EY Identifies Main Fraud and Corruption Trends

Companies and their boards, struggling with increased regulatory burden and the risks associated with operating in emerging markets, should pay particular attention to increased fraud risk and exposure to cyber-crime as well as expansion into Africa and other emerging markets says EY.

The advisory firm, formerly Ernst & Young, comments that regulators are challenging corporate compliance and governance models as companies aim to mitigate risk while shareholders expect growth. The changing landscape for cross-border disputes, bribery and corruption and cyber-crime continues to test compliance and governance models, especially in new markets.

“Our clients are continually looking for ways to improve their approach to anti-bribery and corruption risk in emerging markets,” said Brian Loughman, EY America’s leader for fraud investigation and dispute services (FIDS). “However, we see related risks gaining traction with multinationals as well as industry specific risk issues that will persist into FY14. FIDS has identified six key themes where we expect our clients to focus in 2014.”

The six are as follows:

1. Dealing with reputational harm and the business risk associated with cyber-crime will become part of a general counsel’s responsibility set.

Traditionally the role of the chief information security officer (CISO) focused on information security attacks and compromises due to their damaging and potentially public nature. These risks are requiring immediate and planned responses organised by inside and outside counsel. Additionally the potential shareholder impact, risk due to state-run and industrial cyber-espionage, loss of highly valuable intellectual property (IP), unique business process, or client data elevates the responsibility of cyber security to a board level exercise. The related disclosure issues can be complex.

2. Balancing significant growth opportunities in Africa with perceived corruption risk.

With a number of rapidly growing economies and increasingly sophisticated consumer markets, multinationals continue to heavily invest across a wide range of industry sectors. However, the perceived level of corruption in the region, and the attention of US authorities on business conduct in the region, is prompting organisations to reassess their controls, testing and compliance programmes. EY’s 2013 EMEIA Fraud Survey found that 83% of African respondents polled viewed bribery and corrupt practice as widespread. Organisations setting up operations in Africa will need to perform robust due diligence in order to manage these risks.

3. The impact of regulation will be felt stronger than ever by the financial services industry.

Notwithstanding the billions of dollars in restitution, fines and litigation costs incurred to date by banks and securities firms, regulatory pressure is not expected to dissipate in 2014. Important themes from 2013 will likely continue as the industry responds to broad regulatory focus on systemic risk and reacts to Consumer Financial Protection Bureau (CFPB) rulemaking on mortgage loans, student loans and credit cards. Regulatory enforcement pressure, which heretofore has focused on the largest institutions, may also migrate to mid-sized banks in 2014 prompting reassessment and enhancement of risk and compliance efforts at this tier.

4. Foreign and Corrupt Practices Act (FCPA) compliance will remain a top priority for life sciences companies operating in emerging markets.

The recent enforcement actions in China have shown a notable expansion of the exposure that life sciences companies face when operating overseas. Gone are the days when enforcement was led solely by US authorities. Staying on top of the differing anti-corruption laws and standards, particularly in markets where the rule of law is not always clear, will present a challenge and opportunity for companies that depend deeply on growth in those markets. Companies can expect even greater attention to compliance processes as well as overall internal control enhancements.

5. Anti-money laundering (AML) and corruption programmes to face greater scrutiny.

Global regulators and the Department of Justice (DoJ) continue to press large, global financial institutions on the issues of money laundering, trade sanctions and bribery and corruption, stressing the need for robust program controls, sophisticated monitoring systems and knowledgeable personnel at the watch. The regulatory scrutiny is now moving beyond the traditional banking sector into non-banks, including credit card issuers, insurance providers and gaming enterprises, prompting the need to seriously review and enforce their compliance programmes and controls.

6. The opportunity to leverage ‘Big Data’ in the context of compliance and anti-corruption will allow companies to ask new questions.

Data analytics, traditionally the domain of marketing and sales, has effectively migrated into the realm of internal audit, compliance, and corporate oversight. Companies now have opportunities to use forensic data analytics for proactive monitoring of business data. Organisations will be able to develop a better understanding of the risks and rewards of forensic data analytics and how these techniques can be used to transform data to help detect potential instances of fraud and implement effective fraud risk mitigation programmes.

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