Age-old crimes lead, but one pervasive enemy jumps ahead
While asset misappropriation, bribery and corruption, procurement fraud and accounting fraud – the traditional leaders in this category – all showed a slight decrease this year over 2014’s statistics, one crime has been on a steady increase everywhere since it first appeared in our survey back in 2011. Cybercrime has now jumped to second place.
Asset misappropriation has historically been regarded as the easiest of frauds to detect, and the levels of this crime reported in our survey have previously been fairly easy to predict. However, since 2011, we have seen a downward trend in the reported rates of this particular crime. This could be as a result of a tightening of organisational controls – and that organisations are getting better at preventing traditional economic crime. This in turn could mean that it is evolving into different, higher-impact types of fraud, including cybercrime.
When considered in the light of the decreased rate of detection by means under management control – and of the increased prevalence of cybercrime – we must ask ourselves: are these crimes becoming harder to detect or are we simply becoming less aware of changing threats our businesses face? And the more important question: what should we do about this? With 20% of our survey respondents on average believing that it is likely that their organisations will experience these leading economic crimes in the next 24 months, the time is right for a fresh look.
Economic crime: a global problem, but not the same everywhere
While some regions reported lower rates of economic crime and the global trend was steady, Africa, Western Europe and the Middle East showed significant increases in our 2016 survey. The main drivers for the high and/or increased reported rates of economic crime in Africa were South Africa (69%, unchanged since 2014), followed by Kenya (61%, up 17% over 2014) and Zambia (61%, up 35% over 2014), while in the Middle East, respondents from Saudi Arabia reported that rates of economic crime more than doubled from 11% in 2014 to 24% in 2016. Western Europe was led by France (68%) and the United Kingdom (55%), both increased by 25% relative to 2014. The significant increase for France was attributable to a jump in external frauds – predominantly cybercrime, which nearly doubled, from 28% in 2014 to 53% in 2016.
In the United Kingdom, the increase was driven by an 83% increase in reported cybercrime incidents, relative to 2014. At the regional level, while most have experienced increased incidents of cybercrime, Eastern Europe reported a fall of 2% (10% lower than the global average). Cybercrime also does not feature in the top three types of economic crimes experienced in Africa, Asia Pacific and Eastern Europe. These regions, on the other hand, have higher-than-global-average incidences of bribery and corruption and procurement fraud.
While most developed countries have seen increased regulatory attention – particularly around sensitive issues such as cybercrime, money laundering and bribery and corruption – the blurring of borders through the transnational nature of criminal activities is prompting a growing level of international cooperation in regulation and enforcement. Lest an observer be tempted to fall into familiar thinking, these statistics demonstrate that economic crime is very much a diversified global issue – both in type of crime and across emerging and developed markets. Understanding these differences can help organisations focus their prevention efforts in the right areas. The opportunity thus exists for all organisations – no matter their size or geographic diversity – to take a global view and to apply international standards to their efforts to combat economic crime. However, with the market evolving toward integrated business solutions, many organisations outside financial services are taking on activities traditionally undertaken by banks.
Numerous non-financial services businesses in the automotive, retail and consumer and communications sectors, to name just a few, are either in joint arrangements with financial services companies or are in possession of banking licences of their own. Fraudsters seeking to “follow the cash” now have many more avenues to fulfil their objectives. While the financial services industry, by virtue of its highly regulated environment, has over the decades built up sophisticated control mechanisms, detection methodologies and risk management tools, the hybrids have generally yet to come into their own in managing either the risks or the fast-evolving compliance landscape they now find themselves in.
Rising financial & collateral damage
Losses can be stiff. Nearly a quarter (22%) of respondents experienced losses of between $100,000 and $1 million, 14% of respondents suffered losses of more than $1 million, and 1% of respondents (primarily from North America and Asia-Pacific) reported losses in excess of $100 million. These are substantial sums of money and are representative of a trend of rising costs of individual frauds.
The true cost of economic crime to the global economy is difficult to estimate, especially considering that actual financial loss is often only a small component of the fallout from a serious incident. Our survey respondents consistently note wider collateral damage including business disruptions, remedial measures, investigative and preventative interventions, regulatory fines, legal fees – and, critically – damage to morale and reputation as having a significant impact on long-term business performance.
These kinds of losses, of course, while not always quantifiable, can over time dwarf the relatively shorter-term impact of financial losses. More than half of internal perpetrators still originate from middle and senior management, but junior management also contributed a great deal to the perpetration of internal fraud in some regions. This points to a potential weakness in internal controls, whereby these measures serve as check-box exercises rather than effective processes embedded into an organisation’s culture. This is further suggested by the fact that 22% of respondents have never carried out a fraud risk assessment and a further 31% only carry out such an assessment annually.
In some regions (for example Asia Pacific), senior management fraud, which is the hardest to detect and tends to have a much greater impact, has jumped significantly. At the regional level, internal actors remain the main perpetrators of fraud in Africa (7% higher than the global average), Asia Pacific (9% higher) and Latin America (9% higher), despite significant falls in respondents stating internal actors were responsible for perpetrating fraud (6% – 15% decline across these regions since 2014). Conversely, external actors were responsible for more fraud incidents in Eastern Europe (44%), Western Europe (49%) and North America (56%) compared to the global average of 41%.
The most fundamental change in perpetrator type was in North America where there was a very significant swing from internal to external perpetrators.
Perception of law enforcement
We asked respondents to give us their views on whether they believe local law enforcement to be adequately resourced and trained to investigate and prosecute economic crime. A resounding majority – 44% to 28% – expressed doubts on this point, while a further 28% could not answer. This metric could result from several divergent factors.
These could include the countrywide rate of economic crime, the extent to which law enforcement in the respective country publicises or downplays its expertise in certain areas like cybercrime, and the extent to which law enforcement is perceived to be above political interference.