WASHINGTON—Enron, WorldCom, and Tyco are all names that have been firmly etched into the annals of business misconduct. Those cases of serious white collar crime may be considered rare, but corporate fraud activities are in fact no longer isolated incidents.
About 80 percent of all senior executives have either experienced, or have been aware of fraud within their firms during the past three years, according to a recent survey by the Economist Intelligence Unit (EIU), a global research and advisory firm based in London.
Theft of supplies and portable assets (e.g., conference room projectors) were on top of the list—reported by more than two-thirds of the survey respondents. Around half of the executives reported that non-compliance with regulations, conflict of interest, theft of intellectual property and trade secrets, financial fraud, corruption and bribery significantly impacted earnings.
Among firms with more than $5 billion in annual sales, 10 percent of those surveyed reported more than $100 million in lost revenues due of fraud annually.
Financial services firms—banks, brokerages, and securities holders—were the most affected. On average, losses due to fraud in the financial services industry doubled the average in most other industries.
"Larger companies are obviously bigger targets," suggested Kroll, Inc., an advisory and investigative firm based in New York owned by Marsh & McLennan Companies. "On average, they lose six times more money to corporate fraud than smaller ones," Kroll was cited in the "Global Fraud Report."
The greater the distance a subsidiary is from its parent company, the greater the potential for fraud, the Kroll report suggested.
"Fraud occurs to a far greater extent away from the home office and more distant operations create a disproportionate number of incidents," said Jules B. Kroll, Chairman of Kroll, in the report.
The report based its analysis on the EIU survey of close to 900 senior executives from Europe, Asia-Pacific, North America and South America.
Fraud Becoming More Detrimental
Today's technological advancements create fraud that is more damaging and far-reaching than ever before. The report concluded that although fraud is an age-old blight, it has soared to unprecedented heights after the turn of the century.
"The risks of fraud for business are greater today than in the past," said Andres Antonius, president of Kroll's consulting services, in the report.
In the past, criminal activities were comparatively benign—such as plagiarism, stealing from petty cash, selling fake merchandise and land swindles.
Today, corporate crimes have metamorphosed into something that is much more far-reaching and can be perpetrated much faster than anything in the past due to the Internet. For example, manipulating a company's financial system can generate hundreds of millions of dollars in fictitious revenues in mere seconds.
Identity theft, credit card fraud, and unauthorized moving of funds from company or bank accounts, stealing trade secrets, falsifying financial information, paying bribes and corruption are types of fraud most prevalent in today's business environment.
Today, businesses depend on intricate information systems and network and data integrity to quickly communicate with suppliers, customers, banks, and subsidiaries. Fraudulent transactions and data can do damage much quicker and affect a greater number of people than ever before.
Location and Size Matters
To fuel expansion, multinational companies are moving into regions where laws and regulatory systems are either underdeveloped, do not exist, or impossible to enforce.
Bribery, corruption and financial fraud are generally associated with an entire region and are more prevalent in Middle Eastern, Eastern European, African, Latin American and Asian countries than in the developed markets.
'The extent of corruption and bribery varies widely from one region to another," claims the report.
"Among firms operating in China, 38 percent have experienced such fraud in the past three years, compared with just 14 percent in rival developing economy India," according to the report.
However, property theft and information attacks are as common in the United States as in any other region of the world.
"The frequency of the most widespread types of corporate fraud, and those giving rise to the most concern, vary relatively little by region," says the report.
Fighting Corporate Fraud
The U.S. Foreign Corrupt Practices Act (FCPA) is being used to convict executives, employees and companies in greater frequency over the past few years. FCPA has become prominent in court rooms since the Enron and WorldCom scandals.
The U.S. Department of Justice and the Securities and Exchange Commission charged Baker Hughes, Inc., an oilfield services group, with bribery in April of this year. The civil and criminal fines amounted to $44.1 million.
In 2004, ABB Ltd., a Swiss-Swedish engineering group, was fined $10.5 million and an additional $5.9 million for illicit profits. Additionally, ABB incurred about $17 million in attorney fees.
"Operation Raw Deal" by the U.S. Drug Enforcement Administration (DEA) and other federal agencies has been targeting unlawful manufacturing and trafficking of steroids and associated raw materials. Over 124 people were arrested and more than 100 illegal manufacturing sites were closed down in the U.S. alone in September. The majority of the raw materials were brought into the U.S. from China.
"DEA successfully attacked the illegal steroid industry at every level of its distribution network—from the manufacturers in China who supply the raw materials, to the traffickers n the United States who market the deadly doses," said Karne P. Tandy, administrator at the DEA, in a recent Department of Justice press release.
Companies are starting to conduct thorough background checks when hiring employees. Since 2005 an ever-increasing number of prospective employees were found to falsify information on their résumés or job applications. Falsification of employment records increased by close to 13 percent from 2005 to 2006, and educational background checks revealed that over 7 percent of all applicants exaggerated their educational achievements, according to a recent Kroll report.
"Not only are employers making it mandatory that potential employees pass a drug test and undergo a criminal background check before getting hired, they're digging deeper than ever before, " said Barry Nadell, a VP at Kroll.
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