Not in My House: Companies Take a Proactive Stand Against Fraud

GLOBAL SPOTLIGHT

Mandy Moody, CFE
ACFE Social Media Specialist

With the changing mindset towards the subject of white-collar crime, corporations around the world are interested in making it clear to shareholders, regulators, the media and investors that they are taking proactive measures to prevent, detect and deter fraud. And it’s no wonder, as a recent COSO study found that news of an alleged fraud resulted in a 17 percent stock price decline in the two days surrounding the announcement. It is only imaginable what a fraud conviction’s effects are on a company. Think Enron, Olympus, Parmalat and WorldCom. 

Just as the effects are becoming more profound, so are the proactive steps companies are taking to prevent fraud from happening in the first place. As the ACFE’s Marketing and Business Development Director Kevin Taparauskas, CFE, said in a blog last year about the evolution of fraud over the past 15 years, “It is no longer a question of whether it is taking place within a company, but rather what are people doing about it?”

One thing companies like Raiffeisen Bank International (RBI) are doing is joining the ACFE’s Corporate Alliance program. The program, which began as a pilot program with anti-fraud teams at USAA and Walmart, provides companies wanting to take a proactive stance against fraud the opportunity to partner with the ACFE to help educate and grow their fraud-fighting teams. Benefits of the program include access to exclusive resources, training and membership pricing.

“Fraud can seriously harm a company,” Dr. Michael Wittenburg, CFE, Head of Risk Quality & Fraud Risk Management at RBI, said. “We need to fight it in every possible manner. We hope that with this alliance we will be able to significantly improve our know-how and get access to global best practices.”

RBI is based in Austria and is one of the most recent companies to join the ACFE’s Corporate Alliance program. RBI is one of the leading banking groups in Austria and Central and Eastern Europe with more than 60,000 employees servicing about 14.2 million customers. According to Wittenburg, they plan on implementing mandatory initial and continuous fraud training to employees and hosting tailor-made advanced trainings. They also plan to make the Certified Fraud Examiner (CFE) credential mandatory for staff in their fraud risk management department. 

Read the full Global Spotlight article.

Corporate Governance in Japan: Memories of the “Japanese Miracle”

GUEST BLOGGER

Roger Aradi, CFE 
ACFE Marketing Manager

It’s one thing to get a conservative culture to change; it’s quite another to get a successful conservative culture to change.

The Economist has been examining corporate governance in Japan in the aftermath of the Olympus scandal. In the article “Back to the Drawing Board,” they describe how Japan Inc. has resisted attempts to revise legal requirements for corporate boards and point out how Japanese requirements differ from the standards of other nations, including many of their Asian neighbors. And in “Olympian Depths,” they go on to say, “The refusal to embrace higher standards of corporate governance is a further sign of short-sightedness.”

I am certainly not going to argue in favor of a system of corporate governance that can be described as insular and opaque. Clearly any system of governance that does not include a truly independent audit committee is lacking a vital component, undermining any internal controls they may have in place. But to write off the resistance to change as mere “short-sightedness” is to overlook one key factor. Japanese leadership may be reluctant to change their system of governance in part because their current system has worked so well for them in the past.

Japan went from being a nation in ruins at the end of World War II to a global economic powerhouse in the span of a few decades, a feat often referred to as the “Japanese miracle.” While many have researched the factors that made this “miracle” possible (see, for example, “MITI and the Japanese Miracle”), the current system of tightly interlocked, opaque and insider boards governed the Japanese corporations that drove this economic growth. In fact, I’m old enough to remember a time when the Japanese model was held up as a positive example, their long-term focus praised as an alternative to the American system’s obsession with short-term numbers. So perhaps Japanese business leaders, many of whom rose through the ranks during the Japanese miracle, can be forgiven for being reluctant to overhaul a system that seems to have served them well.

Improving corporate governance is a crucial part of the fight against fraud – not just in Japan, but worldwide. As anti-fraud professionals push for systems that proactively prevent and deter fraud, it is important to keep in mind that resistance may not be a sign of greed or malice – your client or organization may, like Japanese business leaders, be held back by memories of their own past successes.

Even if it Ain’t Broke, Consider Fixing It

GUEST BLOGGER

Catherine Lofland, CPA
ACFE Research Specialist

The average person can name several corporate scandals off the top of their head. Once a fraud scandal becomes a household name, the victim organization may never recover from the damage to its reputation. The effects are far-reaching: employees, investors, creditors, vendors, customers and the community are among those who can suffer tremendously from fraud. The pervasive threat of corporate malfeasance indicates companies need to seriously consider whether they have effective systems in place to prevent such scandals. While strong internal controls, independent external audits, an ethics program and a whistleblower policy are effective fraud deterrents and detection methods, these measures succeed only when supported by a robust corporate governance system.

Corporate governance refers to the procedures and processes according to which an organization is controlled. It consists of the official policies promoting oversight and accountability in a variety of areas, including financial reporting, corporate strategy and risk management. You can think of corporate governance as a system of checks and balances similar to those outlined in the U.S. Constitution, which allows each branch of the government to regulate one another. An organization’s checks and balances are designed to protect the diverse interests of its stakeholder groups by keeping management and the board in line.

One of the biggest challenges in implementing a corporate governance system is that some companies, especially smaller organizations, don’t see any reason to change the status quo. This “if it ain’t broke, don’t fix it” attitude toward fraud prevention can be dangerous. Managers who exhibit this attitude aren’t concerned about fraud simply because they haven’t suffered from it yet. However, if an organization has a weak corporate governance structure, a devastating fraud might be just around the corner.

Our latest online self-study course, Corporate Governance for Fraud Prevention, describes the principles, functions and essential components of a corporate governance system. It addresses the controversy of CEO duality, the recommended committees any organization should have on its board of directors and how to set the appropriate tone at the top. The course discusses corporate governance best practices that you can tailor to your organization’s structure and needs, since there is no one-size-fits-all approach.

Many corporate governance programs are born from a crisis. But it is critical not to wait until disaster strikes at your organization to begin implementing an effective corporate governance system. While establishing preventive measures might seem costly and burdensome, they are vital to the success, reputation and longevity of your company.

Read more about the new course here.

Report Highlights Top Fraud Trends in the Asia-Pacific Region

GUEST BLOGGER

Andi McNeal, CFE, CPA
ACFE Research Director

In 2010, the ACFE released the results of our first ever global fraud survey; all of our previous research had been limited to fraud cases in the U.S. The results of our international research revealed that the characteristics of fraud cases and perpetrators follow some universal patterns, but that each geographical region faces unique challenges. Our second global study in 2012 reinforced this observation.

With this in mind and in light of the upcoming 2012 ACFE Asia-Pacific Fraud Conference, we thought it would be interesting to look more closely at some of the trends in the 176 fraud cases from our 2012 study that were reported from the Asia-Pacific region. (For purposes of this analysis, we included the cases from the following countries: Australia, China, Fiji, India, Indonesia, Japan, Malaysia, New Zealand, Philippines, Singapore, South Korea, Taiwan, Thailand, and Vietnam. This breakdown differs from the “Asia” region as discussed in the full 2012 Report to the Nations on Occupational Fraud and Abuse.)

The following chart compares the methods used by fraudsters in Asia-Pacific countries to those employed by fraudsters throughout the world. We see that corruption schemes were significantly more common in the Asia-Pacific region, and misappropriation of non-cash assets also occurred more frequently in this region than was observed overall.

Among our most notable observations was that overall losses were higher in the Asia-Pacific region than for the full sample of cases in our 2012 study. The median loss for the 176 Asia-Pacific cases was US$235,000, compared to a median loss of US$140,000 for all cases. And the median loss was greater in eight of the 11 fraud scheme sub-categories we studied, with the biggest disparity in the losses related to financial statement frauds. The median loss for those cases in the Asia-Pacific region was US$4 million, or four times the median loss for all financial statement fraud cases studied.

In examining how frauds in the Asia-Pacific region were detected, we found that the distribution of detection methods was very similar to that observed overall; that is, tips were by far the most common way frauds were detected, followed by management review and internal audit. Together these three mechanisms accounted for more than 80 percent of frauds detected in the Asia-Pacific region and approximately 72 percent of frauds detected throughout the world.

The table below shows the breakdown of the fraud cases in the Asia-Pacific region by the department in which the perpetrator worked and provides the median loss for the cases associated with each department. When we compared these findings to our overall study results, we noted that fraud was much more common in the Sales and Purchasing departments in the Asia-Pacific region, whereas fraud in the Accounting department occurred much less frequently in that region than in the full sample of cases.

As anti-fraud professionals in the Asia-Pacific region gather to learn and network, we hope this information helps them focus their efforts and assists them in working together in the fight against fraud.

From Regulatory Confusion to Fear of Regulators

GUEST BLOGGER

Daniel Tannebaum, CFE
Head of Compliance - Americas, Travelex and Chief Compliance Officer, Travelex Currency Services Inc.
New York, NY

In June, I wrote an ACFE Insights piece, “Why Won’t Regulators Just Tell Us What They Want?” in advance of my presentation at the ACFE Annual Fraud Conference in Orlando. That article seems like ages ago in relation to this summer’s events.

I can’t recall a time when a money laundering investigation made it to the whip-around on the Daily Show, but HSBC did just that.

I can’t remember a time when one of the largest correspondent banks in the U.S. was threatened with the termination or suspension of its banking license, but Standard Chartered filled that void.

I wrote in my last piece that it seems as if regulators have shifted from a culture of guidance and clarification to one of enforcement. It seems now that regulators are following through with the threats made over the past several years.

It has been known for some time that HSBC was in the midst of what will ultimately result in the largest civil monetary penalty in global history for AML and sanctions deficiencies, and potentially may result in criminal charges (although that has been threatened in the past). On July 17, 2012, the Senate Permanent Subcommittee on Investigations (PSI) held a public hearing in which HSBC business and compliance leadership testified on a lengthy report relating to programmatic issues dating back nearly a decade. This event was the equivalent to a Super Bowl for compliance professionals. A Group Head of Compliance stepped down in front of the U.S. Senate, and the former architect of the U.S. counterterrorist financing regime, now Chief Legal Officer at HSBC, was lambasted by various senators. Never before have AML and sanctions issues been brought into the mainstream like this hearing had done.

In the end, the Office of the Comptroller of the Currency (OCC) publicly stated that they will be increasing the stringency of their AML examinations, something that they stated in the wake of the Wachovia penalty nearly three years ago.

And that was just July…

August brought with it a threat from the New York State Department of Financial Services (DFS) to Standard Chartered claiming that transactions conducted over the past 10 years through their New York branch violated Iranian transaction regulations. The order called for a public hearing to speak to the charges with the potential penalty of having its license terminated.

This is where the fun begins. The DFS claimed that Standard Chartered was stripping Iranian references from payments, as in other cases such as Credit Suisse, Lloyds and ABN, to evade sanctions. This case is slightly different than those. Standard Chartered was using an exemption in OFAC regulations called a “u-turn,” where commercial transactions to Iran could clear through U.S. financial institutions so long as the transaction originated at a non-U.S. bank going through a U.S. bank and destined for a non-U.S. bank. While this exception was terminated by OFAC in November 2008, the transactions listed in the DFS report pre-dated the change in OFAC policy.

In the end, rather than face a public hearing, Standard Chartered paid a $340 million settlement to DFS. A letter sent by OFAC Director Adam Szubin to the UK Financial Services Authority highlighted the legitimacy and due diligence requirements of u-turn payments while not directly commenting on the pending Standard Chartered vs. DFS case. You be the judge.

Whereas before we were concerned that regulators were focusing more on enforcement than guidance, those worries continue to be upheld. The scary part now is what do you do when a regulator threatens your license using laws they aren’t the subject matter expert on?

They’re the regulator, what they say goes and you must pay to stay in the game. Even scarier.