While the Channel Islands are actively seeking new markets in Far East Asia and elsewhere, Ernst & Young are warning the States and businesses to be aware of the growing possibility of fraud in many jurisdictions.
Ernst & Young’s 2012 Global Fraud Survey, Growing Beyond: a place for integrity, shows fifteen percent of senior executives polled at leading companies around the world are willing to make cash payments to win or retain business, up from 9% in 2010. The survey also showed that over a third of the respondents believed corruption was widespread in their country – a figure that was significantly higher in rapid-growth markets such as Brazil (84%), Indonesia (72%) and Turkey (52%).
Samantha des Forges, Senior Manager leading Fraud Investigation & Dispute Services (FIDS) in the Channel Islands said: “It is vital that Channel Islands businesses recognise these trends and the impact they have on the relative risks posed by doing business with clients and agents in these global locations. Far East Asia is seen as a significant growth opportunity for Channel Islands business, but consideration must be given to the risks associated with this region. Financial statement fraud remains an important risk across many jurisdictions but the survey found that fifteen percent of respondents in Far East Asia think that financial performance misstatement can be justified.”
The Survey identified significant themes in relation to China and India, amongst other rapid-growth markets. Those interviewed in China are almost twice as likely to think that local regulators are willing and effective at prosecuting corruption as the global average, reflecting the high priority given to the fight against bribery and corruption by the Chinese leadership. Many recent fraud allegations in China have hinged on the legitimacy of supposedly official documentation, for example, regarding property ownership or the use of natural resources. The Survey notes risks to be aware of include the use of imaging software to create false documentation, spreadsheets preloaded with official bank logos and letterhead allowing users to simply enter the transactions they want and the availability of ‘refurbished’ official tax invoices online were amounts and vendor details have been erased. Samantha des Forges commented that “local businesses should be aware of these challenges and, where appropriate, consider additional steps such as follow-up enquiries, site visits or engaging third parties with local investigative expertise.”
In India anti bribery/ anti corruption (ABAC) legislation is evolving rapidly, with enforcement action also increasing. The scale and unique nature of the Indian market results in investors often working with local partners, to access their knowledge and contacts. However, 28% of Indian respondents are willing to make cash payments to win or retain business and 16% are willing to misstate financial performance in order to help their business survive. Samantha noted that “these are worrying results that emphasise how critical it is to select the right partner and to ensure that governance processes are embedded at a local level.”
“The survey provides a timely reminder for all Channel Islands companies. With the increased attention on bribery and corruption in the UK and globally, combined with a growth in acceptance of unethical behaviour, local businesses should seek to reinvigorate their commitment to provide appropriate anti-fraud and anti-bribery training, processes and structures.”
More than 1700 executives across 43 countries, including CFOs and heads of legal, compliance and internal audit, were surveyed for their views of fraud, bribery and corruption. Face-to-face interviews were also subsequently held with senior executives of blue chip companies to discuss these findings and their own efforts to mitigate these risks.
For a growing number of executives, the pressure to meet revenue growth targets is undermining their commitment to compliance with policies and the law. The competitive landscape continues to be distorted by unethical conduct.
Boards under pressure
Boards are held responsible by regulators and shareholders for addressing these challenges and are under intense pressure. But more than half of chief executives respondents think the board needs a more detailed understanding of the business if they are to function effectively as a safeguard. Mixed messages are being given by management – with the ‘tone at the top’ diluted by the failure to penalize misconduct. Almost 50% of respondents believed that, while management strongly communicated its commitment to anti-bribery and anti-corruption policies, people were not penalized for breaches.
David Stulb, Global Leader of Ernst & Young’s Fraud Investigation & Disputes Services practice said: “Growth and ethical business conduct in today’s markets can appear to be competing priorities. Our findings show that, as businesses continue to pursue opportunities in new markets, many executives are underestimating the risks. Boards need to put pressure on management to conduct more frequent and more robust anti-bribery/anti-corruption risk assessments and they need more tailored reporting to drive improved compliance.”
Preparing for new challenges: managing third parties and risk from acquisitions
Companies pursuing opportunities in rapid-growth markets face specific risks that are not always being managed effectively, according to the survey. For example, due diligence on third parties is expected by regulators – it is required under both the US Foreign and Corrupt Practices Act and the UK Bribery Act – but almost half the respondents (44%) reported that background checks were not being performed. Many businesses are also exposed to additional risk, having failed to conduct appropriate anti-corruption due diligence before and after acquisitions. For US-based companies, this type of due diligence is the norm – 84% either always or very frequently conduct it pre-acquisition. Elsewhere the frequency is much lower (32% in China, 9% in Nigeria).
David Stulb concludes, “The survey shows companies struggling to balance growth and ethical business conduct. Many companies are failing to do enough to manage the risks of fraud, bribery and corruption. Boards need effective channels of communication with contacts across the finance function and other executives within the business to ensure that they have a full and an accurate picture of compliance. For businesses to seize new opportunities, boards need to ensure that the right tone is set not just at the top, but at all levels and in all markets.”
Category: Finance & Business