The Economic Crime Triad: Companies Facing Major Risks

by Michael Volkov
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economc5FCPA practitioners can suffer from myopia – a narrow focus on FCPA risks.  The FCPA does not apply to company actors who take bribes in exchange for awarding contracts to companies.  That situation is commonly referred to as “kickbacks.”

Taking a step back, companies face a major triad of economic crime risks.  We all know about companies paying bribes to foreign officials.  There are two other significant risks that companies grapple with every day: procurement fraud and asset misappropriation/theft.   The economic crime threat is significant to all businesses, especially those operating in international markets.

PWC issued a fascinating report on the problem of economic crime – Economic Crime: A Threat to Business Processes (available here).  As reported by PWC, almost half of US companies suffered from economic crime in the last two years.

Approximately 57 percent of all US companies plan to enter high-risk international markets to expand their business opportunities.

Interestingly, just over a quarter of all companies surveyed suffered some type of procurement fraud.   Approximately 69 percent of the surveyed companies suffered asset misappropriation.  One in seven companies reported foreign bribery and one in five companies reported accounting fraud.

Companies have to combat economic crime.  That means more than just promoting an ethical culture and putting in place an effective compliance program.  Fraud control has to become part of the company’s business operations.  It means vigilance over internal controls but inclusion of compliance principles into the business fabric of the company.  Everyone in a company should have a stake in reducing internal fraud.economic2

With all the attention given to bribery of foreign officials, companies have to turn back and focus on bribes their employees may demand or receive from vendors or suppliers looking for lucrative contracts with the company.  Procurement fraud is a growing problem because it is difficult to ensure that foreign actors maintain adherence to US-based purchasing, supply and payment policies and processes.

Companies are seeking cheaper suppliers and manufacturers of goods around the world.  They are looking for cheap labor, cheap raw materials, and then shipping products greater distances to consumer markets.  As a result, companies are expending more resources to control and manage their supply chains.

The PWC survey found that procurement fraud most often occurred in vendor selection, vendor management, payment processes, and the bidding process.   In the end, company managers and employees were seeking personal benefits at the expense of company supply chain management.

Companies need to conduct robust vendor/supplier due diligence in high-risk areas.  Purchasing managers are familiar with conducting basic due diligence focusing on financial qualifications.  The due diligence process needs to be expanded to identify relevant red flags, and resolve them, similar to the process used for due diligence review of third parties.   Otherwise, companies will continue to suffer from kickback schemes, bribery, collusion and even bid-rigging.

economic4The PWC survey also found that there was sharp increase in internal fraud committed by middle management (54 percent) over junior staff (31 percent).  This may reflect the fact that middle managers have a greater ability to commit economic crimes while junior staff does not have the same opportunities.

To be effective, internal controls have to take into account the risk posed by middle managers, and address this risk with controls designed to prevent middle managers from engaging in fraud.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Michael Volkov, The Volkov Law Group | Attorney Advertising

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Michael Volkov
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