Fraud Hits 98% of Chinese Companies—Report

China has overtaken Brazil as the top market in which companies suffered fraud, according to the latest edition of the Kroll Annual Global Fraud Report.


This year’s study shows that 98% of the respondents in China suffered at least one type of fraud in the last year, while 90% of respondents in Brazil, which was in the top spot in 2009, said the same. Last year 89% of companies in China had experienced fraud, compared with Brazil’s 92%. The findings are the result of a study of more than 800 senior executives worldwide, commissioned by Kroll with the Economist Intelligence Unit.


The report also found that the types of fraud experienced in China are more varied than any other market in the world. Nine of the 11 frauds covered in the survey affected at least one out of five companies, including management conflict of interest (30%), IP theft, piracy, or counterfeiting (26%), theft of physical assets or stock (22%), regulatory or compliance fraud (22%), financial mismanagement (22%), market collusion (22%), corruption and bribery (20%), vendor, supplier or procurement fraud (20%), and money laundering (20%). Respondents noted that high staff turnover (34%) and weak internal controls (34%) have increased their exposure to fraud.


Like China, Southeast Asia has a number of significant fraud issues. 90% of respondents in Southeast Asia experienced fraud in the last year, positioning the region, along with Brazil, as the markets with the third highest incidence of fraud. Respondents in Southeast Asia reported one of the highest rates of theft of physical assets or stock (32%), while the incidence of IP theft (16%) was surpassed only by China. Respondents in Southeast Asia also face above average levels of management conflict of interest (26% compared with a global average of 19%).


Another finding is that companies operating in China are starting to broaden their approach to fighting fraud. The number of respondents planning to invest in financial controls (52%) is above the global average (45.8%), although is down from 73% in 2009. On the other hand, the number of those intending to put money into staff training (54%) and staff background checks (42%) has risen noticeably (from 35% and 31% respectively in 2009). This makes sense given that employees were identified as the key perpetrators of 42% of frauds experienced by respondents in China.


While these numbers are promising, the report also shows that some areas are being overlooked. Forty-four percent of the frauds in China were perpetrated by vendors, suppliers and customers, however the number of companies in China that have partner, client, and vendor due diligence in place is significantly below the survey average (38% compared with a global average of 50%), as is the number intending to invest in this area in the coming year (32% compared with the global average of 41%).


Meanwhile, fear of fraud dissuades nearly half of companies surveyed from becoming more global. Nearly half (48%) of respondents indicated that fraud had dissuaded them from pursuing business opportunities in at least one foreign country. The biggest impact has been on emerging economies, with fraud deterring 11% of businesses operating in China and similar percentages of businesses operating in Africa (11%) and Latin America (10%). Respondents claimed they managed risk in these countries simply by avoiding the regions, even though they may offer attractive investment opportunities.


For those companies who have been affected by fraud over the past year, the most common fraudsters were equally junior employees (22%) and senior management (22%), with agents or other intermediaries accounting for a further 11%. The proportion of fraud carried out by these employees was consistent across geographies - between 50 and 60% in North America, Europe and the Asia-Pacific, but increasing to 71% in the Middle East and Africa and dropping to 42% in Latin America.




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