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Six fraud and corruption trends for 2014 

Six fraud and corruption trends for 2014 

By Neil Amato 
January 09 2014

Fraud and corruption risks are not going away. The threats facing companies doing business anywhere, but especially in emerging markets, are growing in number and complexity.

EY’s Fraud Investigation and Dispute Services practice recently released these six themes for fraud and corruption trends in 2014.

1. Dealing with reputational harm and the business risk associated with cybercrime will become the responsibility of more than just the chief information security officer. Technology is great, except for all the problems it can cause. Companies must keep pace with technology to grow their businesses, but they also face greater threats associated with increased use of cloud-computing and social media. Organisations’ reputations can be dented faster than ever thanks to the viral nature of social media. And cyber-attacks, more organised and more global, can lead to losses of trust and actual property. EY says cybersecurity has become a board-level issue and risks in this arena require “immediate and planned responses” organised by legal counsel. In other words, it’s not just an IT problem anymore.

2. Balancing significant growth opportunities in Africa with perceived corruption risk. EY research suggests that pressure placed on managers to generate growth in emerging markets leads companies to avoid addressing corruption risks. The research also showed that 83% of African respondents viewed bribery and corruption as widespread. The annual Corruption Perceptions Index by Transparency International shows many countries with high growth potential are perceived as corrupt, including the BRICS nations of Brazil, Russia, India, China and South Africa. EY recommends that companies setting up operations in emerging markets perform robust due diligence to manage these risks.

3. The impact of regulation will be felt stronger than ever by the financial services industry. Regulatory enforcement pressure, EY writes, may affect midsize banks in 2014, not just the larger institutions in the US. One example of regulatory impact is the December passage of the so-called Volcker Rule, which prohibits institutional trading by US banks and limits their ability to invest in hedge funds. The Volcker Rule is a key provision of the 2010 Dodd-Frank Act. EY also says the financial services industry will be forced to reassess strategies in response to US Consumer Financial Protection Bureau rules on mortgage loans, student loans and credit cards. More intense regulation in banking is not just a US occurrence. A KPMG report in 2013 said that, for banks around the world, “the single most pervasive driver of change is the regulatory agenda.” Basel III standards, designed to ensure banks have enough liquidity to handle a potential run on funds, are among many new regulations.

4. Compliance with the US Foreign Corrupt Practices Act (FCPA) and other global bribery legislation will remain a top priority for life sciences companies operating in emerging markets. “Staying on top of the differing anti-corruption laws and standards, particularly in markets where the rule of the law is not always clear, will present a challenge and opportunity for companies that depend deeply on growth in those markets,” EY writes. One litigator who focuses on corruption said the most frequent trouble experienced by companies under the FCPA and the UK Bribery Act involves corruption charges related to third parties in developing markets.
 
5. Anti-money-laundering and corruption programmes face greater scrutiny. Regulatory pressure on the issues of money laundering, trade sanctions, and bribery and corruption will create the need for “robust programme controls, sophisticated monitoring systems and knowledgeable personnel at the watch,” EY writes. Regulatory scrutiny is moving beyond the banking sector to credit card issuers, insurance providers and gaming enterprises, according to EY. Banks whose anti-money-laundering controls fail can be subject to fines from regulators that exceed $1 billion, according to research by PwC that recommends strategies for strong anti-money-laundering deterrence.

6. The opportunity to leverage Big Data in the context of compliance and anti-corruption will allow companies to ask new questions. Companies now can analyse their data to prevent fraud and to create effective fraud risk mitigation programmes, EY writes. The opportunities for harnessing the power of Big Data seem infinite, but more information can create more risk. A recent survey by international IT trade association ISACA showed that about one-fourth of respondents felt their organisations were adequately or extremely prepared to provide effective governance and manage privacy related to Big Data. A recent CGMA report offers five ways companies can become more data-centric.

Related CGMA Magazine content:

How Not to Cut Ethical Corners as Economic Growth Slows in Emerging Markets”: After years of rapid growth, economies in some emerging markets have slowed, causing companies to lower their vigilance about fraud, bribery and corruption risks, according to recent research. But there are ways to better manage these risks.

Top Risk for Businesses: Regulation, Compliance Overload”: Corporate directors believe regulatory and compliance overload is the greatest risk facing their business, well ahead of cyber threats and corruption, a survey shows.

Neil Amato (namato@aicpa.org) is a CGMA Magazine senior editor.



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