Letter from the Editor, April 2014

 

Nick Burkill

Welcome to the April issue of the AFN newsletter.

In this issue, we are pleased to include an extract from Fraud: The Counter Fraud Practitioner’s Handbook, published by AFN partner Gower Publishing. We hope the extract will spark a debate as to whether the predictions of the 2009 Ernst & Young survey have come true. Please join the debate on our Linkedin page.

 

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Extract taken from Fraud: The Counter Fraud Practitioner’s Handbook, edited by Alan Doig

Fraud-TheCounterFraudPractitionersHandbook

 

 

 

 

 


Future Trends in Fraud

A pan-European study of 2,246 employees by Ernst & Young (2009) found that 55 per cent of respondents expected corporate fraud to increase over the next few years: a third because changes to their business opened up new areas of risk; 31 per cent because management were not focused on anti-fraud measures; 29 per cent because they didn’t trust management and an equal number because pressures to protect the future of the company will be greater. East Europeans were particularly sceptical about their own management.

Over a third of respondents mentioned that normal controls were likely to be forgotten or overlooked during cycles of redundancies, especially when linked to merger activity which could easily lead to disorganization and low morale. When asked whether activities would be justified if they help a business survive the economic downturn (a form of ‘noble cause corruption’), a quarter found it justifiable to make cash payments or give personal presents to win or retain business; a fifth to provide ‘entertainment’ to win or retain business; and a twelfth to misstate the company’s performance. Only two fifths said that it was unjustifiable to commit corruption or fraud under such circumstances. Stock-exchange listed companies differed little from others. Opportunity, culture and the expectations about others’ behaviour are so central to the propensity to defraud that one must be wary of automatic assumptions about international transferability. However, the Internet is to some extent a leveller of transnational crime opportunities, creating many more chances for technically savvy people in otherwise low-opportunity countries (see also KPMG 2009; Kroll 2010; and PWC 2009 for parallel fraud surveys, with different samples and orientations).

Fraud, like the value of investments, can go down as well as up. But fraud – like many other crimes – is not a unitary ‘thing’ but consists of many different sorts of harm which are likely to be driven by different factors, including what we do to prevent them and prosecute them. Whereas Levi et al. (2007) were asked merely to review the scientific adequacy of existing data, the National Fraud Authority (2010) has been able to stimulate a broader range of bodies to collect and divulge data about fraud during the period covered. But it is a mistake to think that there is a ‘true figure of fraud’: there will always be frauds that are unrecognized as such by victims and third parties, and even where something is recognized as a suspicious loss, the amount of it that can properly be attributed to intentional or reckless dishonesty may be a legitimate area of dispute.

A rise in crime rates can be an indication that the quality of life has got worse, but in this case, the substantially greater cost-of-fraud figure is far more likely to reflect improved knowledge than a real rise. Indeed, on a strict like-for-like comparison of items included in both reports, there has been a slight fall of 3.47 per cent since 2005 in the costs of fraud. Thanks to improved controls rather than improved social morality, Missing Trader Intra-Community and social security frauds have gone down substantially, while in the private sector, insurance, online banking, payment card and telecoms frauds have gone up; and in the public sector, NHS patient frauds and frauds against the BBC have gone up. Other than for payment card, cheque and some identity frauds – where the data are more reliable (and are thoughtfully reviewed in CIFAS 2010b) – we cannot know without further work whether these changes reflect better analytical skills in fraud detection by victims or real changes in fraud. But we should appreciate that any given sector of fraud risk consists of the interaction between motivation, criminal ingenuity and the opportunities that we give criminals by the way potential victims and ‘third party guardians’ watch over our assets and intervene (or otherwise). All three of these can change over time.

Though there remain areas of fraud against individuals, business and government that need greater understanding of risks, the UK government has made a more sustained effort than have other countries to measure the direct costs of fraud in private, public and not-for-profit sectors, and we are beginning to understand a little more about the impacts that these costs have upon our businesses, citizens, external investors, public services and visitors, which are not included in these financial totals. Measurement is only the beginning, for the process of analysis should stimulate us to reflect on what we can do about our vulnerabilities, and what we need from ourselves and from others to tackle them better. We do not know precisely how much displacement of fraud to other crimes and countries occurs, but it is easiest to cut out the opportunists: the determined will seek out alternative sources of profit, via social engineering and/or technical means, and will try to migrate to other frauds. In a climate of private and public sector spending cuts, there is a risk that we may lose sight of the harm that frauds can do and the importance of both individual and collective effort in reducing them.

Fraud: The Counter Fraud Practitioner’s Handbook is published by AFN partner Gower Publishing. Gower offers AFN members and newsletter recipients a special 30% discount on the list price of their anti-fraud book titles. Simply click here and, once you have made your choice, go to the online checkout and enter G8ATZ30 into the field marked “Leaflet Code.” Your order will be processed with a 30% discount.

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Letter from the Editor, March 2014

Nick BurkillWelcome to the March issue of the AFN newsletter.

In this issue Sophie Keen from, CIFAS, the UK’s fraud prevention service, explains why you should vet employees with the same vigour that you would apply to vetting customers or suppliers.

As ever, we are always interested in articles and book reviews written by AFN members and readers. If you would like to contribute to the AFN newsletter or the website, please contact us at info@antifraudnetwork.com.

Nick Burkill

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Fraud: not just an external threat

SophieKeenOrganisations have typically been aware of the fraud risks that come from the outside, such as fraudulent applications, documents or identity crime. The same cannot always be said for the risks faced from within. And yet, fundamentally, the risks are the same.

Organisations will check numerous sources of information, e.g., credit checks, voters’ roll and fraud prevention services such as the CIFAS National Fraud Database, when dealing with a customer application to verify information before any decision is made. The checks for potential employees should, therefore, be no different. Organisations need to guard against not only the risk of employing someone who could cause serious financial or reputational damage, but also against those people committing the same acts at another, unsuspecting organisation after they have moved on.
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Letter from the Editor, February 2014

Nick BurkillWelcome to the first issue of the AFN newsletter for 2014.

We are delighted to welcome a new member to the AFN Board. Carl Hinze is a Partner in the Shanghai office of Dorsey & Whitney. He is a recognised expert in the field of Chinese sociolinguistics and politeness research. With his insight into how language and culture affect the legal and business situation in China, Carl has helped clients to manage, mitigate and avoid risks arising in the context of China-related mergers and acquisitions, crisis management, anti-corruption and bribery investigations, and dispute resolution.

Carl has this month contributed an article on the compliance challenges Western businesses face in China.

Next month, CIFAS, the UK’s fraud prevention service, will be explaining why you should vet employees with the same vigour that you would apply to vetting customers or suppliers. CIFAS has recently revealed that there was an 18% rise in the total number of staff frauds recorded in 2013 when compared with 2012.

As ever, we are always interested in articles and book reviews written by AFN members and readers. If you would like to contribute to the AFN newsletter or the website, please contact us at info@antifraudnetwork.com.

Nick Burkill

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Doing business in and with China: Battling a corruption culture by building a compliance culture

Carl Hinze 2014Culture of corruption

It was during the pause between the main course and dessert that the mild-mannered man sitting next to me, a senior in-house counsel of a US multinational company, suddenly became animated. “It seems as though every deal we try to do in China is tainted by corruption and gets killed off in the due diligence phase…it’s like corruption is part of the culture!” he exclaimed.

China has an ancient authoritarian culture. For millennia power has been centralized and, since Confucian times, the primary moral imperative has been the obligation of loyalty to those within one’s “in-group”. Outside the in-group, there are decreasing levels of ethical responsibility and little (or no) moral obligation is felt towards others. Coupled with a fear of power and the inability to rely on a stable and independent legal system, this situation has given rise to an inherently dangerous and uncertain social structure. Refuge is sought in one’s network of relationships of trust and, ideally, securing the favor of those in power. As John Steinbeck once wrote, “power does not corrupt, fear corrupts…”

Poverty has exacerbated the tendency to form in-groups. Throughout Chinese history, those with political or administrative power have been underpaid, yet the power that comes with the position of “government official” has been sought after. Not only have such positions offered personal security, but the fact that others have been prepared to spend their monetary and social capital in order to win a government official’s patronage has made it lucrative.

In a socio-political environment where ties of reciprocity, not trust in shared values and a reliable legal system, are fundamental to social order, winning and maintaining the favor of others, especially those who exert power, has engendered a culture of corruption. The economic reforms of the past three decades and the ensuing cultivation of wealth, especially among those with power or in-group connections to power, have further entrenched the culture of corruption. As the central ideological pillar of Communist China has morphed into a fountain of wealth, there has been no shortage of people willing to ingratiate themselves with those who have power in order have an opportunity to drink from the fountain.

Anti-corruption campaign

Foreign media coverage of China frequently focuses on the latest corruption scandals. In recent weeks, corruption scandals involving the former mayor of Nanjing, a senior admissions official at one of China’s leading universities, and two former senior executives at Sinopharm, a state-owned Chinese drug group, have been highlighted in international media reports. This is in addition to other recent, high-profile corruption probes involving the UK multinational pharmaceutical group, GSK, and the former chairman of China’s National Petroleum Corporation, who until recently headed the government body that oversees state companies.

It is not surprising that Xi Jinping’s first speech as China’s new President to the 12th National People’s Congress on 17 March 2013 instructed members of the Communist Party to “battle against the corruption culture” and to “fight tigers as well as flies at the same time”, a reference to the fact that China’s new anti-corruption campaign should be as robust against high-flying officials as it is against more lowly participants in corrupt conduct.

More recently, during the Third Plenary Session of the Chinese Communist Party in November 2013, the Party released its “Decision on Major Issues Concerning Comprehensive and Far-Reaching Reforms,” which included references to the need to improve systems for identifying and disciplining corruption. Around this time, President Xi is reported to have declared that the problem of corruption is “a matter of the life and death of the Party and the country”.

In January 2014, Huang Shuxian, the vice secretary of the Central Commission for Discipline Inspection, said that 182,038 people were punished in 2013 for party discipline violations, a 13.3% increase on 2012.

This all points to the Party making a concerted effort to crack down on corruption among and outside its ranks.
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Letter from the Editor, December 2013

Nick BurkillWelcome to the last issue of the AFN newsletter for 2013.

In this issue, Eyal Ben Cohen explains the importance of screening employee CVs to ensure their degrees comes from real universities rather than from diploma mills. If more companies weeded out employees who had purchased their degrees, it might help prevent the employment of dishonest individuals.  A related version of this problem has been much in the news lately since the revelation that a UK lawyer lied about his academic background.

We are also pleased to be able to offer a 10% discount to AFN newsletter readers on IIR fraud courses. Fundamentals of Detecting & Preventing Fraud takes place on 15 January 2014 at The Hatton in central London; Advanced Techniques to Detect, Prevent & Investigate Fraud takes place on 16 January 2014 at The Hatton in central London. Click here for more information. Register your place either online, by calling +44 (0)20 7017 7790, or emailing kmregistration@informa.com. Use VIP code FKW52588AFNL to save 10%.

As ever, we are always interested in articles and book reviews written by AFN members and readers. If you would like to contribute to the AFN newsletter or the website, please contact us at info@antifraudnetwork.com.

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The importance of screening employees for bogus degrees

EyalBenCohenPeople who have been to university know how tough it is to get a degree and the amount of work that is required. Employers expect that anyone claiming to have a degree has gone through this demanding process and that their degree is recognised in the country in which it was awarded. Regardless of whether or not having a degree is essential for the job itself, it is an issue of honesty, integrity and trust. If someone has knowingly set out to deceive in this way, they may not stop there and the potential risk to the unsuspecting employer is huge.

Often it is the case that, when conducting a background check, high importance is given to protecting against applicants who present fake certificates from genuine universities. Checking if a certificate has been faked is fairly simple and is done by contacting the institution that has supposedly issued it. Unfortunately, this approach does not help when trying to spot and protect against bogus “life experience” degrees sold by degree mills.

Degree mills are mainly online entities that purport to be genuine universities, offering qualifications based on little or no work, but simply on the candidate’s life experience. Their lack of recognised accreditation or legal authorisation to grant degrees means there is no guarantee of quality. Those who rely on these “degrees”, such as prospective employers and the public at large, are therefore put at risk. Two recent cases uncovered by Verifile, highlight the need for thorough screening for degree mills as part of good practice CV checking.
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Letter from the Editor, November 2013

In this issue, Arjun Medhi, who provides the strategic lead on the UK Ministry of Defence’s Fraud & Corruption Risk Assessment & Loss Measurement programmes but also specialises in white collar crime in soccer, has written on the risks of fraud and corruption in UK soccer and how the sector can learn from financial institutions.

In addition, Wendy Johnson, who works in the Complaints and Investigations area of a bank affiliated broker-dealer has reviewed An Introduction to Internet-Based Financial Investigations: Structuring and Resourcing the Search for Hidden Assets and Information by Kimberly Goetz, published by Gower Publishing.

Gower has recently released four new titles: Heads or Tails, It Should Never Happen Again, Integrity in Business and Auditor Independence, as well as a series of publications on management/leadership skills. AFN members can order Gower titles with a 30% discount by using leaflet code G8ATZ30.

We are also pleased to again offer a 10% discount to AFN newsletter readers on IIR fraud courses. Fundamentals of Detecting & Preventing Fraud takes place on 15 January 2014 at The Hatton in central London; Advanced Techniques to Detect, Prevent & Investigate Fraud takes place on 16 January 2014 at The Hatton in central London. Click here for more information. Register your place either online, by calling +44 (0)20 7017 7790, or emailing kmregistration@informa.com. Use VIP code FKW52588AFNL to save 10%.

As ever, we are always interested in articles and book reviews written by AFN members and readers. If you would like to contribute to the AFN newsletter or the website, please contact us at info@antifraudnetwork.com.

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Book Review: An Introduction to Internet-Based Financial Investigations: Structuring and Resourcing the Search for Hidden Assets and Information by Kimberly Goetz (London: Gower Publishing Limited, 2012)

Impressed with the easy read and the breadth of information in Introduction to Internet-Based Investigations, I found it to be both validating of my own processes and highly educational in regard to areas for improvement.  When I first began my career in investigations, no one provided me with a manual of where to begin and what steps to take when documenting an investigation.  No one provided broad insight into the legal and professional ramifications of the information that I gathered.  I learned, and continue to learn as many do, through trial and error.

In a market and regulatory environment that provides greater and greater resources for fraudsters to make meritless claims against businesses and the agents that represent them, it is increasingly likely that claims will be litigated and the investigator may find themselves in the court room defending their investigation process as well as the results.  Having the building blocks that Ms Goetz provides can be invaluable in protecting yourself, your career and your employer.

Ms Goetz lays out an easy-to-following approach in An Introduction to Internet-Based Financial Investigations.  It is a practical approach for both the novice and intermediate investigator.  Ms Goetz first begins by forcing the investigator to think not only about the investigation process and the subject, but also how the investigation may impact the investigator and their employer ethically, legally and financially.  It is easy to forget that you may not always be the faceless information gatherer, and that your actions may have real world consequences that you will have to explain.

With a clear understanding of how the investigation can have personal impacts, Ms Goetz builds a foundational understanding of legal structures and the associated documentation.  Armed with the basic understanding of how business entities are structured and may be used to shield assets, Ms Goetz delves deeper into the investigation process and the task of finding and analyzing the results.  Each chapter concludes with a real-life application to cement your understanding of the subject matter.

While not a complete roadmap for highly complex financial investigations, An Introduction to Internet-Based Financial Investigations will provide the basic building blocks for the investigator to grow the skills to tackle more complex subjects.

After walking you through the legal and ethical considerations, the basics of business structure and searching the documentation, Ms Goetz provides practical tips for organizing your search and using the many search engines that are available, both free and fee-for-service.  Her real-world tips and noted personal preferences provide welcome guideposts in the sea of information.

Once all the documentation has been gathered, the most daunting task in any investigation can be putting it all together.  Even seasoned investigators can struggle with telling a complex story that may be heard by managers, judges, or juries.  Ms Goetz explains how to organize your data graphically, allowing an investigator to see gaps that need to be filled.  Finally, she lays the groundwork for summarizing your conclusions or determinations.  It is often the discrepancies that paint the broadest picture and Ms Goetz provides a step-by-step guide to presenting these findings.

Internet-based investigations are, for the most part, impersonal and detached.  As computer-based investigators, we can sometimes forget that we are ultimately dealing with people.  It is important to make an effort to understand your subject and what motivates them, making your investigation as robust as possible and identifying the road blocks you may encounter in bringing your investigation to conclusion.  Ms Goetz provides a quick, yet surprisingly extensive, overview to the various “people problems” we may encounter during the investigation process.  While brief, her assessments appear to be spot-on.

Ms Goetz has written a useful “how to” manual for the novice and intermediate investigator and a handy reminder for any investigator who may have fallen into comfortable habits. I would recommend this as initial reading for anyone entering the field of financial investigation, law, accounting, etc.  The foundation set forth in An Introduction to Internet-Based Financial Investigation will be invaluable in how you research, review, and compile data and finally present your findings.

An Introduction to Internet-Based Financial Investigation can be purchased from Gower Publishing with a special discount for AFN newsletter readers. Click here and, once you have made your choice, go to the online checkout and enter G8ATZ30 into the field marked Leaflet Code. Your order will be processed with a 30% discount.

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