It’s often not until a fraud has erupted into view — in the eyes of the board, the media, or regulators — that a company will turn to external counsel and consultants for independent advice. Yet typically, the underlying business issues that enabled the fraud have been germinating unseen for some time. Had the company been able to catch and address these issues proactively, they might have avoided not only the reputational, financial and regulatory risk they now face — but also the expense of costly investigations and remediation.
The ability to prepare, respond and emerge stronger from fraud and economic crime requires specialized expertise and an understanding of key business issues. Counsel has an important role to play as they help their clients address unique and challenging situations. By understanding the deeper fraud trends and engaging with subject matter experts, counsel can help provide a path to success for their clients. PwC has recently released its biannual Global Economic Crime and Fraud Survey, which explores in depth not only the types and trends of fraud clients face, but also the complex factors driving those frauds — and what organizations can do to mitigate them.
Bribery, corruption, FCPA enforcement and regulatory expectations are up — yet risk
assessments are down. The share of US respondents who’d been asked to pay a bribe more than quadrupled since 2016, from 7% to 31%, and the percentage who believed they’d lost an opportunity to a competitor who did pay a bribe nearly quadrupled, from 8% to 29%. Also, more than half of respondents said they expect regulatory changes to have an increased impact on the organization in the coming two years.
Despite these trends, only 37% of our US respondents said they’d performed a bribery and corruption risk assessment in the last 24 months; and just half had specific policies that address bribery and corruption.
The share of serious internal fraud in the US committed by senior management has doubled. Internal fraud holds special legal risks for a company. The more so when it’s committed by the people most able to override internal controls: C-suite and other senior executives. Such crimes carry outsize legal risk — and can easily bleed into the less-manageable domain of reputational risk or crisis. Among US respondents, the percentage of economic crimes committed by this special class jumped from 18% to 36%.
Bad news travels fast: Reputational risk now outstrips regulatory risk in terms of impact. The executives we surveyed consistently ranked reputational harm at or near the top of negative impacts from various forms of economic crime. And that’s telling, because in this era of radical transparency, companies often don’t get to decide when an issue becomes a crisis — the jury of public opinion will.
When it comes to fraud, technology is a double-edged sword — both a potential protector and a potential threat. While many companies are introducing powerful new fraud-detection tools such as artificial intelligence, machine learning and Big Data, the sophistication of hackers (both individual and nation-states) continues to grow. Over a third of all respondents have been targeted by cyber-attacks, and 41% of executives surveyed said they spent at least twice as much on investigations and related interventions as was lost on cybercrime. And more than a third of respondents said some of that detection technology is yielding false positives, creating the growing challenge of “customer friction” — the irritation of getting too many fraud alerts.
Fraud is at an all-time high — but ethics and compliance programs are lagging. More than half of our US respondents reported serious incidents of fraud or economic crime over the last two years, a far higher share than ever before. Yet the percentage of respondents who indicated they have a formal business ethics and compliance program has actually dropped, from 82% to 77%, since our 2016 survey.
Partner, US Territory Global Economic Crime & Fraud Survey Leader, PwC US
Client Relationship Director, Forensics, PwC US
Client Relationship Director, Forensic Services, PwC US