Economic crime: A global risk

Roderick M. Danao Vice Chairman and Assurance Managing Partner 01 Sep 2017

Economic crime has been a hot topic because of a number of incidents involving fraud, corruption and bribery that have caught the attention of the country’s legislative and regulatory bodies. These crimes, which involve money laundering, alleged briberies and internal fraud, are normally driven by a common motive: financial gain.

The ongoing Senate investigations into a tax collection agency, the internal fraud and money laundering case involving a couple of financial institutions, and the alleged overpricing of government projects, indicate that economic crime is a prevalent issue that has to be addressed with urgency.

In 2016, PwC published the Global Economic Crime Survey report involving a total of 6,337 respondents from 115 countries. In my view, the survey is reflective of the real risks faced by businesses and organizations today, regardless of size and location. Below is a summary of the important points, from my perspective, as revealed by this survey:

Economic crime is an obstinate threat

The survey reveals that 36 percent of the organizations they represent have experienced economic crime. Geographically, economic crimes are observed in both developed and emerging markets. Prevalence, however, is higher in Africa (57 percent). Thirty percent of those surveyed in Asia have experienced economic crime. The Middle East recorded the lowest rate at 25 percent.

What surprised me is that Western Europe and North America have prevalence rates of 40 percent and 37 percent, respectively. This tells us that economic crime or fraud is a serious threat even in advanced countries where organizations, in general, have invested heavily in technologies and resources to prevent and detect fraud.

The rise in cybercrime is also revealed by the survey, affecting 32 percent of participating organizations. Regrettably, only 37 percent of organizations have cyber incident response plans.

The survey also shows that detection methods are not keeping pace. In my opinion, this is a correct observation. Let us take a look at the alleged under-declaration of imported goods in one of the tax collection agencies. I believe they have computerized systems and real-time information to monitor the declared value of each importation, which can help curb illegal practices. This information should be analyzed to spot any indications of smuggling. So where is the gap? The answer has to be a product of the ongoing inquiry. I am dismayed that thousands of importations, under the same broker, with identical declared values and taxes paid, have gone undetected.

What are the most pervasive crimes?

The top five most pervasive economic crimes are 1) asset misappropriation, 2) cybercrime, 3) bribery and corruption, 4) procurement fraud, and 5) accounting fraud. Tax fraud, which is one of the main reasons behind the ongoing Senate inquiry, is in the list of the top 10 most common economic crimes.

The above crimes, in my humble opinion, are consistent with what we may be experiencing in the Philippines. I remember a company president of a marketing firm creating bogus sales documents to make it appear that sales volumes targets are met. The president became entitled to bonuses and incentives because of this fraudulent act. This abuse was not immediately detected until an audit was conducted. Unfortunately, overpaid incentives to the president were never recovered.

Profile of the fraudster

According to the survey, more than half of the internal perpetrators originate from middle to senior management. This is probably the reason why economic crime or fraud is sometimes called white-collar crime.

Their involvement suggests that fraud is perpetuated when internal controls have failed, because of issues related to values and behavior. Where fraud involves senior management, it is probable that policies and well-established controls are deliberately overridden. Even if you have the most sophisticated system in place, your organization is still susceptible to fraud if certain people connive to perpetuate a crime.

So what are the characteristics of an internal fraudster? Survey says he is generally male, a university or college graduate, somewhere between 31 and 40 years old, with at least three to five years of service. In my view, this result makes sense because you cannot perpetuate a fraud without intimate knowledge or familiarity with the processes, systems, people, suppliers, customers and the organization as a whole.

So how do you combat economic crime?

Combating economic crimes within the organization requires an integrated and holistic approach. People with the right culture and behavior are your best defense. Good governance has to be a fundamental part of any organization. Regardless of the size and degree of systems sophistication, the organization should be where good behavior, values and culture of compliance are promoted, enforced, measured and where appropriate, rewarded.

Needless to say, you need to have the right systems and processes to make it work and support the overall needs of your business or organization.

Enjoy the long weekend, everyone.

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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Roderick M. Danao

Roderick M. Danao

Vice Chairman and Assurance Managing Partner

Tel: +63 (2) 459 3065

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