Insights & Reports > Kroll Global Fraud Report

With the global economy facing its biggest downturn in decades, companies can ill afford losses and reputational damage arising from fraud. Fraud takes many forms and is present in all financial climates, but the risks increase substantially when fragile corporations face an economic slump. Moreover, fraud often comes to light in such conditions as companies examine their operations and costs.

The numbers certainly indicate that fraud is on the rise according to a recent Kroll survey of over nine hundred corporations worldwide, over the past three years companies have lost US$8.2 million each year on average, an increase of 22 percent over the same figure from the previous year’s survey. The proportion of companies that had experienced at least one incident of fraud also increased – to 85 percent, up from 80 percent the previous year.

 

Kroll has received numerous inquiries about fraud risk from Japanese corporations since the economic downturn began. These companies come from different industries but have much in common, including:

• Putting effort into unbalanced cost-saving activities;
• Not acting against fraud in ways consistent with company policy;
• Not properly investigating indicators that fraud may be occurring;
• Making decisions based only on what other companies are doing or on short-term cost savings;
• Expanding business in overseas markets without sufficient due diligence.

Many are particularly concerned about increased fraud risks associated with their foreign operations. Certain Japanese firms, after seeing their own domestic and other developed markets grow stagnant, have stepped up, and diversified the forms of their activities in emerging markets. Still more corporations will likely shift from a simple manufacturing base abroad to higher value markets, and build up their own overseas operations rather than entering into joint ventures or licensing agreements.

Accordingly, companies are seeking advice on problems associated with their foreign operations or transactions, notably: fictitious transactions by local vendors or business partners; embezzlement by expatriate employees; fraudulent use of company secrets and intellectual property; and corruption, including slush funds and kickbacks. The risks are particularly acute in developing regions. Kroll’s survey found that the incidence of the top ten major frauds (see chart) is generally highest in Middle Eastern and African countries, and lower, except for IP fraud, in Europe and North America.

Japanese companies generally assume that they are more vulnerable than American or European companies because Japanese managers are more trusting. Failure to adhere to good practice, however, is a more likely culprit. Japanese companies that have fallen victim to fraud overseas often:

• Lack information about their business partners and local officer candidates;
• Do not carry out proper fraud checks on potential investments or business partners;
• Accept bid-rigging, kickbacks, and other forms of fraud as “locally accepted business practice”;
• Incorrectly assume that employees sent out by parent companies are more trustworthy than local employees; and
• Resign themselves to fraud occurring by saying, “there is nothing we can do in country X”.

Corporations, especially those looking to foreign markets, must actively address the risk of fraud to give themselves a better chance of surviving the current difficult economic environment and maintaining sustainable growth. In order to do so, it is necessary to gain a better understanding of their business partners and to conduct fraud investigations that exceed compulsory standards for internal auditing. Most important, corporations must create an effective policy for dealing with fraud and strictly adhere to that policy when fraud is encountered. Fraud prevention is not about being suspicious or abandoning national culture: it is about best practice to safeguard your company’s assets.

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Tadashi Kageyama is a senior managing director and the head of investigations for Asia, specializing in business intelligence, investigations, and risk consulting services for corporate clients and government agencies. Prior to joining Kroll, he was a global purchasing agent for Mitsubishi Heavy Industries Ltd and worked as a staff writer for Nihon Keizai Shinbun (Nikkei).

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