Sharp increase in cybercrime and procurement fraud activity

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The number of cases still low in Hungary, but complex and sophisticated forms of fraud are emerging

Economic crime against businesses continues to rise around the world. One out of four Hungarian companies and 37% of respondents globally reported having been the victim of economic crime in the last two years, but the actual numbers are probably even higher. Asset misappropriation remains the most prevalent type of fraud, but threats are becoming more diverse as new forms of fraud emerge.

With over 5,000 responses from senior executives around the world, including 91 Hungarian companies, this is the most comprehensive global survey of economic crime available to businesses. Economic crime is constantly evolving, and new challenges require new solutions and technologies. Companies that fail to take the necessary measures to protect their assets will inevitably face increasing risks.

“Economic crime affects every industry in Hungary. Procurement fraud and cybercrime have gradually emerged as major forms of fraud, and we treated them as separate categories for the first time in this year’s survey. Both forms are difficult to detect, so we strongly advise companies to adjust their risk assessment procedures appropriately” – said Miklós Fekete, a PwC Hungary Advisory Partner.

Frequency of fraud unchanged, new forms on the rise

About 26% of the respondents reported having experienced one or more instances of economic crime in the past 24 months. Asset misappropriation remains the most common type of business fraud, but the distribution of various forms of economic crime is becoming more diverse, and the share of other forms is increasing.

Main findings for Hungary:

  • Asset misappropriation (63% of companies) is the most common economic crime, followed by bribery and corruption (38%) money laundering (25%), procurement fraud (25%) and cybercrime (17% of companies).
  • Almost one in five Hungarian respondents said that their company was asked to pay a bribe in the last 24 months, and one in three respondents believe that their company lost an opportunity to a competitor that paid a bribe.
  •  Corruption is more common in Hungary (38%) than in the CEE region (34%) or globally (27%).
  • The share of respondents experiencing cybercrime increased four-fold, from 4% to 17%, and is expected to rise further. About a third of respondents indicated that their perception of cybercrime risks has increased over the last 24 months, compared to 14% in 2011.
  • External parties (vendors and customers) are the typical perpetrators of economic crime (58%). Fraud committed by vendors (21%) is twice as common as in the region (11%) or globally (10%).
  • The share of internal perpetrators is 42%, which is slightly lower than in the CEE region (46%). The typical internal fraudster is a 31-40-year-old male who has been with the company for three to five years.
  • In the case of internal perpetrators, the organisations usually notify the law enforcement authorities (70%) or take civil action (60%) – these figures exceed both CEE and global results. However, internal fraudsters are fired in only half of the cases (50%), which is way below regional (78%) and global (79%) levels.
  • Similarly, in the case of external perpetrators, organisations notify law enforcement (50%); or take civil action (57%), but business relationships are discontinued only in a third of all cases.
  • Companies are taking a stronger stance against fraud: no respondents said that their organisation did nothing in response to an internal fraud allegation, compared to 22% in 2011.

There are many fraud prevention and detection methods available to manage the risk of economic crime. Knowing your business partners can be critical; still, due to lack of resources, organisations often fail to do proper background checks on third parties (i.e. suppliers, partners and agents). Providing solutions that allow employees to safely and anonymously report economic crime, and periodically performing fraud risk assessments are also essential components of every anti-fraud strategy. Most companies use only preventative measures, and thereby risk that fraud will go undetected longer. In addition to the resulting financial loss, such fraud can also seriously damage the company’s reputation and business relationships, and employee morale.

“It appears that, compared to their regional and global peers, Hungarian organisations underestimate the risk that they may become victims of cybercrime. The rate of reported economic crime might be lower than the regional and global average, but the new forms of fraud are often hard to detect and have a high latency. Only the combination of a strong, robust control environment and an appropriate detection mechanism can help avoid adverse surprises” – said George Surguladze, PwC Hungary’s Forensic Services Leader.

Cybercrime – Low risks and high rewards

Cybercrime is a growing threat both globally and in the region, and offers high rewards with lower risks of being detected, identified and caught compared to more traditional forms of economic crime. The proportion of Hungarian respondents who reported cybercrime increased dramatically since our last survey in 2011, from 4% to 17%. Respondents are also more aware of this economic crime: about a third said that their perception of cybercrime risks has increased over the last 24 months, up from 14% in 2011.

However, compared to their regional (26%) and global (30%) counterparts, very few Hungarian respondents (16%) consider it likely that their company will face cybercrime in the following 24 months. They may be too optimistic, because the growing dependence on computer applications, the spread of network solutions and the very nature of today’s business transactions significantly increase the likelihood of cyber-attacks. Since regulations often lag behind current technology, the increase in new forms of cybercrime such as employee time theft, bandwidth theft or Bitcoin scams, and the emerging use of social media sites and mobile devices poses new challenges to business leaders.

Procurement fraud grows into its own category

For the first time, this year’s report included procurement fraud as a separate category of economic crime. One out of four respondents said that their companies were subject to procurement fraud at least once within the last 24 months, making it the second most frequently indicated economic crime. The vendor selection process is especially vulnerable to fraud. Due to the collusion between the parties (the employees and the vendors, or the vendors within the industry), detection and investigation can be very difficult. As a result, the actual rate of procurement fraud is probably even higher than the measured rate.

Economic crime remains an important issue for organisations and businesses. New technologies and transforming work environments offer new opportunities and pose new challenges. Business leaders who understand both can provide a competitive edge to their organization over their less cyber-savvy competition.

Notes to editors:

To download the Hungarian results of the 2014 PwC Global Economic Crime Survey visit:

pwc.com/hu/crimesurvey

To see the full results of PwC’s Global Economic Crime Survey visit:

http://www.pwc.com/gx/en/economic-crime-survey/downloads.jhtml

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