The escalating threats of cybercrime, terrorist financing and, more recently, the revelations regarding widespread possible misuse of offshore jurisdictions, have increased pressure on governments to act and companies to identify and mitigate fraud, bribery and corruption issues.
EY’s 14th Global Fraud Survey 2016: "Corporate Misconduct – Individual Consequences" highlights overwhelming corporate support for enhanced beneficial ownership transparency, with 91% of executives recognizing the importance of establishing the ultimate beneficial ownership of entities with which they do business.
“With the continuing anti-corruption enforcement focus on third-party conduct, and the recent revelations on the possible misuse of offshore financial structures, business leaders are right to be focused on securing a deeper understanding of their clients, partners and suppliers," says David Stulb, EY Global Leader of Fraud Investigation & Dispute Services.
"Enhanced transparency is clearly a focus of broad public interest.”
Increased transparency is, however, only one facet of the solution to a problem that shows no sign of abating. In total, 39% of respondents believe that bribery and corrupt practices happen widely in their country, little changed from 38% in 2014 and 38% in 2012.
In a question introduced in this year’s survey, 32% of respondents report that they have had personal concerns about bribery and corruption in their workplace.
Coordinated efforts by regulators to root out corruption
Regulators recognize the threat that bribery and corruption pose to a financial system already under stress and are increasingly cooperating across borders to hold individuals accountable for illegal acts.
Such enforcement efforts appear to be heavily supported by survey respondents, with 83% agreeing that prosecuting individuals will help deter future fraud, bribery and corruption.
However, with 42% of respondents admitting that they could justify unethical behavior to meet financial targets, and 16% of finance team members below the CFO ready to justify making a cash payment to win or retain business, those executives responsible for ethics and compliance appear to be facing a significant challenge if they are to keep their organizations clear from the scrutiny of prosecutors.
The survey also identified a perception in emerging markets that individuals responsible for corruption are not being held to account, with 70% of respondents in Brazil and 56% in both Africa and Eastern Europe believing that although governments are willing to prosecute, they are not effective in securing convictions.
Stulb says, “Increased levels of global cooperation between law enforcement agencies are making it harder for fraudsters and bribe-payers to evade prosecution. However, with respondents indicating that such misconduct is showing no sign of abating, companies continue to be exposed to major risks driven by the illegal actions of a small minority of employees. More can be done to leverage forensic data analytics to manage these risks and improve compliance and investigative outcomes.”
There are some positive indicators in markets where governments and regulators have taken steps to crack down on impropriety.
In India, for example, where steps to increase transparency and crackdown on corruption have been taken by the government, the proportion of respondents from this country believe that bribery and corruption happens widely in the country declined from 67% in 2014, to 58% this year.
In China, 74% of local respondents report that enforcement is effective, indicating the apparent effectiveness of the Chinese Government’s commitment to tackle corruption.
Robust compliance, robust growth?
Expanding into new markets is essential for most companies, yet such expansion brings new and less familiar risks. The research shows that companies are frequently failing to take appropriate steps to respond and reduce their risk exposure.
One in five do not identify third parties as part of their anti-corruption due diligence. One in three do not assess country or industry-specific corruption risks before making investments. Only half utilize technologies such as forensic data analytics to identify and mitigate risks.
Innovation is critical to responding to emerging risks
Whistleblowers remain a critical source of information on alleged misconduct. According to this year’s survey, 55% of companies have whistleblower hotlines in place. Regulators welcome such tips, and in some jurisdictions, including the US, whistleblowers are offered substantial monetary rewards.
Yet such mechanisms are not always effective. Survey respondents report barriers to using such mechanisms: 18% cite that loyalty to colleagues would deter them from reporting an incident of fraud, bribery and corruption and 19% cite loyalty to their company as a deterrent.
Stulb says, “What we are seeing clearly is that some employees, with widely varying motivations, are prepared to misappropriate – or enable others outside the firm to have access to – the confidential data of their companies. The balance between data privacy and security creates further complications.
"Dealing with such cyber and insider threats should be a top priority for management and boards. Yet 59% of CFOs view cybercrime as a low risk – a perspective that deserves robust challenge.”