Our correspondent Andreas Frank writes: As an illustration of the prevalence of fraud globally, 1 in 5 CEOs report they have been asked to pay a bribe. Another finding that should be a concern to general counsels and other in-house attorneys is that one in five businesses participating in the survey did not have an anti-bribery/anti-corruption policy in place.

In a statement, Ernst & Young (EY) said it is “imperative” for companies to have a “robust” strategy to respond to incidents.

The EY survey of over 2,700 executives located in 59 nations show that close to 40 percent of executives saw that bribery and corruption were widespread in their nations. Yet, some 48 percent of those surveyed, saw cyber-crime to be a very low risk or fairly low risk to their business. EY says the respondents apparently underestimate risk from organized crime and foreign governments.

More than 1 in 10 executives surveyed reported their company as having experienced a significant fraud in the past two years. In fact, the level of fraud reported by respondents has remained largely unchanged over the past six years: from 13% in 2008 to 12% in 2014.

At a country level, results are evenly split between those countries reporting an increased incidence of fraud and those reporting a decrease since our last survey.

Ten countries recorded a significant increase, including the US (16% in 2014, up from 8% in 2012), China (8%, up from 4%), Japan (10%, up from 6%) and Russia (16%, up from 10%).

In six countries, more than 25% of respondents reported experiencing a significant fraud in the past two years. These included Egypt (the highest level at 44%), but also Germany and Norway (26%).  Respondents also reported personal experiences of fraud risks. For example, 17% of respondents have been asked to pre-date or post-date contracts.

In a statement sent to Inside Counsel, Loughman said the survey data “suggests there is much work to be done in compliance because only 38% of c-suite executives responded they had been through ABAC [anti-bribery/anti-corruption] training.”

“To the extent compliance reports to legal there is an opportunity for improved advocacy by general counsels to strengthen the ‘tone at the top,’” he added.

The survey comes as cybercrime is becoming more prevalent, and the U.S. Securities and Exchange Commission (SEC) is increasingly focusing on cyber risks, Loughman said. As a result, company boards and their audit committees “need to be vigilant in monitoring these risks,” Loughman said.
Global Fraud Survey – Overcoming Compliance Fatigue – Reinforcing
The Commitment To Ethical Growth
Anti Corruption Reports

Our correspondent Andreas Frank writes: A new research reveals the extent of corruption in Australian organisations and highlights the insidious crimes committed by white collar criminals.

All forms of economic crime are up with 57 per cent of Australian organisations reporting an incident in the past two years, compared to 45 per cent in the last survey. Globally, the number of incidents reported was lower at 32 per cent and in the Asia Pacific region only 37 per cent.

“Typically Australian organisations have always reported more incidents of economic crime but that doesn’t mean we have more, quite the opposite. Results from this year’s survey confirmed what we suspected; Australian organisations take a more serious approach to detecting, investigating and reporting economic crime than other countries,” PwC Partner and Forensic Services Leader, Malcolm Shackell explained.

Over the past two years, two thirds of Australian organisations (67%) reported an incident committed by an external party to regulatory bodies including law enforcement. In the same period two-fifths (39%) reported an incident committed by an internal party to regulators including law enforcement.

The ‘big five’ crimes include asset misappropriation, cybercrime, procurement fraud, accounting fraud, bribery and corruption, according to the report.

Cybercrime:

Cybercrime continues to be of concern to Australian organisations with one in 10 reporting financial losses of more than AUD $1 million from cybercrime in the past two years.

Close to half (43%)of the organisations surveyed ranked the theft or loss of personal identifiable information as the number one concern should a cybercrime attack occur, while a third (33%) were most concerned about the theft of intellectual property and data in general.

PwC Partner Richard Bergman said, “Cybercrime is not just an IT issue. Recent high profile data breaches such as the US Target breach have increased the level of awareness and concern among senior management and the Board. But, the majority of cybercrime incidents still don’t make the headlines.”

“Information is valuable and attackers are determined to get it. Many of the attacks we’ve recently investigated have targeted merger and acquisition information and what surprises many organisations is how long attackers are inside their networks before the attack occurs.”

Procurement Fraud:

Procurement is a risky business according to a PwC survey released today which found that one third of Australian organisations (33%) experienced procurement fraud during the past two years with the mining, construction and energy sectors reporting the most incidences during that period.

According to the Australian edition of PwC’s 2014 Global Economic Crime Survey, procurement fraud was the third most frequent economic crime experienced by organisations in Australia and around the globe during the two year survey period. Asset misappropriation was number one followed by cybercrime.

Mr Shackell said most of the crime occurs where money leaves a business with a surprisingly high amount in the procurement process of awarding contracts to companies.

A common example is inappropriate relationships between a middle management insider who can authorise payments and an external contractor. The outsider might inflate invoices which are paid by the company, with the pair pocketing the extra.

Malcolm Shackell said, “Detecting and responding to any type of economic crime is challenging but procurement fraud is probably one of the more complex and difficult.”

“Procurement supply chains have many links. All of the links are susceptible to weakness and offer opportunities for employees and external providers to exploit. We see this type of fraud in contracting, inappropriate supplier relationships and the supply and disposal of goods and assets – anywhere the money is flowing.”

According to the survey results, Australian organisations are experiencing procurement fraud mostly around vendor contracts and maintenance. Globally, vendor selection is where it is most prevalent.

To stop or at least reduce procurement fraud which in turn will improve productivity, Mr Shackell suggests organisations have a greater focus on scrutinising contractors and relationships with other third parties.

“Organisations need to understand the profile of the people they are most at risk from, internally and externally, to ensure they have the right preventative controls in place,” he said.

According to the survey the majority of fraud is committed by someone internally (51%) with the following characteristics:

Increasingly in middle management roles (65% in 2014 up from 45% in 2012),

Aged between 31-40 years old (52% in 2014 down from 55% in 2012),

Predominantly male (57%); and

Increasingly qualified graduates (30% in 2014 up from 10% in 2012).

For companies acting overseas, the biggest risks include corruption, money laundering and antitrust behaviour.

Australia has also seen a rash of insider trading cases recently — where people seek to profit on the stock market through insider information.

One high profile example saw an Australian Bureau of Statisctics worker who allegedly leaked market-sensitive information to a former university friend, netting the pair $7 million according to police. ABS acting statistician Jonathan Palmer told a Senate hearing into the issue the breach was unprecedented but “it’s a very difficult threat to counter.”

“If someone has a trusted need to access the number and they only have to leak an aggregate number or communicate in some obscure way that the number is contrary to market expectations, there’s no requirement for them to take [numbers] out of the building,” Mr Palmer said.
PwC’s 2014 Global Economic Crime Survey: The Australian Story –
Corruption: From the backroom to the boardroom

Derek Easterby

The International Labor Organization ILO has voiced its concern about the impact of austerity on social protection, saying that measures aimed at offsetting the effects of the crisis have will have long-term detrimental effects on the bloc’s economies.

In its 357-page World Social Protection report published on Tuesday, the Geneva-based UN offshoot warned that “together with persistent unemployment, lower wages and higher taxes, these measures have contributed to increases in poverty and social exclusion, now affecting 123 million people in the European Union, 24 percent of the population, many of them children, women, older persons and persons with disabilities.”..
ILO report warns of austerity ‘inflicting intense human suffering
World Social Protection Report 2014-15

Corruption-reports

Our correspondent Andreas Frank writes: The head of the International Monetary Fund has warned that a persistent violation of ethics among bankers and rising inequality pose a major threat to growth and financial stability.

Christine Lagarde told the audience at the inclusive capitalism conference that six years on from the deep financial crisis that engulfed the global economy, banks were resisting reform and still too focused on excessive risk taking to secure their bonuses at the expense of public trust.

She said: “The behaviour of the financial sector has not changed fundamentally in a number of dimensions since the crisis. While some changes in behaviour are taking place, these are not deep or broad enough. The industry still prizes short-term profit over long-term prudence, today’s bonus over tomorrow’s relationship.

“Some prominent firms have even been mired in scandals
that violate the most basic ethical norms – Libor and foreign exchange rigging, money laundering, illegal foreclosure.”

Lagarde warned the too-big-to-fail problem among some of the world’s largest financial institutions was still unresolved and remained a major source of systematic risk, with implicit subsidies of $70bn in the US, and up to $300bn in the eurozone.

In a speech littered with quotations from Winston Churchill to Pope Francis and Oscar Wilde, Lagarde said international progress to reform the financial system was too slow. “The bad news is that progress is too slow, and the finish line is still too far off. Some of this arises form the sheer complexity of the task at hand. Yet, we must acknowledge that it also stems from fierce industry pushback, and from the fatigue that is bound to set in at this point in a long race.”

Lagarde told that rising inequality was also a barrier to growth, and could undermine democracy and human rights.

“One of the leading economic stories of our time is rising income inequality, and the dark shadow it casts across the global economy,” Lagarde said.

Borrowing from Oxfam research, she noted that the world’s richest 85 people, who could fit into a single London double-decker bus, control the same wealth as the poorest half of the global population of 3.5 billion people.

Options to address inequality include more progressive tax systems and greater use of property taxes, she said.
“We must recognise that reducing inequality is not easy. Redistributive policies always produce winners and losers. Yet if we want capitalism to do its job – enabling as many people as possible to participate and benefit from the economy – then it needs to be more inclusive. That means addressing extreme income disparity.”

Lagarde compared the rising awareness of social responsibility tied into the financial system with the world’s expanding environmental consciousness. “Just as we have a long way to go to reduce our carbon footprint, we have an even longer way to go to reduce our ‘financial footprint’. Yet we must take those steps.”
IMF Lagarde Speech 27.5.14

Derek Easterby

Two days after the Credit Swiss plea agreement, the Swiss Federal Council issued a statement making it clear what it thinks “the new global standard for the automatic exchange of information in tax matters” should look like.

The Swiss Federal Council is basically following the opinion of the Swiss Bankers Association (SBA) which was published on November 29, 2013.

Switzerland wants to portray itself in the domestic
and international media as a clean, well-regulated and transparent financial centre that has broken with the historic haven for thieves and abusers.

However the Swiss Federal Council statement tells a different story. The Swiss statement is yet more evidence of what has been called a “circle the wagons” strategy, when under pressure from a world that’s moving forward, give ground only inch by inch, if at all, hold on to secrecy where possible – and particularly exploit the weaknesses of weaker and more vulnerable countries.

Multilateral negotiations with intransigent countries like Switzerland and Singapore are always more fruitful than bilateral. The Swiss government therefore plans to stick to a bilateral approach to AIE and engage in “cherry picking”

Switzerland wants to make sure it has maximum leverage over vulnerable developing countries and tries to exclude developing countries from AIE for as long as possible.

The Swiss government is not expecting any external resistance to this strategy of cherry picking. Neither the OECD nor the G20 have made a clear statement in favour of a multilateral approach to AIE. Nor have they asked for the inclusion of developing countries in such a multilateral approach. Nor have LIC/LDC (Low income countries/Low developed countries) governments made it clear that they wish to be included.

It can be expected that Switzerland, likely with the silent support of other rich nations, show what all this is really about: countries with which there are close economic and political ties will cooperate to not hurt each other economically, but that less fortunate countries of the world won’t benefit from this international drive against large-scale tax evasion.

In joining the OECD ministerial agreement, Switzerland and Singapore are suggesting that both countries would put an end to banking secrecy. In reality both countries are trying hard to cement the status quo which benefits their economies as well as international organized crime and money launderers.
Federal Council Press Release