While businesses reported only a marginal increase in the prevalence of fraud in China overall (65% in 2012 to 67% in 2013), there are some fundamental changes in the composition of that fraud, finds Kroll's 2013-2014 Global Fraud Report.
The report shows that while theft of physical assets appears to be a shrinking problem in China, IP theft, management conflicts of interest and vendor, supplier or procurement fraud appear to be on the rise with significant increases in detection rates on a year on year basis.
The report discovered that, overall, respondents in China (41%) highlighted the growth in outsourcing and offshoring as the main reason behind their companies’ increased exposure to fraud. Furthermore, where respondents knew the perpetrator of the fraud, 75% indicated that it was an insider problem.
Kroll’s report also highlights a number of fraud types with significant year-on-year increases in perceived vulnerability. Specifically these include: corruption & bribery, regulatory or compliance breaches, management conflict of interest, vendor, supplier or procurement fraud and IP theft.
Given the prevalence of coverage of the issue in news headlines over the past year, it indicates a sharp increase in awareness of the problems that may already or have the potential to impact business.
The research indicates that companies in China are now taking these risks seriously and report a marked increase in those taking preventative measures such as investment in background screening and staff (training/whistle blower hotline) compared to 2012.
“Organisations are far more mindful of regulatory requirements now than at any time in the past but there is still a long way to go," says Violet Ho, Kroll’s Greater China Senior Managing Director. "Fraud schemes in China are increasingly complex, often with systematic kick-back mechanisms in place, and the reality is that a complex and long-term fraud schemes are always difficult to detect and uncover.”
Colum Bancroft, Kroll’s Greater China Managing Director added that, “We are seeing companies taking a more proactive approach to prevention which includes measures like deeper due diligence and data analytics as tools to detect fraud early and prevent it from spreading or growing.”
Given the perceived vulnerability towards procurement fraud it’s not surprising to see that 57% of respondents in China indicated their plan to increase investment in conducting due diligence on partners, clients and vendors in the next 12 months. Colum Bancroft added, “The procurement process is fraught with vulnerabilities and determined fraudsters can cost companies millions. Our contract audits offering monitors delivery, quality and payments against agreed terms throughout the contract cycle, ensuring that projects are delivered to client budget and quality expectations.”
Furthermore, given the ever-increasing vulnerability to IP theft, Kroll reports that 62% of respondents in China are planning to increase their investment in IP protection programs, including IP risk assessment and trademark monitoring programs.
“Given the significant impact to a company’s reputation and bottom line, we advise our clients to take an integrated approach to trade secret protection, looking at the vulnerabilities from operational, cyber and physical security perspectives. Looking at these elements in isolation will not sufficiently combat the complex trade secret theft schemes we are seeing in Asia,” adds Ho.