from Europe, 28% from the Asia-Pacific region,15% from the Middle East/Africa and 11% from Latin America.This report brings together these survey results with the experienceand expertise of Kroll and a selection of its affiliates. It includescontent written by the Economist Intelligence Unit and other thirdparties. Kroll would like to thank the Economist Intelligence Unit,Dr. Paul Kielstra and all the authors for their contributions inproducing this report.Values throughout the report are US dollars.
  3. 3. ContentsGlobal Fraud ReportContents Introduction regional analysis: Asia-Pacific Tom Hartley, Global Head, Business Intelligence & Investigations............... 4 Southeast Asia overview.................................................................................................... 34 Procurement and Supply Chain Fraud in Asia........................................................ 35 Economist Intelligence Unit Overview China overview........................................................................................................................ 37 Survey Results........................................................................................................................ 5 Third Party Vendor Screening: fraud at a glance Compliance as a Route to a Better Business.......................................................... 38 Fraud Fatigue................................................................................................................................ 9 When A Watchdog May Not Be Enough: Auditors are not Fraud Investigators............................................................................ 40 A Geographical Snapshot................................................................................................... 10 India overview.......................................................................................................................... 42 The Regulatory Framework Corruption and the Indian Infrastructure Boom.................................................... 43 FCPA Reform............................................................................................................................... 12 regional analysis: emea Investing in the BRICs........................................................................................................... 14 Europe overview..................................................................................................................... 45 Special Comment The Biggest Threat to Financial Institutions: Recovering Sovereign Assets........................................................................................... 16 It Comes from Within........................................................................................................... 46 Corporate Investigations in Strict Privacy Regimes: regional analysis: Americas The Case of Italy...................................................................................................................... 48 North America overview.................................................................................................... 18 Middle East overview........................................................................................................... 50 When Fraud is an Inside Job: Five Steps to Consider.......................................... 19 Corruption and Vendor Fraud in the Gulf Inadequate Due Diligence Creates a Big Regulatory Risk............................... 21 Practical Advice........................................................................................................................ 51 Say-on-Pay in 2012: A Picture is Worth a Thousand Words........................... 23 Africa overview........................................................................................................................ 53 Canada overview.................................................................................................................... 24 Africa: Are We There Yet?................................................................................................... 54 Canada Steps Up its Anti-Corruption Efforts............................................................. 25 sector summary Latin America overview...................................................................................................... 27 Summary of Sector Fraud Profiles................................................................................. 57 Latin America’s Uneven Playing Field......................................................................... 29 Mexico overview..................................................................................................................... 30 Contacts Rooting Out Fraud After Acquisitions in the Key Regional Contacts at Kroll......................................................................................... 59 Brazilian Sugar and Ethanol Industry........................................................................... 31 Financial Statement Fraud: A Little Journal Entry Could Bring Big Trouble........................................................ 32 Economist intelligence unit Industry analysis Technology, Media & telecoms............................................................... 20 Consumer goods....................................................................................................... 22 Natural resources................................................................................................ 26 Manufacturing........................................................................................................... 33 Healthcare, Pharmaceuticals................................................................ 36 & Biotechnology Retail, Wholesale & Distribution...................................................... 39 Professional services........................................................................................ 41 Financial Services................................................................................................... 47 Construction, Engineering........................................................................ 52 & infrastructure Travel, leisure & transportation.................................................... 56 Annual Edition 2011/12  |  3
  4. 4. IntroductionIntroduction Organizations operating in multiple » Corruption. Half of our respondents were geographies, legal environments and cultures moderately or very concerned about face a complex set of challenges and risks as corruption while the incidence of they develop their business. This fifth edition corruption doubled. of Kroll’s Global Fraud Report, prepared in » Preparedness. Despite the rise in cooperation with the Economist Intelligence corruption concerns, companies are still Unit, illustrates the speed at which the fraud unprepared for greater regulatory threat is evolving, and reinforces the direct enforcement. Less than 30% of financial benefit to those organizations who respondents believe their companies have actively manage their fraud risk. trained their managers, vendors and A positive finding in this years’ report is a foreign employees to be both familiar and drop in the overall prevalence of fraud - from compliant with the UK Bribery Act or US 88% of respondents having suffered an Foreign Corrupt Practices Act, and less incident in the last 12 months to 75%. than one quarter believe their pre- However, a number of specific fraud types are transactional due diligence identifies a growing more common: in particular, target’s compliance with the Acts. management conflict of interest, supply chain » Anti-Fraud measures pay. Our survey fraud, internal financial fraud and corruption suggests that any company can be the are of mounting concern. Companies must victim of fraud, but consistently and acrossAll businesses are confronted stay vigilant as today’s fraudsters are industries and geographies, the biggest increasingly sophisticated in the structuring victims of fraud invested the least in thewith the risk of fraud. of their crimes and the tactics deployed to unglamorous disciplines of training, audits,How they respond – the nature prevent detection. screening and due diligence.of their approach to prevention, There are some points of particular note that The Report presents the collective input ofdetection, investigation and emerge from this year’s survey; some of the world’s most talented anddisclosure – will separate » Awareness. Awareness and concern diligent anti-fraud practitioners. I hope it about fraud has risen markedly - even provides some useful insights and helps youthose who manage through as, or perhaps partly supporting, an identify emerging threats and opportunities overall decrease in the number of for your own business.the issues from those who suffer businesses suffering a fraud incidentsignificant loss. in the last 12 months. » Evolution. The good news is that the two biggest areas of fraud - theft of physical assets and theft of information both saw small declines this year, but fraudsters are evolving and other fraud areas, especially those linked most closely to the firms’ own employees and supply chain partners, have Tom Hartley Global Head gone up sharply. Business Intelligence & Investigations4  |  Kroll Global Fraud Report
  5. 5. Economist Intelligence Unit OverviewEconomist Intelligence UnitOverview Rising Fraud may not be obviously seen to be engaging inThis report, the fifth and biggest annual Economist Intelligence Unit theft of physical assets and information asGlobal Fraud Survey, commissioned by Kroll, polled more than 1,200 they may have been previously, but that doessenior executives worldwide from a broad range of industries and not mean they are giving up. Instead, other frauds are becoming much more common, infunctions in June and July 2011. As ever, it found fraud to be particular internal financial fraud, corruption,pervasive and protean, with progress made in some areas almost and vendor or procurement fraud.inevitably matched by increasing risks in others. The data this year As a result, instead of an environment where there are two leading risks and a number ofprovides four key insights about the current fraud environment. other smaller issues, companies now face a range of more widespread dangers. In particular,1. oncern is rising about every C Companies, however, are anything but relaxed: after the two most common frauds, the next type of fraud as businesses face instead, the level of concern has increased four—management conflict of interest, a more varied threat. sharply among respondents. For every fraud procurement fraud, internal financial fraud, and covered by the survey, the proportion ofOn the surface, the 2011 survey contains some corruption—hit roughly one in five companies respondents saying that their business isgood news. The number of companies affected last year, and financial mismanagement was highly or moderately vulnerable has risen,by the two most common types of fraud has close behind at one in six. This rapid shift in usually by between 10% and 15%. Even fordeclined. This year, 25% report experiencing the nature of the fraud threat explains the theft of information and physical assets, whichtheft of physical assets (down from 27% in the increase in a sense of vulnerability. Fraudsters declined from 2010, concern has grown.2010 survey) and 23% suffered from information have been deploying a range of tools to probetheft, loss, or attack (also down from 27%). More What can we make of this? It may take corporate defenses rather than just relying onbroadly, only 75% of companies were victims further years of survey data to demonstrate one or two, for the most part. Whether thisof a fraud in the last 12 months, a noticeable an absolutely clear trend, but this year’s shift continues, and how successfuldrop from last year’s figure of 88%, and one figures suggest the beginning of a broad companies will be in tackling it, will becomeof the lowest totals since the survey began. shift in the fraud environment. Fraudsters clear only in future surveys. Annual Edition 2011/12  |  5
  6. 6. Economist Intelligence Unit Overview As a result, concern about corruption has Chart I: Proportion of companies describing themselves as highly grown to the extent that it is one of the or moderately vulnerable to the following frauds biggest fraud issues for companies: 47% now describe themselves as at least moderately 2011 2010 vulnerable to corruption, more than for every Information theft 50% 38% fraud except information theft. More Corruption and bribery 47% 38% strikingly, 24% say that they are highly vulnerable to corruption, more than triple the Theft of physical assets 46% 34% level last year and the highest figure for any Management conflict of interest 44% 27% fraud in the survey. Vendor, supplier or procurement fraud 42% 26% This is having an impact on investment decisions. As was the case last year, this Regulatory or compliance breach 41% 30% year’s survey indicates that when fraud IP theft 40% 27% dissuades companies from doing business in a country or region, corruption is by far the Financial mismanagement 39% 30% biggest specific concern: of the 46% of Internal financial fraud 38% 27% companies that were dissuaded from operating Market collusion 31% N/A somewhere by one or more types of fraud, 62% cited the presence of corruption as one Money laundering 25% 19% of the leading issues in this decision. In the three regions that saw the largest number of respondents dissuaded from operating—Africa (15%), China (10%), and India (9%)—corruption Chart II: Percentage of companies affected by listed frauds was cited as a leading cause for the decision 2011 2010 69%, 59%, and 65% of the time respectively. Theft of physical assets 25% 27% Despite such high concern, however, companies seem ill-prepared to deal with the Information theft 23% 27% issue. One-quarter admit that they are not Management conflict of interest 21% 19% very well prepared or not at all prepared to comply with regulations in this field, and Vendor, supplier or procurement fraud 20% 15% only 27% say that they are well prepared. Internal financial fraud 19% 13% A deeper look at the data surrounding compliance with the FCPA and Bribery Act Corruption and bribery 19% 10% suggests that the problem is even bigger. Financial mismanagement 16% 13% Although these laws have an extraterritorial Regulatory or compliance breach 11% 12% effect that can even have implications for non-American and non-British companies IP theft 10% 10% if they have certain links to the United Market collusion 9% 7% Kingdom or the United States, it is possible that a foreign company’s activities do not fall Money laundering 4% 7% under the scope of either. This analysis therefore looks only at those respondents based in one of the two countries, as it2. ompanies are growing C increasingly vigorous, and extraterritorial, would be difficult to imagine scenarios where increasingly aware of their in their enforcement of the Foreign Corrupt their companies were not subject to the exposure to corruption but Practices Act (FCPA). Britain’s Bribery Act, provisions of at least one of these pieces of which entered into force this July and also legislation. Of those respondents, only 43% often still do not have structures applies extraterritorially, is in some ways have trained senior management, agents, in place to address it. even tougher than the American legislation. vendors, and foreign employees to beCorruption is a growing risk for companies It applies to bribes of individuals rather than compliant with one of these laws, and justworldwide. Its prevalence has shown the just government officials, imposes a corporate 39% have assessed the risks arising frombiggest increase of any of the frauds covered duty to prevent bribery, and forbids facilitation them. These figures are not that much higherin the survey, nearly doubling from 10% last payments. These are only the most prominent than the number of companies whichyear to 19% in the latest survey. This is examples of greater regulatory rigor. Other definitely have not done so. Often,occurring in an environment of ever greater countries, including China and India, have respondents simply do not know if theyregulatory scrutiny. The United States been toughening their legislation, although have—which suggests at the very least thatauthorities have for some years now been the effects on the ground remain to be seen. any efforts have not had a high profile.6  |  Kroll Global Fraud Report
  7. 7. Economist Intelligence Unit Overview a company is likely to have. For technology, Chart III: How companies are reacting to the UK Bribery Act and US FCPA media, and telecoms companies, proprietary (British and United States-based respondents only) data is the most common target (cited by 36% of respondents), while for financial We have trained our senior managers, agents, vendors and foreign employees to be both familiar and compliant with the UK Bribery Act and/or US FCPA legislation. (1) services it is customer information (29%). Agree 43.4% Overall the ongoing investment in Disagree 31.3% Don’t know/Not applicable 25.3% information security may have yielded some positive results this year, but this is a battle We have made a thorough assessment of risks to our organization arising from the UK Bribery Act and/or US FCPA and their enforcement, and set in place a monitoring and reporting system to assess risks on an ongoing basis. (2) far from won. Agree 38.9% Disagree 31.9% 4. Those hit hardest by fraud Don’t know/Not applicable 29.2% often have no one but We have set in place adequate procedures to prevent bribery at all levels of our operations. (3) themselves to blame. Agree 53.8% Disagree 24.3% This year’s fraud survey calculates the Don’t know/Not applicable 21.9% economic cost of fraud in a new, more direct Our internal compliance regime has become more global because of the extraterritorial reach way by asking respondents what proportion of the UK Bribery Act and/or US FCPA. (4) Agree 34.4% of revenue their company has lost in the last Disagree 31.9% year. Most companies lost something, and for Don’t know/Not applicable 33.7% the survey as a whole, fraud cost companies When entering into a joint venture, making an acquisition or providing financing, our due diligence provides us with 2.1% of earnings in the last 12 months— sufficient understanding of the target’s compliance with UK Bribery Act and/or US FCPA requirements. (5) looked at in a different way, this equates to Agree 36.6% Disagree 24.7% a whole week’s revenue over the course of Don’t know/Not applicable 38.7% a year—which varies only modestly by geography or company size. Looking just at the overall average, however,Nor have due diligence processes caught up One-half of respondents consider themselves hides a group of 18% of companies that lostwith the problem. Only 37% of respondents moderately or very vulnerable to this fraud,say that their companies provide a sufficient up from 38% in 2010. IT complexity is the more than 4% of revenues to fraud. Fifty-understanding of a potential partner’s or leading cause of increasing fraud exposure three businesses, or just under a quarterinvestment target’s compliance with these in the survey, cited by 32% of respondents, of this group, were particularly badly hit,acts. Errors here can get expensive. In 2007, up from 28% last year. It is therefore no losing more than 10% of their revenue toeLandia, a networking technology company, surprise that IT security is the most fraud. Analyzing these firms—here calledbought Latin Node, a wholesale provider of widespread anti-fraud investment planned the “most affected”—reveals certainInternet telephony. Upon discovering for the coming year (30%). common characteristics.evidence of corrupt payments at its new Part of the reason for this concern may be The first lesson is that anyone can be hurt.subsidiary, eLandia did everything right that, typically, information theft tends to Geography and industry are certainly factors,(informing authorities, firing implicated be more expensive than the other most but not dominant ones: African and Middleexecutives, terminating contracts obtained widespread fraud, physical theft. When Eastern companies are slightly over-illegally), but the costs of all these actions looking at companies that suffered only represented (19% are among the most-mounted up and took a toll on the information or physical theft—in order to affected, higher than their weight in thesubsidiary’s operations. Within a year, assess the impact of each—we can see that survey overall of 15%); and the group hadeLandia decided that the best option was to those hit by information theft lost morewind up Latin Node completely, losing its a greater proportion of financial services money. On average, victims of physical theftentire $22m investment in the process. firms (28%) than would be expected from and no other crime lost 1.5% of earnings their prevalence in the overall survey (17%).It is good that companies are aware of the to fraud, while those hit by informationproblem corruption represents. They now theft lost 1.9%, suggesting that the latter is The bigger differences are in how theseneed to do something about it. substantially more expensive. companies deal with the risk of fraud. Moreover, the nature of the information being To begin with, their defenses are weaker.3. he battle against information T sought by fraudsters is also widespread, As the chart shows, they are much less likely theft remains a leading focus requiring potentially different defenses for to have invested in any of the anti-fraud for companies. distinct types of data. As the chart shows, measures covered in the survey.The prevalence of information theft declined proprietary data is the most frequent target,in the last year, from 27% to 23%, but that but customer and employee data are also These poorer defenses leave the mostdoes not mean that companies are confident common goals. The prevalence of these affected much more open to fraudsters, andthat they have the problem under control. targets obviously varies between industries respondents are aware of this fact. A higherInstead, their concerns have increased. depending on the value of the information proportion of those surveyed from these Annual Edition 2011/12  |  7
  8. 8. Economist Intelligence Unit Overview companies reports being highly vulnerable to Chart IV: f your company has suffered information loss, theft or attack, I every fraud in the survey, with the what kind of information was targeted differences particularly large for corruption, money laundering, and regulatory breach. Personally identifying information – customers 16.7% Similarly, these companies are less likely Personally identifying information – employees 11.9% to say that they are well or reasonably well Personal health information 2.8% prepared to cope with compliance requirements relating to corruption, data, Proprietary data, including intellectual property 20.6% anti-trust rules or financial regulation, or Other 6.5% to have set effective anti-bribery safeguards Don’t know 8.3% in place throughout the company. We haven’t suffered from this kind of fraud 47.4% They may know that they have a problem, but that is not enough to galvanize these companies into action. They differ little from the survey average in terms of their intention Chart V: In which of the following anti-fraud measures does your company currently invest to invest further in anti-fraud measures. Moreover, even existing anti-fraud controls Survey Over 10% of revenue Average lost to fraud are too often not being well-maintained. Among the most affected, the leading Financial (financial controls, fraud detection, internal 72% 60% contributor to increased fraud exposure, cited audit, external audit, anti-money laundering policies) by 36% of respondents, is weakening of Information (IT security, technical countermeasures) 66% 42% internal controls. In the survey as a whole, Assets (physical security systems, stock 62% 40% only 22% reported this problem, as did just inventories, tagging, asset register) 8% of those who suffered no financial loss. Management (management controls, incentives, 52% 38% Such controls, however, are essential for external supervision such as audit committee) lowering the incidence of fraud. Last year, Employee background screening 47% 36% the survey found that more often than not fraud is an inside job. This year, if anything, Staff (training, whistleblower hotline) 44% 21% this is even more the case: for those Partners, clients and vendors (due diligence) 43% 30% companies that have experienced fraud and where the culprit is known, 28% report that Reputation (media monitoring, compliance 41% 21% controls, legal review) the fraudster was a junior employee and a further 21% say it was a senior employee Risk (risk officer and risk management system) 42% 26% (both figures were 22% last year). For a IP (intellectual property risk assessment and 34% 19% further 11%, the crime was committed by an trademark monitoring program) agent or intermediary, meaning that overall 60% of fraud this year was carried out by someone who worked for the company one way or another—up from 55% last year. Chart VI: Proportion describing themselves as highly vulnerable to the following frauds Not only do companies clearly need strong Survey Over 10% of revenue controls, those controls need to be properly Average lost to fraud implemented throughout the organization. Corruption and bribery 24% 51% Even though junior employees are most often the culprits, they are not the most expensive Theft of physical assets 13% 24% fraudsters. For the most affected, senior Management conflict of interest 13% 24% executives are to blame in 29% of cases and Vendor, supplier or procurement fraud 13% 19% junior ones in only 8%, while for those losing less than 1% to fraud, the figures are 20% and IP theft 13% 17% 35%. The more senior the potential fraudsters, Information theft 13% 17% the more rigorous a company’s controls need to be in order to prevent their schemes. Regulatory or compliance breach 11% 30% Financial mismanagement 10% 27% It is hardly surprising that those who do less to protect themselves from fraud are Market collusion 9% 24% more likely to suffer the consequences, Internal financial fraud 9% 15% but the number of companies losing a substantial portion of revenue suggests that Money laundering 8% 30% it is a point worth restating.8  |  Kroll Global Fraud Report
  9. 9. Fraud at a Glance occasions corporate advisors such as us are inclined to fan the flames. The result, not surprisingly, is fraud fatigue. There needs to be a balance and some simple principles are worth keeping in mind in order to achieve it. The risk of fraud is real. The financial crisis did not make it worse; it simply made it more apparent and, perhaps, made the consequences more serious. Most of the frauds took place during the good times, when our guards were lowered. Fraud prevention is important and needs to be proportionate and relevant to fraud vulnerability. As that vulnerability evolves Fraud along with how business is conducted – from paper ledgers to computer files, from cash-in-transit to electronic fund transfer, from physical assets to intellectual property – so must prevention techniques develop. Fatigue Spotting the financial crime trends helps to anticipate where efforts need to be focused. Compliance systems and controls are a key part of the defense against fraud, but compliance should not become an end in itself, perhaps not even a means to an end. We should aspire to be compliant not because the compliance how we got here to learn some useful By Tommy Helsby departments tells us to but because that is lessons. As Warren Buffett said, “You only the best way to run our businesses. learn who has been swimming naked when Separation of duties in the accountsOur annual survey in this edition the tide goes out.” When times are good and department picks up errors far more often profits are high, a fraud might be treated asof our Fraud Report shows a than it does the occasional fraud. Contracts an “accounting correction”; but when thingssmall decline in fraud. Have we are tough, that correction may result in a won through open competition are more valuable than ones awarded thanks to bribes.turned the corner? Is fraud breach of banking covenants. When Background checks on vendors and agents businesses fail, there is a natural desire tobeginning to decline? Are fraud hold someone responsible, even to accuse will help weed out the incompetent and the inappropriate as well as the Minister’s brother-prevention measures finally that person of fraud – often with some in-law. The central mission of compliance justification, although the suspect willstarting to make inroads into probably claim desperately that it was just needs to be maintaining and developing acorporate crime? well-founded and enduring business. “market practice.” Certain “market practice” may now be recognized as, at best, improper It is simple to say but may not be so easy toThe answer is probably “no.” The survey is and, sometimes, illegal; and politicians are put into effect, particularly in an environmentan effective barometer of senior executives’ finding that what used to be “unnecessary where transgressions are being treated moreawareness of fraud as a corporate risk. It red tape” has become “essential tightening of harshly. If we don’t get it right, though, thereshows the trends in different regions and in the regulations.” Regulators are encouraged is a real possibility that the pendulum willvarious areas of fraud vulnerability. The – and empowered – to take no prisoners and, swing back to the laissez-faire past ofnumbers probably say more about what in response, the corporate compliance rule-bending and blind eyes, of regulatorybusiness people are thinking than about the department is transformed from a backwater capture and arbitrage, and the cycle willreal size of the problem. The financial crisis to a core component of business strategy. start again.of 2008-9 put a focus on fraud that pushed it Of course, I have over-simplified, but I thinkvery high on the corporate agenda for the most people would recognize the outline ofpast two years. There are, though, plenty of Tommy Helsby is Chairman of Kroll the story and many would agree that thepressing matters competing for executive Eurasia based in London. Since joining result was a good thing, long over-due. You Kroll in 1981, Tommy has helped foundattention and therefore a danger that fraud can, however, have too much of a good thing: and develop the firm’s core duerisk – generally an uncomfortable subject diligence business, and managed many no one wants regulators turning intoand an unquantifiable exposure – is of the corporate contest projects for vigilantes, the compliance police patrolling which Kroll became well known in thebecoming neglected. Bluntly put, people may company corridors, and executives seeking 1980s. Tommy plays a strategic role both for the firm andbe getting bored with fraud. for many of its major clients in complex transactions and legal advice on whether to choose a latte or a disputes. He has a particular interest in emergingBefore the pendulum swings back too far in cappuccino at Starbucks. And of course, the markets, especially Russia and India.the wrong direction, it’s worth reviewing press, conference organizers, and even on Annual Edition 2011/12  |  9
  10. 10. Fraud at a GlanceA Geographical Snapshot Management Information conflict of theft 18% interest 19% Information Information theft  22% We compared the results of the theft 26% Global Fraud Survey findings with Prevalence Prevalence 71% 70% Transparency International’s Prevalence 66% Corruption Perceptions Index (CPI). Physical theft  16% Vendor/supplier fraud 14% Management Physical The CPI measures the perceived conflict 15% theft 23% Kroll findings Canada Internal financial Kroll findings 23% levels of public sector corruption as North America Canada performed very well in the fraud 16% Physical theft North America has the lowest last year relative to other regions. Kroll findings seen by business people and country average fraud loss for any region, It had the lowest loss rate than any EUROPE as well as the lowest regional other region and saw a drop in Even though the overall prevalence analysts; ranging between 10 incidence for many of the frauds 9 of the 11 frauds covered by the of fraud has decreased in Europe, covered in the survey with the survey. More than half of the the incidence of nine of the 11 (very clean) and 0 (highly corrupt). exception of information theft and Canadian respondents said they frauds has increased in this region. IP theft. Even though information have avoided operating in - or have Only 23% of European companies The comparison clearly demonstrates theft decreased slightly in the past left - a region because of fraud. said that they had suffered no 12 months, it remains the most Increased comfort levels in this financial losses from fraud, down that fraud and corruption frequently common fraud in the region. relatively benign fraud environment significantly from 47% last year. Respondents reported investment have led to companies being less Companies in Europe feel most go hand in hand. in a broad array of anti-fraud likely than average to invest in vulnerable to information theft, measures, including IT security, IP anti-fraud strategies. loss or attack. Despite these controls, financial controls, and risk growing concerns, the region is management. less likely than average to adopt most anti-fraud strategies. The panels on the map summarize: K he percentage of respondents per region t Corruption Management or country suffering at least one fraud in the bribery 37% conflict of interest 21% last 12 months Information K he areas and drivers of most frequent loss t theft 27% Prevalence 69% Transparency International Vendor/supplier Corruption Perceptions Index 2009 fraud 21% Very Clean 9.0 - 10.0 Internal financial 31% Management fraud 23% Internal financial Physical theft conflict of 8.0 - 8.9 Kroll findings fraud 18% interest 21% Mexico 7.0 - 7.9 Mexico has a widespread fraud Information problem. Companies posted above theft 24% 6.0 - 6.9 average incidences for eight of the 11 frauds with the biggest problem 5.0 - 5.9 being corruption and bribery. Prevalence 74% Theft of physical assets is well 4.0 - 4.9 above average and information 3.0 - 3.9 theft, compounded by growing IT Vendor/supplier complexity, is also a significant fraud 23% 2.0 -2.9 risk. Even though they are aware of these dangers, Mexican Corruption 1.0 - 1.9 companies are either less likely or bribery 23% 25% only about as likely as average to Kroll findings Physical theft 0.0 - 0.9 invest in every anti-fraud strategy Latin America covered in the survey. The Latin American fraud picture is Highly Corrupt No data one of transition. Although the overall number of companies suffering at least one fraud declined, there has been a striking increase in companies reporting they are at risk. Companies describing themselves as at least moderately vulnerable to theft of physical assets or vendor fraud spiked 29% while others also saw notable increases. Companies in this region are investing in a range of fraud prevention strategies, including IT security, physical asset security, and financial controls.Map image by permission Transparency International.All analysis Kroll/Economist Intelligence Unit.10  |  Kroll Global Fraud Report
  11. 11. Fraud at a Glance Management conflict of interest 23% Financial mismanagement 22% Physical theft 20% Information theft 28% Prevalence 84% Vendor/supplier Internal fraud 33% financial fraud 20% Kroll findings China Eighty four percent of respondents in China fell victim to fraud in the past year, the second highest figure Internal financial after Africa. China had the highest fraud 19% prevalence figures for vendor, Information supplier, or procurement fraud and theft 26% information theft, loss, or attack among any country surveyed. The Management biggest driver of increased conflict of exposure in China is high staff interest 23% Prevalence turnover. While companies are 68% responding with above average investment in staff-related fraud prevention, these measures are not enough when China experiences a Vendor/supplier high level of fraud perpetrated by fraud 25% Corruption senior management. bribery 21% Kroll findings middle east Financial While the number of companies mismanagement 22% that have suffered from fraud has fallen, we are seeing substantial growth of several specific types of Information theft fraud this year such as bribery 27% corruption and supply chain fraud Physical Management conflict of theft 23% interest 31% compared to last year. Despite such worries, companies are Corruption bribery undermining their own anti-fraud 31% Information theft efforts: one-third of respondents 28% in the Middle East said that Physical Prevalence theft 33% weaker internal controls are increasing their exposure to fraud. 84% Corruption bribery 28% Vendor/supplier Prevalence Financial Internal fraud 22% 76% mismanagement 32% financial Kroll findings fraud 23% INDIAPhysical theft India has a higher prevalence than38% Management conflict of the overall average for 8 of the 11 Vendor/supplier Internal interest 27% frauds in the survey. Corruption fraud 33% financialCorruption and information theft, loss, or Kroll findings fraud 24% bribery attack, are key challenges for Southeast asia37% companies in India: 78% of Respondents from the area respondents indicated that their reported the highest rates of organization is highly or moderately vendor, supplier, or procurement Prevalence 85% vulnerable to corruption bribery. fraud and management conflict of Fewer than 50% invest in anti-fraud interest and face above average measures such as employee levels of corruption and bribery. background screening, partner or Corruption is a top concern forVendor/supplier third party due diligence, and risk companies in Southeast Asia this Internal management systems, even thoughfraud 31% year, with 70% indicating that their financial 59% of those that suffered fromKroll findings fraud 33% organization is highly or moderatelyAFRICA fraud said it was an inside job. vulnerable to this threat. DespiteAfrica reported the highest this recognition, 52% said thatincidence of fraud among any weaker internal controls haveregion, with 85% of respondents increased their organizations’falling victim to fraud in the past exposure to fraud– the highestyear. Corruption is a major level for any region.problem, with 78% of companiesin Africa indicating a high ormoderate vulnerability to bribery corruption. Africa remains theregion where the experience orperception of fraud has dissuadedmost companies from operating.While companies in Africa widelyadopt anti-fraud strategies,weaker internal controls will makethem less effective. Annual Edition 2011/12  |  11
  12. 12. The Regulatory FrameworkFCPA Reform Help Could be Coming to Those Who Help Themselves By Jeffrey CramerOn November 30, 2010 the United States Senate Judiciary Given the aggressive enforcement of the FCPA in recent years and the very smallCommittee’s Subcommittee on Crime and Drugs held a hearing to number of court cases which havediscuss potential changes to the Foreign Corrupt Practices Act clarified it, at least five potential areas are ripe for change: clarification of what(FCPA). Those testifying on behalf of reform argued that the FCPA, constitutes a “facilitating” payment;which has not been altered in 10 years, needs to be amended establishment of an affirmative defenseto allow for greater fairness in its application by the Department based upon a company’s compliance program; a better definition of “foreignof Justice (DOJ). Such sentiments were echoed on June 14, 2011 official”; limitations on successor liability;when the House of Representatives Judiciary Committee’s and a change in what a company has toSubcommittee on Crime, Terrorism, and Homeland Security also know in order for it to be liable. These potential changes could each giveexamined the issue. By the time the gavel dropped on both businesses a better chance of avoidinghearings, it was clear that Congress intended to enact FCPA reforms. FCPA problems with federal prosecutors.12  |  Kroll Global Fraud Report
  13. 13. The Regulatory FrameworkClarification of“Facilitating” PaymentCompanies have justifiably been confused asto what constitutes a permissible facilitatingpayment under the FCPA. Whether somethingis a bribe, gift, or facilitating payment issubject to interpretation, often of theprosecutor assigned to the investigation.The law abhors such vagueness. Rep. JamesSensenbrenner (R-WI), the House’sSubcommittee’s Chairman stated that“everybody has a right to know what’sillegal, and there has to be much morecertainty in the law.” The DOJ does giveexamples on its website of what constitutesa bribe as opposed to a facilitating payment,but these do not provide the necessary levelof confidence as to what is proper. Statutorychanges could deliver the clarity companiesrequire to conduct their business overseaswith assurance. language makes it difficult for businesses to person who violated the FCPA was an employee determine if they are risking a violation of at the time of the crime. It makes sense for theAffirmative Defense for the law when they do transactions with individual mens rea requirement to be thea Compliance Program partially government-owned entities. same as that which would expose a companyThis reform could have the most impact as it Trying to establish what constitutes an to liability. Without this change, businesseswould afford companies a statutory “instrumentality” is nearly impossible in will continue to be subject to prosecutionopportunity to help themselves before they some parts of the world where governments even if they were unaware of the violation byget into potential trouble. Similar to the own a portion of many firms. Changes to the an employee until after the fact. This potential“adequate procedures” defense in the UK FCPA may provide clearer direction to reform is crucial when analyzing corruptBribery Act, the reform might afford a business in the form of examining the payments to foreign officials which are routedcompany potential defenses if it showed that percentage a foreign government owns through agents or other third parties. Thereit had procedures in place to prevent and of a subject firm or similar test. may be a carve-out for higher leveldetect unlawful conduct. An employee acting executives whose actions, it can be argued,independently might not subject the are more closely tied to the company’s fate. Limitation of Successor Liabilitycompany to criminal liability if he or she After the June 2011 hearing, Rep. Sensenbrennercircumvented the existing and reasonable The FCPA could be amended to eliminate informed those present that the Subcommitteecompliance program. Such a reform would or limit the liability of an acquiring company would start drafting legislation and told thelikely result in companies taking a more if a pre-purchase FCPA violation by the DOJ representative that the Departmentaggressive approach to compliance in order acquired company surfaces. Such a benefit should “get the message.” Companies lookingto ensure they have a sufficient program and might be derived only if the acquiring firm to limit their FCPA exposure should take heeddue diligence procedures in place. Congress discloses and remedies the conduct by an as well. Regardless of which reforms pass,could make the existence of adequate investigation of the acquired company, making companies that are subject to regulationarrangements a complete defense to a robust due diligence and internal audit all under the FCPA should take affirmative stepsprosecution, or it could merely codify benefits the more attractive for the acquiring business. to protect themselves. These steps shouldsuch as lesser penalties in order to encourage include appropriate levels of due diligence,companies to investigate violations on their training and monitoring. This will put Limitation of Liabilityown and self-report to the DOJ or the companies in a position to help themselves. to Willful ViolationsSecurities and Exchange Commission. For all but some minor criminal offenses, mens rea – Latin for guilty mind – is basic to Jeffrey Cramer is a managing directorClearer Definition of and head of Kroll’s Chicago office. Since establishing the guilt of a defendant in“Foreign Official” joining Kroll, he has worked with committing a crime. The FCPA requires that companies to draft their complianceIf there is one term in the FCPA that confuses individuals accused of violating the Act do so plans and lead due diligence investigations into foreign intermediariesmore than “facilitating payment,” it is “foreign “willfully.” Companies, however, could be throughout the world. He wasofficial.” Under the Act, “foreign official” is held criminally liable if they were merely previously a prosecutor in New York and Chicago and hasdefined to include any officer or employee of aware of the relevant criminal acts but failed investigated several FCPA cases during his 13 years in law enforcement. Most recently he was a Senior Litigationa foreign government or any to remedy them. Strict liability in this context Counsel for the Department of Justice in Chicago.“instrumentality” thereof. The current could result in problems for a company if the Annual Edition 2011/12  |  13
  14. 14. The Regulatory Framework Investing in the BRICs Extra due diligence is vital By David Holley and Doug Frantz The high level of concern uncovered in the survey may overestimate the true degree of compliance because companies often believeThe fertile and fast-growing economies of the BRIC (Brazil, Russia, India, and they are doing better in following the lawChina) countries are calling to international corporations, investment banks, than they are actually are. Even if we acceptand investors like the Sirens sang to Jason and his shipmates in Argonautica. these self-reported estimates, however, there is cause for alarm over the exposure of manyThe haste to take advantage of these burgeoning markets can lead to corporations to the criminal sanctions andrushed decisions, shortcuts in diligence, and potentially unmeasured costs imposed by the FCPA and UKBA,business decisions. Whether a company is entering a new market, particularly in this era of aggressive enforcement by the Department of Justicecontemplating a joint venture with an overseas partner, investing in a (DOJ) and Britain’s Serious Fraud Office (SFO),foreign business, or acquiring an overseas company, an appropriate level of respectively. The question then becomesdue diligence on the foreign entity, its agents, business partners, and what steps should be taken by a corporation determined to follow the spirit and letter ofintermediaries is required to avoid problems associated with current anti- the law. Managing the anti-bribery risksbribery legislation. However, the results of the 2011 Global Fraud Survey through heightened due diligence should be a paramount focus when expanding into theindicate that fewer than one in four respondents believe that their due BRIC markets and other emerging economies.diligence is sufficient to fully understand whether the acquisition target There is little guidance in either law as tocomplies with either the United Kingdom Bribery Act (UKBA) or the United what constitutes sufficient due diligence. TheStates Foreign Corrupt Practices Act (FCPA). In addition, nearly one out of two FCPA makes no mention of the term. The DOJrespondents consider their companies to be moderately to highly vulnerable in “Opinion Procedure Release 08-01” has defined a “reasonable” due diligence file asto corruption, which is among the leading reasons why companies avoid containing the following: an independentinvesting in new regions or countries. investigative report by a reputable14  |  Kroll Global Fraud Report

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