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    Pwc 2003gecs Pwc 2003gecs Document Transcript

    • economic crime survey 2003
    • economic crime survey 2003 contents introduction 2 executive summary 3 economic crime: a growing global threat 4 industries at risk 6 types of economic crime 7 the financial cost of fraud 9 the collateral cost of fraud 10 detecting economic crime 12 managing economic crime 13 recovering stolen assets 14 preventing economic crime 15 economic crime risks of the future 16 survey demographics 18 terminology 19 contact details 20
    • 2 introduction
    • 3 executive summary • Economic Crime remains a significant • Average loss per company: • Three quarters of victims of crime threat: 37% of respondents report US$2,252,889 recovered less than 20% of their significant economic crimes during losses; only half of respondents had the previous two years. • The impact on reputation, brand image, insurance against economic crime, and staff morale can be more important but they recovered more of their losses. • The bigger you are, the harder you than the direct financial loss. fall: companies with more employees • The biggest concerns for the future are more likely to have suffered from • Two-thirds of respondents stressed are asset misappropriation – the most economic crime. the company’s Board had ultimate visible of economic crimes – and responsibility for preventing or cybercrime. • No industry is safe: over 30% of managing economic crime – but only respondents in each of the industries just over a quarter had given their interviewed suffered fraud. boards any risk management training. • Asset misappropriation is the most • Tangible risk management measures widely reported crime. It is also the reap clear results: those that had easiest crime to detect, with 59% of suffered fraud took practical anti-fraud all victims citing this as one of the measures, from employee screening frauds that they had suffered. to active awareness raising; those that had not, relied on passive measures such as a company code of ethics.
    • 4 economic crime: a growing global threat Economic crime remains a significant This figure is significantly higher than in Figure 2: Victims of fraud (by region) threat to companies across all industries our previous European research in 2001. and territories. Well over a third of The number of organisations reporting respondent companies worldwide fraud in Western Europe has grown W Europe 34 (37%) said they had suffered from one from 29% to 34%, and in Central and C&E Europe 37 or more serious frauds during the Eastern Europe from 26% to 37%. This South & Central 39 previous two years. increase appears to reflect two factors: America N America 46 Figure 1: Victims of fraud (worldwide) • greater awareness of fraud leading Asia & Pacific 39 to heightened detection rate; and Africa 51 0 10 20 30 40 50 60 • a growing desire for transparency, particularly in EU ‘accession countries’. Yes The highest levels of economic crime were reported by respondents in Africa (51%) and North America (46%). In contrast, respondents in Russia and Turkey reported no economic crime at all. There is clearly some way to go in both these countries to either improve detection or to promote greater transparency.
    • 5 The bigger they are… Figure 3: Victims of fraud by organisation size (worldwide) Our findings suggest a direct relationship between company size and Number of employees the likelihood of economic crime. Only Less than 35 35% of smaller companies (less than 1000 65 1,000 employees in territory) reported economic crime, compared to 49% in More than 49 1000 51 larger companies (over 1,000 employees in territory). 0 20 40 60 80 Yes No Possible reasons for this higher incidence among larger companies Larger companies also generally invest include their greater devolution of more in fraud risk management systems. operational responsibility, tendency This will increase detection rates for to pursue opportunities in unfamiliar most economic crimes. markets, higher transactional complexity, and greater opportunities for collusion amongst employees. Staff in larger corporations may also be less concerned about the financial well being of their employer, regarding fraud as a “victimless crime”.
    • 6 industries at risk While all commercial activity is of physical assets held, and access to acutely aware of the threat from vulnerable to economic crime, its financial transactions, many of which economic crime. So the higher reported incidence varies between industries. may be complex. levels of fraud in these sectors partly reflect higher sensitivity to – and The results of the Global Survey It is also noteworthy that other highly detection of – economic crime. reinforce our findings from the 2001 regulated industries, such as telecoms, European Survey. Financial services appear at the top of this league table. The lower end of the chart contains (banking, insurance) have reported more Due to their regulation, these less regulated industries such as incidences of economic crime than companies have usually developed manufacturing and construction. other industries. The financial services more sophisticated control and Whilst these industries are prone to industry is an obvious target for any compliance systems. The financial economic crimes ranging from asset fraudster, given the significant quantities services sector in particular is more misappropriation to product piracy, they may often have less sophisticated Figure 4: Victims of fraud by industry (worldwide) control and detection mechanisms, or may accept losses through fraud as inevitable. Banking 53 Insurance 49 Telecom & Media 49 IT & IT services 46 Services 45 Retail & Consumer 44 Energy & Utilities 43 Pharma & Biotech 40 Other financial services 39 Automotive & Aerospace 35 Manufacturing & Industrial products 34 Construction 31 0 10 20 30 40 50 60 % respondents by industry
    • 7 types of economic crime By far the most commonly reported Perception and reality very similar. This is likely to be due to fraud is asset misappropriation, with their greater visibility: lost assets can 59% of those reporting economic Further insights can be gained by be counted, counterfeit products seen crimes claiming this was among them. comparing the perceived prevalence in the market. This type of fraud is generally the of each type of economic crime with easiest to detect, as it involves the theft its actual incidence. However, with both financial of tangible items with a defined value. misrepresentation and corruption This may help to explain why it is the With asset misappropriation, product & bribery, the perceived prevalence most commonly reported. piracy and cybercrime, the perceived is much higher than the reported prevalence and actual incidence are incidences. Figure 5: Types of fraud experienced (worldwide) Figure 6: Frauds considered most prevalent compared with their actual incidence (worldwide) Asset 59 24 Misappropriation Asset Misappropriation 24 Financial 10 17 Misrepresentation Financial Misrepresentation 4 Corruption & 14 31 Bribery Corruption & Bribery 6 Money 6 3 Money Laundering Laundering 1 Cybercrime 15 6 Cybercrime 6 Industrial 2 7 Industrial Espionage Espionage 3 Product Piracy 19.5 20 8 Product Piracy 8 0 20 40 60 80 % respondents 0 5 10 15 20 25 30 35 % respondents Perceived prevalence Actual incidence
    • 8 With financial misrepresentation, this Given the serious implications of It is inevitable that the overall figure for gap appears to reflect two factors: financial misrepresentation, it should be Money Laundering incidence will be low. worrying that one in 10 organisations In order to get a realistic impression of • higher awareness following the reported incidences (figure 5). the level or impact of money laundering, corporate scandals in North America it should be assessed according to its and Europe; and The high perceived prevalence of incidence within the financial services corruption & bribery reflects the hard sector. One in six banks reported having • an understanding that it is likely to work of governments, regulators, and uncovered money laundering during the have an especially dramatic impact certain NGO’s to raise public awareness; previous two years. 220 financial on a business. an important factor in helping to reduce services organisations worldwide said actual incidence. they had reported suspicious transactions Figure 7: Types of corruption & bribery during the two years, with 20% reporting (worldwide) 199 respondents reported suffering more than 10 suspicious transactions. corruption & bribery (worldwide). 45% This almost certainly reflects the well % were solicited with or received a bribe, publicised and ongoing efforts to raise 50 and 41% of those more than 4 times! awareness of money laundering and 45% 43% 43% were required to offer or pay a stop movements of illegally obtained 40 bribe – 52% of those more than 4 times! funds by convincing countries to adopt The remaining 12% refused to comment. internationally accepted anti-money 30 laundering regulations, as well as The incidence of corruption & bribery has regularly monitoring their performance. 20 a regional bias towards the developing markets of Africa, South and Central 10 41% 52% America, and Asia Pacific. In these regions such acts are often viewed as an 0 Solicited/ Offered/ acceptable element of doing business. received a bribe paid a bribe Increasing pressure from developed No of respondents affected by corruption & bribery economies is forcing many countries More than 4 times to promote increased awareness of corruption & bribery, and many companies operating in those markets to carefully review their procedures.
    • 9 the financial cost of fraud We spoke to over 1250 companies that cybercrime can be especially hard to Among the remaining two thirds reported losses due to economic crime in quantify. Even with a more quantifiable (793 companies), we estimate the the last 2 years. 793 of these companies crime such as asset misappropriation, average loss from fraud was were able to quantify their loss. 21% of victims could not put a figure US$2,252,889. on their losses. Even when companies know that they have suffered economic crime, they Figure 9: Average financial loss by type of fraud over last two years (worldwide) find it difficult to quantify the financial impact on their business. A third of Asset misappropriation victims cannot even guess how much 3% of larger companies and 2% Product Piracy & Counterfeiting of smaller ones admitted to losing it cost them. It is clear that the financial 5% of larger organisations and 3% more than US$10 million. of smaller ones estimated their cost of less tangible economic crimes, losses at over US$10 million. US$1,390,038 such as bribery & corruption and US$3,757,218 Figure 8: Financial loss through fraud (worldwide) US$4,025,060 Corruption & Bribery One in twenty respondents estimated that they had paid Difficult to put 33 out more than US$10 million a value on in bribes. US$4,247,504 More than 10m 3 US$912,337 Industrial Espionage Cybercrime Of the small number who Over two thirds of cybercrime 1m to 10m suffered this crime, almost 10 victims could not quantify the three quarters were unable to direct monetary costs. put a figure on their losses. 250k to 1m 12 50k to 250k 17 The average loss per company from fraud – US $2,252,889 10k to 50k 12 up to 10k 13 0 10 20 30 40 50 % respondents
    • 10 the collateral cost of fraud The damage inflicted by economic crime Incidence of economic crime in an on external business relationships. goes far beyond direct monetary loss. organisation invariably raises questions It is noteworthy that both asset Intangible assets including business in employee’s minds about its leadership misappropriation and cybercrime are relationships, staff morale, reputation and and governance, its ethics, or as a secure perceived to inflict less damage in this branding are critical to any business. These environment to work. Repeated exposure area than the other forms of economic can all be undermined by the occurrence to such issues can undermine years of crime. It may be that organisations or even the perception of fraud. carefully built up staff loyalty. accept exposure to these types of crimes as part of the everyday risks The reported impact varies depending The second most common concern is of doing business, whereas financial on the nature of the crime committed. the effect of economic crime incidence misrepresentation, corruption and Figure 10: The collateral cost of fraud (worldwide) Asset Misappropriation Reputation 50% Brand image Share price 40 Staff moral Product Piracy Financial Misrepresentation Business relations 30 20 10 Industrial Espionage 0 Corruption & Bribery (solicited/received) Cybercrime Corruption & Bribery (offered/paid) Money Laundering
    • 11 bribery may be indicative of wider Overall, a failure to tackle – or at believed the impact to be short-term company issues. least manage the risk of – economic (less than one year). This should not crime effectively can store up long-term disguise the fact that approximately one Business relationships and brand image operational problems for any enterprise. third of respondents reported long-term also suffer significantly where product The safeguarding of valuable intangible effects of economic crime on their piracy is at play. As a crime extremely assets such as brand, client relations, and business, and in the case of share price prevalent in Africa and Asia Pacific, staff morale should be a key objective. 44%. A sure sign that collateral damage companies operating in those markets should be considered on a par with need to be aware of the major impact Asked to consider whether the collateral monetary loss when determining product piracy can have on product damage had a short or long-term impact economic crime risks. and brand licensing deals by diluting on their business, most respondents the underlying asset value and creating mistrust among business partners. Figure 11: Was the impact of economic crime short or long term? (worldwide) The relationship between economic crime and share performance is a 35 Reputation complex issue. A relatively small 70 number of victims felt that fraud had Brand image 38 affected their share price – even where 66 financial misrepresentation has Share price 44 potentially called previously disclosed 58 information into question. However, the Staff morale 31 75 proportion of respondents who reported an impact on share price as a result of Business relationship 32 73 economic crime has doubled since our 2001 research, perhaps indicating that 0 10 20 30 40 50 60 70 80 % respondents the financial markets no longer view Long term Short term economic crimes as a historical offence with limited future relevance.
    • 12 detecting economic crime Fraudsters invariably take great pains The results vary considerably depending Clearly, reliance on luck is not a basis to conceal or remove evidence of their on the size of the organisation for an anti-fraud regime. However, crimes. As companies can only report concerned. Within larger organisations even where companies have control crimes that have been detected, it is a combination of factors are likely to be systems to detect economic crime, not possible to judge how much fraud involved in the detection of an incident. these can often be rendered ineffective goes unnoticed. What we can analyse Large companies most often detected by management override or collusion. is the means by which fraud is brought fraud through their control and risk Companies need to do more in terms of: to light. management systems. However, in many cases this was accompanied by • Assessing the real risks and Figure 12: How economic crime is detected a finding from the internal or external vulnerabilities to fraud within the (worldwide) audit function or from a tip-off. organisation Smaller organisations detected a far • Communicating actively the company’s By a tip-off 28 greater proportion of economic crime stance on fraud and “walking the talk” By changes in management 10 through audit processes than by other By internal or means. Given the respective size of the • Proactively monitoring risky areas 52 external audit organisations this is most likely to be Risk management 28 via the external auditors – a worrying • Developing policies to encourage systems finding that suggests smaller companies (and protect) “whistleblowers” Accidentally 34 may be placing too little attention on Other 28 the development of effective controls • Expecting the worst and being and alternative checks and balances. prepared – devising a robust fraud None of 6 the above Over-reliance on a single annual review response plan 0 10 20 30 40 50 60 to root out problems may be playing % respondents into the fraudster’s hands. A consistent theme from our previous European survey is that over a third of economic crimes at major companies are uncovered by accident.
    • 13 managing economic crime Respondents assign primary responsibility Figure 13: Bodies to which economic crime We are surprised that this figure is so for managing economic crime issues to must be reported (worldwide) high. Our experience in investigating the board of directors. 62% of economic crime for corporations respondents stated that the board must suggests that there are many reasons Board of directors 62 be informed of all instances of economic why an organisation may choose not to crime. There are significant regional Audit committee 24 report a fraud to an external body. These variations however. Within Asia & Pacific include the potential impact of negative Internal audit 34 (83%) the responsibility is vested firmly publicity on business relationships or staff with the Board. Significantly fewer Board of morale. In addition, companies often fear 40 management companies in North America (45%) and the costs of a drawn-out judicial process, Other 11 Central & Eastern Europe (47%) rely on or simply believe there is little chance the Board to fulfill this duty. In both 0 20 40 60 80 of recovering the stolen assets. It may % respondents these regions, company management is well be that companies have a public just as likely to have responsibility for face supporting a policy of reporting all managing the issues. Respondents’ opinions varied on matters to the authorities, but become how economic crimes should be dealt more pragmatic when faced with an Regardless of where the primary with once detected. Overall 63% of actual event. responsibility lies it is surprising that respondent organisations said they only 28% of organisations have had a requirement to report frauds to Figure 14: Responsibility for dealing with economic crime (worldwide) implemented any fraud-related training an external body. Once more though, for the Board or management. Given the regional variations are significant. increasing focus on corporate fraud with In the Asia & Pacific region only 48% Board of directors 33 regulators, ratings agencies and others of companies had a requirement to now scrutinising companies involve the authorities. In Africa and Internal audit 20 for signs of misdeed, Boards and Central & Eastern Europe over 80% Internal legal 14 council management need to consider making of companies said that they applied this type of training part of their this policy. External auditors 3 corporate governance regime. External legal council 9 Other 21 0 10 20 30 40 50 60 % respondents
    • 14 recovering stolen assets Even if economic crime is detected and Insurance However, insurance can have a prosecuted, it can still prove impossible significant impact on recoveries. to recover the assets. Of respondents Surprisingly, given the high awareness Companies with insurance reported who had experienced fraud, only 8% of economic crime, less than half the being 300% more likely to recover had succeeded in recovering more than organisations surveyed had taken out more than 60% of their losses. 80% of their losses, whilst almost three- insurance against fraud losses. This may quarters recovered less than 20%. be due to management indifference or scepticism over how much insurance There are many reasons for this relative could actually recover. failure to recover lost assets. Companies are reluctant to embark on long Figure 15: Recoveries of companies with and without insurance (worldwide). recovery processes with no certainty of success, especially where the assets have been moved across borders. Companies 27 52 21 with insurance However, there may be good reasons to pursue the assets regardless – firstly because it is not always possible to Companies 24 69 7 without insurance form a realistic view of the chances of 0 20 40 60 80 100 recovery until the process gets under % recovered way, and secondly because a policy 0 1 to 60% 61 to 100% of always attempting recovery helps to create the right culture of deterrence.
    • 15 preventing economic crime Not surprisingly, companies that have Those that had not suffered fraud Organisations that take practical measures suffered economic crime are more tended to rely on more intangible to combat fraud, and that effect change concerned about the strength and prevention tools such as codes of on the ground rather than creating the effectiveness of their systems to prevent conduct or ethical policies. In contrast, appearance of addressing the problem, fraud. They are also more likely to have fraud victims instituted more tangible will develop a stronger culture of taken proactive measures to reduce measures such as employee screening, prevention. As a result of such action, future exposure. management training and whistleblowing companies that had reported economic programmes. They also invested greater crime are “quite” or “very” confident Our findings illustrate the impact of effort in raising awareness of the that their anti-fraud controls are stronger fraud on an organisation’s mindset. potential for economic crimes. now than they were two years ago. Figure 16: Types of corrective measures Figure 17: Confidence in fraud risk management systems taken (worldwide) Specific fraud Global -8 55 27 27 training for management Organisation ethics 65 or a code of conduct W Europe -7 56 28 Consideration of fraud in risk management systems 49 C & E Europe -3 57 33 Pre-employment screening 47 South & Central America -4 63 24 Public source information 33 N America -1 61 27 Asia & Pacific -14 46 22 Whistleblowing 27 Africa -9 61 25 Other 16 -20 0 20 40 60 80 100 % respondents 0 10 20 30 40 50 60 70 80 % respondents Not confident Quite confident Very confident
    • 16 economic crime risks of the future Most organisations expect the threat The responses from Central & Eastern risks without substantial actions to of economic crime to increase over Europe are in line with our European tackle the roots of all economic crime: the next five years, with respondents survey of 2001. Then companies motive, opportunity and a clearly in North America and Africa being surveyed also showed some optimism perceived benefit of reward over especially pessimistic. Our findings for a fall in economic crime risks in punishment. support this general perception that that region. In the last two years the risk will increase. however, our respondents in Central Looking forward over the next five & Eastern Europe reported significantly years, 34% of companies expect their However, companies in Central & more economic crime (2003: 37%, 2001: greatest economic crime risk to be asset Eastern Europe and South & Central 26%). In our view it is unrealistic to misappropriation – currently the most America expect the risk to decrease. expect decreases in economic crime frequent form of fraud worldwide – and 33% cybercrime. Figure 18: Expectation as to whether fraud risk will increase over the next 5 years Compared to our previous European Global -23 27 7 survey where cybercrime was by far the greatest fear for the future (2001:43%) this is a significant decrease. Regional W Europe -15 31 7 factors do play a role however in this analysis. Asset misappropriation is C & E Europe -44 15 3 most noticeably seen as a threat in South & Central America -39 18 5 Africa (48%) and North America (52%). N America -13 42 10 In the Asia & Pacific region however, cybercrime is still seen as the key risk Asia & Pacific -16 31 9 for the future with 35% of companies Africa -22 22 20 citing this as their chief concern. 27% -60 -40 -20 0 20 40 60 of South and Central America companies % respondents agreed with them, however a similar Less likely More likely Much more likely proportion believe that the issues of corruption & bribery will remain their greatest economic crime threat.
    • 17 Figure 19: Frauds considered most prevalent compared with future concerns (worldwide) Asset Misappropriation 24 34 Financial Misrepresentation 17 15 Corruption & Bribery 31 21 Money Laundering 6 5 6 Cybercrime 33 2 Industrial Espionage 13 8 Product Piracy 18 0 5 10 15 20 25 30 35 % respondents Perceived prevalence Future concerns The lower proportion of respondents electronic data and the use of viruses. anticipating cybercrime as the most Companies now define cybercrime significant future threat (figure 19) may more accurately, and expect fewer reflect two factors. Firstly, much activity occurrences as a result. Secondly, initially categorised as cybercrime was whilst the effects of cybercrime can be in fact ‘traditional’ fraud conducted by extremely severe for those companies electronic means – for instance, asset targeted, it appears that many cyber misappropriation through tampering criminals are extremely selective in with payment data – rather than crimes their targets. Companies that have now clearly defined as cybercrime such not yet been made a target may be as denial of service attacks, theft of breathing a premature sigh of relief.
    • 18 survey demographics This survey was the result of 3,400 interviews in 50 countries. The number of The size of participating organisations was interviews conducted per country was: as follows: Western Europe 1476 South & Central America 554 Global UK/NI/ROI 162 Argentina 96 Austria 83 Brazil 86 France 156 Chile 53 <200 23 Germany 150 Columbia 48 Norway 90 Dominican Republic 31 Portugal 50 Mexico 87 201-1,000 41 Spain 106 Guatemala 30 Sweden 91 Peru 51 1,001-5,000 25 Switzerland 89 Uruguay 36 The Netherlands 103 Venezuela 36 Italy 159 >5,000 9 Denmark 88 North America 103 Greece 59 Canada 103 0 10 20 30 40 50 Belgium 90 % USA Central & Eastern Europe 378 Asia & Pacific 878 Respondents were CEOs and CFOs and Czech Republic 50 Australia 100 Estonia/Lithuania/Latvia 25 those responsible for preventing and Hong Kong 85 detecting fraud. They were drawn from Hungary 25 India 85 Bulgaria 25 the following industry sectors: Indonesia 85 Poland 85 Japan 423* Romania 29 Singapore 50 Slovenia 27 Global Thailand 50 Turkey 52 Services Financial services Russia 29 29% 13% Slovak Republic 31 Africa 143 Algeria 21 Morocco 17 South Africa 91 Tunisia 14 *weighted in the statistics to reflect a base of 150 respondents Manufacturing Percentages may total more or less than 100 per cent as respondents were able to provide multiple answers 58% or may have chosen not to answer. 8 companies suffered economic crimes totalling in excess of US$100 million, and have been removed from the “total cost” analysis.
    • 19 terminology Due to diverse descriptions of individual types of economic crime in countries’ legal statutes, we have developed the following categories for the purposes of this survey. The descriptions were read to each of the respondents at the start of each survey to ensure consistency. Fraud/Economic Crime The intentional use of deceit to deprive another of money, property or a legal right. Asset misappropriation The theft of company assets (including monetary assets/ cash or supplies and equipment) by company directors, others (inc. embezzlement by employees) in fiduciary positions or an employee for their own benefit. Financial misrepresentation Company accounts are altered or presented in such a way that they do not reflect the true value or financial activities of the company. Corruption & Bribery Typically, the unlawful use of an official position to gain and advantage in contravention of duty. This can involve the (inc. racketeering & extortion) promise of an economic benefit or other favour, the use of intimidation or blackmail. It can also refer to the acceptance of such inducements. Money Laundering Actions intended to legitimise the proceeds of crime by disguising their true origin. Cybercrime The illegal access to a computer or computer network to cause damage or theft. (e.g. hacking, virus attacks, denial of service, electronic theft of proprietary information) Industrial espionage & information brokerage The acquiring of trade secrets or company information by secretive and illegal means and/or the selling of these secrets or information to interested parties. Product Piracy/Counterfeiting The illegal copying and/or distribution of fake branded goods in breach of patent or copyright. This also includes the creation of false currency notes & coins with the intention of passing them off as genuine. Other terms used in the survey Whistleblowing The disclosure by an employee of malpractice in the workplace Tip-off A hint or indication about goings-on in the organisation Audit The formal examination and review of a company’s accounts and/ or practices. Risk management systems Systems put in place to assess, identify and respond to risks in the company. Soliciting or receiving a commission Being offered or given money or other incentives to help influence a business decision in the donor’s favour. Offering or paying a commission Having to offer or give money or other incentives to help influence a business decision in your favour.
    • 20 contact details endnotes 1 The majority of companies would have found it a near impossibility to quantify exactly the financial impact of a fraud or frauds upon them. In order to facilitate their answering of this question, we provided a series of financial ranges for them to work within: • < US$ 10,000 • US$ 1 million – 5 million • US$ 10,000 – 50,000 • US$ 5 million – 10 million • US$ 50,000 – 100,000 • US$ 10 million – 50 million • US$ 100,000 – 250,000 • US$ 50 million – 100 million • US$ 250,000 – 500,000 • > US$ 100 million • US$ 500,000 – 1 million The values quoted in the report are estimates derived from a computation that assigned a midpoint to each value range for the frauds which a company reported it had been subject to. This provided a total cost of fraud for each individual company from which was calculated (1) the average figure and (2) the total figure.
    • © 2003 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. Designed by studio ec4 15404 (05/03).