Fraud Rises as Financial Crisis Deepens, Firms Focus on Corporate Security
The financial crisis and global recession will result in a significant increase in white collar crime as well as significant changes in how fraudsters operate this year, according to a recent Kroll Global Fraud Report. Kroll says it predicts a surge in full-scale fraud investigations involving legal disputes, regulatory action and prosecution in 2009. Whistleblowing is also expected to become more common, Kroll adds.
“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,” says Blake Coppotelli, Senior Managing Director in Kroll’s Business Intelligence & Investigations practice. “We saw a marked increase in the number of corporate fraud cases during the market downturns of 1987, 1991 and 2001.”
Early on the overheated U.S. property market and subprime mortgage boom provided opportunities for fraud in both mortgage originations and secondary mortgage-backed securities. As the financial crisis deepens we’ve seen a rash of scandals, including the $65 billion Ponzi scheme run by Bernard L. Madoff.
Now, as companies enter new markets and consider foreign direct investment through acquisition or joint venture partnerships, they will increase their exposure to complex fraud and corruption, according to Kroll. The firm warns that comprehensive due diligence is a vital tool for containing fraud in times of economic uncertainty.
“Comprehensive due diligence — not a cursory ‘check-the-box’ review — is the key to managing exposure to these threats through the downturn,” said Richard Abbey, Managing Director in Kroll’s Business Intelligence & Investigations practice. “Companies should not think that they are safer in certain country markets — this is a global concern that spans all industries.”
Moreover, with regulation expected to tighten in the wake of high profile fraud cases such as the Madoff scandal, Kroll adds that companies will need to re-examine their financial controls, corporate governance, compliance and transparency policies.
Meanwhile, a separate report from KPMG echoes Kroll’s findings, predicting a surge in fraud. KPMG’s 2009 E-crime Survey concludes that employees may be more willing to steal data or sell insider knowledge, according to Computerworld. The survey found that 66% of respondents feel that out-of-work IT professionals would be tempted to join a criminal underground as a result of the economic meltdown and use their knowledge against their former companies.
Employees often have “super access” to sensitive company systems and know those systems’ weaknesses. Companies need to have strict procedures for locking such individuals out once they no longer work at their organizations, the survey said.
The KPMG survey also finds that fraud committed by managers, employees and customers tripled last year in comparison with 2007, which indicates that the recession will likely exacerbate those problems.
The FBI has already been inundated with potential fraud, opening thousands of mortgage and securities fraud cases, according to NPR. The report adds that FBI officials believe it’s just the beginning, and many expect to open many more in the weeks and months ahead. In addition to the 500 corporate investigations already under way, reports NPR, the bureau is bracing for new cases that will grow out of the government’s bailout and stimulus plans. The FBI expects the hundreds of billions of dollars being spent will create new possibilities for fraud and public corruption.
Amid the trend, executive search firm, A.E. Feldman, expects an increase in demand for senior level managers and executives with expertise in corporate security. Firms are increasingly tapping into specialists who fit seamlessly into the corporate world… but look at it in an entirely different light.
One corporate security expert consulted for this article says that there has been a major paradigm shift in who is securing corporate America and how it is being done. Right now, he says, it’s about “security on demand.” In today’s economic climate a corporation can not look at security (including physical security as well as IT or data security) as something that will be implemented after something has transpired. Whether they are monitoring accounting practices, combating corporate espionage or taking steps to protect staffers and information overseas, multinational and domestic corporations must be keenly aware of what is out there to protect their people and their assets– especially during times of economic turmoil.
Are you working in corporate security? If you want to grow your career or discuss your firm’s talent or security needs, contact A.E. Feldman’s President, Mitch Feldman, today.
