Organisations should renew their focus on protecting their business from fraud and corruption during disruption.

Many organisations are experiencing a significant spike in fraud and corruption threats as a result of remote working conditions, climbing financial pressures on individuals and diverted businesses. Occupational fraud occurs when opportunity, motive and rationalisation meet.

Fraud opportunity chart

The rise of fraud and corruption

The coronavirus (COVID-19) pandemic is unprecedented in modern times, however, from a fraud and corruption perspective there are some parallels between now and the 2007/8 Global Financial Crisis. During the GFC companies reduced headcounts, rationalised processes and controls, cut back on internal audits and restructured parts of their business.

One of the unintended consequences was an increase in fraud and corruption risk, which was evidenced in KPMG’s 2010 Fraud & Corruption Misconduct Survey. It showed the value of fraud detected in Australia had more than doubled in the second half of 2009, potentially reflecting fraud events that began during the GFC.

We are now experiencing similar control challenges but with greater severity. Additionally, the aggravating factor of hastily activated remote working conditions has placed intense strain on the control environment and further increases the opportunity for fraud and corruption. At the same time, financial distress, as there was during the GFC, gives greater incentives for employees, suppliers, customers, agents and others to commit fraud.

What motivates an individual to engage in fraud or corruption varies for each person, but common motives in the current environment include: intense financial hardship due to loss of family income, a ‘noble’ cause (I need to do this or the company won’t survive), and personal addictions (e.g. gambling or alcohol) that are aggravated in times of stress.

Steps to protect your organisation from fraud and corruption

As opportunity, motive and rationalisation converge during COVID-19, some organisations are experiencing a number of significant fraud and corruption risks. Businesses should consider how these risks could surface in their organisation and result in a serious fraud or corruption exposure.

Financial controls are not working well in the remote working environment

Workforces operating remotely could mean that standard controls become less effective. Segregation of financial functions are vulnerable to override, the ability to verify that goods or services have been received is impeded and ‘system work arounds’ to get things done are becoming more common.

Consider the following steps:

  • Review your existing financial control environment to understand how remote working and reduced human interactions impact your controls.
  • Pay particular attention to supplier payment controls.
  • Implement increased transactional review, exception reporting or other controls through data analytics or other mechanisms.
  • Where an instance of fraud, corruption or serious misconduct is identified, undertake the necessary fact-finding investigation to determine whether the allegations are substantiated or not. Investigations can be used to deter or disrupt other potential inappropriate action by internal or external stakeholders and assist in setting the tone during uncertain times.

Corrupted supply chains are appearing in organisations

Border closures will mean reduced access to international air/shipping freight and potentially delay and bottleneck the flow of goods throughout domestic road/rail networks. This interruption of supply chains may cause organisations to need to augment usual suppliers with new ones.

There is a risk that these suppliers may not be the right people to do business with, particularly if they are operating in foreign jurisdictions. Suppliers who state ‘they can get things done when others cannot’ should be considered very high risk, as often the delivery of these services include breaches of foreign bribery laws and straight out fraud committed against you.

Consider the following steps:

  • Ensure any new supplier on-boarded in the coming weeks and months is subject to increased supplier due diligence.
  • Understand their beneficial ownership, their track record and dive a little deeper into how the services will be provided.
  • Implement specific fraud and risk mitigation plans for high risk suppliers.

The likelihood of bribes being paid by employees and agents is high

When supply chains are constrained there is a real risk that bribes are sought by individuals and government officials to achieve otherwise normal business activities. The risk is more significant with supply chains or delivery abroad, but it is also a risk in Australia. When regulators review this type of conduct in the years ahead they will not be sympathetic to justifications pointing to COVID-19.

Consider the following steps:

  • Re-visit your bribery and corruption risk assessment to identify which risks have increased and might increase in the future.
  • Implement specific anti-bribery controls or reinforce existing ones to mitigate the short term increased risk.
  • Ensure your business’ leadership team have communicated that a zero tolerance approach to bribery and corruption applies even in the most difficult times.

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