Fraud set to rise as financial crisis deepens

The current financial turbulence and threat of a global recession will result in an increase in white collar crime as well as significant changes in how fraudsters operate, according to the newly released Kroll Global Fraud Report. Kroll expects to see an increase in full-scale fraud investigations involving legal disputes, regulatory action and prosecution in 2009 as whistleblowing also becomes more common.

“In difficult economic conditions, businesses are struggling to compete for fewer business opportunities. This creates more incentives to deviate from proper business practices and engage in fraudulent activities to protect and maintain revenue,” said Tadashi Kageyama, regional head of Investigations for Kroll in Asia. “We saw a marked increase in the number of corporate fraud cases during the market downturns of 1987, 1991 and 2001.”

Market downturns traditionally reveal crimes which took place in the preceding boom years, but even while doing so they provide new opportunities for criminals and different vulnerabilities for companies. Fraud remains, but its forms change, and successful anti-fraud strategies must too.

According to Kroll, comprehensive due diligence is a vital tool for containing fraud in a time of economic uncertainty as companies enter new markets and consider foreign direct investment through acquisition or joint venture partnerships.

“Comprehensive due diligence—not a cursory ‘check-the-box’ review—is the key to managing exposure to these threats through the downturn,” said Sharon McCarthy, associate managing director for Kroll. “Companies should not think that they are safer in certain country markets—this is a global concern that spans all industries.”

Additionally, with regulation expected to tighten in the wake of high profile cases such as the Madoff investment fraud and Satyam fraud, companies will need to re-examine their financial controls, corporate governance, compliance and transparency policies.

Kroll Global Fraud Report key findings:
• The financial crisis will see an increase in fraud claims, legal disputes and regulatory action
• Corporate governance will become a serious issue for shareholders
• Management will need to understand the process of whistleblowing and formulate appropriate responses
• Businesses will need to assess regulatory risk and its impact on future investments
• Cross-border transactions will increase exposure to complex fraud and corruption
• Greater due diligence will be required to ensure sound investment and meet compliance policies