Tue, Aug 23, 2016

Mitigating Insider Fraud in China

Over the years, companies operating in China have experienced various types of fraudulent activities, including theft of physical assets, misappropriation of company funds, corruption and bribery, and procurement fraud. While we are seeing China-based companies investing more in financial controls to mitigate fraud, there is a continued increase in frauds relating to IP theft, information theft, corruption and bribery, and conflict of interest in China. In fact, according to the 2015 Kroll Global Fraud Report, 73 percent of China-based executives were affected by fraud, an increase of 6 percent from the previous year.

The increase in such incidents is partly due to the lack of employee and third party vendor due diligence and proactive data analytics to identify anomalous transactions or behavior, as well as inadequate compliance training.

Unraveling a fraudster

Fraudsters could exist anywhere in any organization, but the risk of such fraud can be mitigated through proactive preventive efforts. In addition, it is important to understand the typical profile of a fraudster in China to enable an organization to better protect itself against insider fraud.

Based on Kroll’s experience of cases in China over the past 18 months, a typical fraudster in China is often someone who appears trustworthy, is smart and articulate, has the ability to think outside the box, and lives a lifestyle beyond their means. These fraudsters behave like entrepreneurs, having a high tolerance for risk and ambiguity, and a low fear of failure. While they may work hard at their jobs, they generally believe they deserve to be compensated better.

This misguided sense of entitlement, coupled with the “fear of missing out,” dictates their spending habits, leading them to live beyond their means which often results in a continued search for ever-bigger rewards. Such self-justification/rationalization also leads to denial of any wrongdoing when committing fraud. Such a fraudster may explore multiple opportunities to make a personal gain, ranging from seemingly insignificant employee expense fraud to larger matters such as manipulating or “hijacking” entire sales/distribution channels, and from one-off misappropriation of large company assets to frequent small-value frauds.

Five key preventive steps an organization can take to combat insider fraud:

  • Third party and employee due diligence – Knowing the background, reputation, and financial strength of customers, vendors, and employees can allow the organization to identify and mitigate potential associated risks.
  • Fraud risk assessments – A comprehensive fraud risk assessment can enable the organization to thoroughly evaluate its business operations in order to identify and manage those processes, internal controls, and procedures which could be subject to higher fraud risks.
  • Regular transaction review – Transactional data analytics supplemented by regular transaction testing can help the organization to identify potential fraudulent transactions and evaluate them on a more timely basis.
  • Establishment of robust fraud response protocol – The protocol will set out the procedures required to be followed when a fraud or other irregularity is discovered or suspected. It will demonstrate that the organization is prepared and ready to tackle fraudulent activities if and when necessary.
  • Involvement of experts – An independent forensic expert can help the organization to investigate and objectively evaluate any matters of concern. Depending on the organization’s needs, an expert can utilize different tools (such as computer and mobile forensic technology and access to various information databases), methods, and procedures, and deploy a team within a short time frame.

While the above-mentioned steps and insights into the mindset of a typical fraudster in China provide effective preventive efforts, it is critical that such efforts are supplemented by a strong “tone at the top” and zero tolerance message from senior management, which should be comprehensively cascaded throughout the organization.

This article originally appeared in Asian-Mena Magazine.



Forensic Investigations and Intelligence

The Kroll Investigations, Diligence and Compliance team are experts in forensic investigations and intelligence, delivering actionable data and insights that help clients worldwide make critical decisions and mitigate risk.