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Reality Check
Benchmarking
Anticorruption
Resources
Introduction                                                               47%




C
                                                                                          41%
         ompanies are reportedly devoting increased
         resources to their anticorruption efforts in
         response to the string of high-profile
settlements under the US Foreign Corrupt Practices Act                                                    12%

(FCPA) and the threat of the seemingly stricter UK
Bribery Act.
                                                                          Staffing    No Change         Staffing
According to a recent survey, 47% of chief compliance                    Increased                     Decreased

officers saw staffing and budget increases in 2012.             How did your 2012 compliance staff change from 2011?
                                                                         Source: Consero Group: http://consero.com
Given some previously lax policies among global
companies, these increases are probably well deserved.                     47%            45%
But how should a company measure the appropriate
level of resources to devote to combating corruption?

The simple answer is this: the level of resources should
be proportional to the level of risk.
                                                                                                           8%
But how do you quantify risk? And how do you
translate a risk assessment into an appropriate
                                                                          Budget      No Change         Budget
allocation of resources?                                                 Increased                     Decreased

                                                               How did your 2012 compliance budget change from 2011?
                                                                         Source: Consero Group: http://consero.com




                                                           2
Siemens (2010)                                                                                 $800 Million
           KBR/Halliburton (2010)                                                            $579 Million
                       BAE (2009)                                             $400 Million
         Snamprogetti/ENI (2011)                                          $365 Million
               Technip S.A. (2010)                                     $338 Million
           JGC Corporation (2010)                        $219 Million
               Daimler AG (2010)                     $185 Million
             Alcatel-Lucent (2008)             $137 Million
  Magyar/Deutsche Telekom (2011)           $95 Million
                 Panalpina (2010)         $82 Million
                                              Top Ten FCPA Settlements
                                           Source FCPA Blog: http:www.fcpablog.com




E
       veryone involved in anticorruption efforts has               the FCPA, but no one should mistake this list as a
       seen the list of top ten FCPA settlements. This              representation of the measure of corruption risk faced
       list went unchanged in 2012. (There are reports              by any other company.
that the French “supermajor” oil and gas company,
                                                                    As data points, the top ten cases are statistical outliers.
Total SA, may debut in 2013 with a $398 million
                                                                    They can make a dramatic opening slide to capture the
settlement. This would put Total SA at number four,
                                                                    attention of company executives and board members,
and push Panalpina off the bottom.)
                                                                    but they are not appropriate data points to measure
Every compliance officer has seen these numbers. And                corruption risk—unless there is evidence that
every CEO should see them as well. They illustrate how              corruption is so pervasive within a company as to put it
aggressive the US authorities have become in enforcing              among the worst companies of all time.

                                                             3
Measuring Corruption Risk                                                $375K

                                                                                                    $250K                    $250K
The current top ten cases span a five-year period from
2008 through 2012. But instead of benchmarking risk
against the worst cases, look instead at median losses
during the same time period. Median losses provide a
                                                                         2008                       2010                      2012
more accurate assessment of the corruption risks that
companies face.                                                                     Median Corruption Losses
                                                                   Source: Association of Certified Fraud Examiners http://www.acfe.com/

According to the Association of Certified Fraud
Examiners (ACFE), the median loss due to corruption
                                                                  Financial Statement Fraud                                      $1,000,000
as reported in 2011-2012 was $250,000, significantly less
                                                                                    Corruption               $250,000
than the losses from of the top ten FCPA cases.
                                                                            Check Tampering                $143,000
But median losses are only part of the risk assessment.                                   Billing        $100,000
To put the losses into perspective, you also need to
                                                                Non-Cash Misappropriations             $58,000
know how corruption losses compare with losses from
                                                                                     Skimming          $58,000
other occupational frauds.
                                                                                  Cash Larceny         $54,000
According to the ACFE, corruption losses are second                                      Payroll       $48,000
after financial statement fraud losses, with these two             Expense Reimbursements              $26,000
categories topping the list of all occupational frauds.         Cash Register Disbursements            $25,000
                                                                Misappropriation of Cash on…          $20,000
The remaining occupational frauds—from check
tampering to misappropriation of cash on hand—are all
                                                                                  All Occupational Fraud Losses
subcategories of asset misappropriation.                           Source: Association of Certified Fraud Examiners http://www.acfe.com/


                                                            4
Fraud Schemes
The ACFE classifies occupational fraud schemes into three
primary categories:

Financial statement fraud schemes: where an
employee intentionally causes a misstatement or
omission of material information in the organization’s
financial reports (e.g., recording fictitious revenues,
understating reported expenses or artificially inflating
reported assets)

Corruption schemes: where an employee misuses his
or her influence in a business transaction in a way that
violates his or her duty to the employer in order to gain
a direct or indirect benefit (e.g., schemes involving
bribery or conflicts of interest)

Asset misappropriation schemes: where an employee
steals or misuses the organization’s resources (e.g., theft
of company cash, false billing schemes or inflated
expense reports)




                                                              5
Analysis
Applying probabilistic risk assessment analysis, we can           Financial Statement Fraud                                           $1,000K

quantify the comparative risk of each risk category by                            Corruption                 $250K
taking the median loss (magnitude) multiplied by the
                                                                    Asset Misappropriation              $120K
frequency of occurrence (likelihood):

       [Risk] = [Magnitude] x [Likelihood]                                                     Median Losses
                                                                      Source: Association of Certified Fraud Examiners http://www.acfe.com/

This provides raw scores of 76 to 104. But we can scale
the results from 1 through 10 and create a simple scale
to measure relative risk.                                         Financial Statement Fraud            7.6%

                                                                                  Corruption                      33.4%
Financial statement fraud causes the greatest losses, but
it occurs so rarely that it is the lowest fraud risk. It            Asset Misappropriation                                              86.7%
earns a raw score of 76 and the lowest scaled score of 1.
                                                                               Frequency of Losses – Percent of Cases
On the other side of the scale, asset misappropriation                Source: Association of Certified Fraud Examiners http://www.acfe.com/

causes the lowest median loss per incident, but it occurs
so frequently that it is the highest fraud risk. It earns a
raw score of 104 and the highest scaled score of 10.              Financial Statement Fraud            1.0

                                                                                  Corruption                    3.4
Corruption sits in the middle, both in terms of
magnitude and likelihood. It earns a raw score of 83.5,             Asset Misappropriation                                              10.0
and a middling scaled score of 3.4.
                                                                                          Calculated Risk Factor
                                                                                       [Risk] = [Magnitude] x [Likelihood}



                                                              6
Reality Check

We can apply the results of our risk assessment as a
reality check to gauge the appropriateness of any
compliance budget.

We previously said the level of resources should be
proportional to the level of risk. This means that the
resources allocated to combating corruption should be
somewhere in the middle—between the resources
allocated to combating financial statement fraud and
the resources allocated to asset misappropriation.

Specifically, it should slightly below the midpoint,
approximately 34% of the way up from the low point to
the high point.

This metric can apply to any budget size.


          1.0                         3.4                          10.0




        Financial                  Corruption                     Asset
    Statement Fraud                                          Missappropriation




                                                         7
Why is this Important?

In the same survey in which 47% of chief compliance
officers reported staffing and budget increases, there                       No
was a similar 47% who said they do not have sufficient                      47%                  Yes
resources to manage a compliance program effectively.                                            53%

Our probabilistic risk assessment is a reality check for
this claim.

It measures how much of the overall budget should be                  Do you have sufficient resources
                                                                to manage a compliance program effectively?
allocated to corruption risk out of the total budget for            Source: Consero Group: http://consero.com
combating all forms of occupational fraud.

It provides one benchmark derived from real word
fraud data in the form of a simple ratio that can be
scaled to any budget size.

Of course, this is not a substitute for an individualized
company risk assessment, but it is a perfect starting
point to help decide where to allocate internal company
resources.




                                                            8
About the Authors
Eric Pesik is an Associate General Counsel and Compliance Officer at Seagate Technology
http://www.linkedin.com/in/ericpesik/

Deanna Purnell Pesik is an independent legal and regulatory compliance professional
http://www.linkedin.com/pub/deanna-purnell-pesik/3/a47/481

This work represents the opinions of the authors alone, and not the opinions their employers or clients. The authors are
not rendering business or legal advice; and this publication is not a substitute for business or legal advice. The authors are
not responsible for any loss sustained by any person or entity that relies on this work. You are free to share, copy,
distribute, and transmit this work; to remix or adapt this work; and to make commercial use of this work, under the
condition that you must attribute this work to the authors (but not in any way that suggests that they endorse you or your
use of this work).

Creative Commons Attribution License
http://creativecommons.org/licenses/by/3.0/
Copyright © 2013 Eric and Deanna Pesik.

                                                          9
Data Source Acknowledgements

FCPA Blog
Top Ten Corruption Settlements
http://www.fcpablog.com/blog/tag/top-ten

Association of Certified Fraud Examiners
2012 Report to the Nations on Occupational Fraud and Abuse
http://www.acfe.com/

Consero Group LLC
2012 Chief Compliance Officer Data Survey
http://www.consero.com

Image Source Acknowledgements

Victor 1558, Woman Measuring Floor
http://www.flickr.com/photos/76029035@N02/6829354783/

Images of Money, Euros
http://www.flickr.com/photos/59937401@N07/5930032284/

Microsoft Office Online, Measuring Tape
http://office.microsoft.com/en-us/images/results.aspx?qu=MP910218070

Images of Money, Stack of Pound Coins
http://www.flickr.com/photos/59937401@N07/5930116778/

Victor 1558, Man with Tape Measure in Empty Office Space
http://www.flickr.com/photos/76029035@N02/6829361737/

D Sharon Pruitt, Coiled Tape Measure
http://www.flickr.com/photos/pinksherbet/3209939998/

                                                                10

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Reality Check - Benchmarking Anticorruption Resources (whitepaper)

  • 2. Introduction 47% C 41% ompanies are reportedly devoting increased resources to their anticorruption efforts in response to the string of high-profile settlements under the US Foreign Corrupt Practices Act 12% (FCPA) and the threat of the seemingly stricter UK Bribery Act. Staffing No Change Staffing According to a recent survey, 47% of chief compliance Increased Decreased officers saw staffing and budget increases in 2012. How did your 2012 compliance staff change from 2011? Source: Consero Group: http://consero.com Given some previously lax policies among global companies, these increases are probably well deserved. 47% 45% But how should a company measure the appropriate level of resources to devote to combating corruption? The simple answer is this: the level of resources should be proportional to the level of risk. 8% But how do you quantify risk? And how do you translate a risk assessment into an appropriate Budget No Change Budget allocation of resources? Increased Decreased How did your 2012 compliance budget change from 2011? Source: Consero Group: http://consero.com 2
  • 3. Siemens (2010) $800 Million KBR/Halliburton (2010) $579 Million BAE (2009) $400 Million Snamprogetti/ENI (2011) $365 Million Technip S.A. (2010) $338 Million JGC Corporation (2010) $219 Million Daimler AG (2010) $185 Million Alcatel-Lucent (2008) $137 Million Magyar/Deutsche Telekom (2011) $95 Million Panalpina (2010) $82 Million Top Ten FCPA Settlements Source FCPA Blog: http:www.fcpablog.com E veryone involved in anticorruption efforts has the FCPA, but no one should mistake this list as a seen the list of top ten FCPA settlements. This representation of the measure of corruption risk faced list went unchanged in 2012. (There are reports by any other company. that the French “supermajor” oil and gas company, As data points, the top ten cases are statistical outliers. Total SA, may debut in 2013 with a $398 million They can make a dramatic opening slide to capture the settlement. This would put Total SA at number four, attention of company executives and board members, and push Panalpina off the bottom.) but they are not appropriate data points to measure Every compliance officer has seen these numbers. And corruption risk—unless there is evidence that every CEO should see them as well. They illustrate how corruption is so pervasive within a company as to put it aggressive the US authorities have become in enforcing among the worst companies of all time. 3
  • 4. Measuring Corruption Risk $375K $250K $250K The current top ten cases span a five-year period from 2008 through 2012. But instead of benchmarking risk against the worst cases, look instead at median losses during the same time period. Median losses provide a 2008 2010 2012 more accurate assessment of the corruption risks that companies face. Median Corruption Losses Source: Association of Certified Fraud Examiners http://www.acfe.com/ According to the Association of Certified Fraud Examiners (ACFE), the median loss due to corruption Financial Statement Fraud $1,000,000 as reported in 2011-2012 was $250,000, significantly less Corruption $250,000 than the losses from of the top ten FCPA cases. Check Tampering $143,000 But median losses are only part of the risk assessment. Billing $100,000 To put the losses into perspective, you also need to Non-Cash Misappropriations $58,000 know how corruption losses compare with losses from Skimming $58,000 other occupational frauds. Cash Larceny $54,000 According to the ACFE, corruption losses are second Payroll $48,000 after financial statement fraud losses, with these two Expense Reimbursements $26,000 categories topping the list of all occupational frauds. Cash Register Disbursements $25,000 Misappropriation of Cash on… $20,000 The remaining occupational frauds—from check tampering to misappropriation of cash on hand—are all All Occupational Fraud Losses subcategories of asset misappropriation. Source: Association of Certified Fraud Examiners http://www.acfe.com/ 4
  • 5. Fraud Schemes The ACFE classifies occupational fraud schemes into three primary categories: Financial statement fraud schemes: where an employee intentionally causes a misstatement or omission of material information in the organization’s financial reports (e.g., recording fictitious revenues, understating reported expenses or artificially inflating reported assets) Corruption schemes: where an employee misuses his or her influence in a business transaction in a way that violates his or her duty to the employer in order to gain a direct or indirect benefit (e.g., schemes involving bribery or conflicts of interest) Asset misappropriation schemes: where an employee steals or misuses the organization’s resources (e.g., theft of company cash, false billing schemes or inflated expense reports) 5
  • 6. Analysis Applying probabilistic risk assessment analysis, we can Financial Statement Fraud $1,000K quantify the comparative risk of each risk category by Corruption $250K taking the median loss (magnitude) multiplied by the Asset Misappropriation $120K frequency of occurrence (likelihood): [Risk] = [Magnitude] x [Likelihood] Median Losses Source: Association of Certified Fraud Examiners http://www.acfe.com/ This provides raw scores of 76 to 104. But we can scale the results from 1 through 10 and create a simple scale to measure relative risk. Financial Statement Fraud 7.6% Corruption 33.4% Financial statement fraud causes the greatest losses, but it occurs so rarely that it is the lowest fraud risk. It Asset Misappropriation 86.7% earns a raw score of 76 and the lowest scaled score of 1. Frequency of Losses – Percent of Cases On the other side of the scale, asset misappropriation Source: Association of Certified Fraud Examiners http://www.acfe.com/ causes the lowest median loss per incident, but it occurs so frequently that it is the highest fraud risk. It earns a raw score of 104 and the highest scaled score of 10. Financial Statement Fraud 1.0 Corruption 3.4 Corruption sits in the middle, both in terms of magnitude and likelihood. It earns a raw score of 83.5, Asset Misappropriation 10.0 and a middling scaled score of 3.4. Calculated Risk Factor [Risk] = [Magnitude] x [Likelihood} 6
  • 7. Reality Check We can apply the results of our risk assessment as a reality check to gauge the appropriateness of any compliance budget. We previously said the level of resources should be proportional to the level of risk. This means that the resources allocated to combating corruption should be somewhere in the middle—between the resources allocated to combating financial statement fraud and the resources allocated to asset misappropriation. Specifically, it should slightly below the midpoint, approximately 34% of the way up from the low point to the high point. This metric can apply to any budget size. 1.0 3.4 10.0 Financial Corruption Asset Statement Fraud Missappropriation 7
  • 8. Why is this Important? In the same survey in which 47% of chief compliance officers reported staffing and budget increases, there No was a similar 47% who said they do not have sufficient 47% Yes resources to manage a compliance program effectively. 53% Our probabilistic risk assessment is a reality check for this claim. It measures how much of the overall budget should be Do you have sufficient resources to manage a compliance program effectively? allocated to corruption risk out of the total budget for Source: Consero Group: http://consero.com combating all forms of occupational fraud. It provides one benchmark derived from real word fraud data in the form of a simple ratio that can be scaled to any budget size. Of course, this is not a substitute for an individualized company risk assessment, but it is a perfect starting point to help decide where to allocate internal company resources. 8
  • 9. About the Authors Eric Pesik is an Associate General Counsel and Compliance Officer at Seagate Technology http://www.linkedin.com/in/ericpesik/ Deanna Purnell Pesik is an independent legal and regulatory compliance professional http://www.linkedin.com/pub/deanna-purnell-pesik/3/a47/481 This work represents the opinions of the authors alone, and not the opinions their employers or clients. The authors are not rendering business or legal advice; and this publication is not a substitute for business or legal advice. The authors are not responsible for any loss sustained by any person or entity that relies on this work. You are free to share, copy, distribute, and transmit this work; to remix or adapt this work; and to make commercial use of this work, under the condition that you must attribute this work to the authors (but not in any way that suggests that they endorse you or your use of this work). Creative Commons Attribution License http://creativecommons.org/licenses/by/3.0/ Copyright © 2013 Eric and Deanna Pesik. 9
  • 10. Data Source Acknowledgements FCPA Blog Top Ten Corruption Settlements http://www.fcpablog.com/blog/tag/top-ten Association of Certified Fraud Examiners 2012 Report to the Nations on Occupational Fraud and Abuse http://www.acfe.com/ Consero Group LLC 2012 Chief Compliance Officer Data Survey http://www.consero.com Image Source Acknowledgements Victor 1558, Woman Measuring Floor http://www.flickr.com/photos/76029035@N02/6829354783/ Images of Money, Euros http://www.flickr.com/photos/59937401@N07/5930032284/ Microsoft Office Online, Measuring Tape http://office.microsoft.com/en-us/images/results.aspx?qu=MP910218070 Images of Money, Stack of Pound Coins http://www.flickr.com/photos/59937401@N07/5930116778/ Victor 1558, Man with Tape Measure in Empty Office Space http://www.flickr.com/photos/76029035@N02/6829361737/ D Sharon Pruitt, Coiled Tape Measure http://www.flickr.com/photos/pinksherbet/3209939998/ 10