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Blog 3 August 2020

Top Types of Fraud in Companies and How to Prevent Them

Top Types of Fraud in Companies and How to Prevent Them

According to the survey on global economic crime and fraud, 47% of 5000 respondents in 99 countries reported fraud in a company in the past year. Because of fraud, a company loses from 5% of profits. In Ukraine 61,5% of companies faced fraud.


Employees, Competitors or Coincidence?


In 37% of cases a swindler turns out to be an employee of the company, in 39% – an external customer or a partner, and in 20% of cases – an employee conspired with a customer or a counterparty.


If we talk about employees, then 34% are middle management, 31% – operational staff and 26% –top management. Employees often “leak” information about the company to competitors, falsify documents or accept bribes. There are cases when an employee himself/herself becomes a competitor of the company.


If we talk about violators outside the company, then in 26% of cases it is a customer and in 19% – a counterparty. These people often damage the reputation or involve the company in legal disputes.


Top types of fraud in companies according to the survey


•  Customer fraud ‒ 35%;

•  Cybercrime  ‒ 34%;

•  Asset misappropriation ‒ 31%;

•  Bribery and corruption ‒ 30%;

•  Accounting/Financial statement fraud ‒ 28%;

•  Human resources fraud ‒ 17%;

•  Deceptive business practices ‒ 16%;

•  Anti-Competition/Anti-Trust law infringement ‒ 13%;

•  Money laundering ‒ 11%;

•  Intellectual property (IP) theft IP ‒ 11%;

•  Insider/Unauthorised trading  ‒ 10%;

•  Tax fraud ‒ 8%;

•  Other. For example, embezzlement and theft of the company property ‒ 4%.


In what fields?


•  Customer fraud and waste of finance are common in the field of consumption.

•  Corruption, misappropriation of assets, accounting/financial statement fraud are common in the industry of energy and resources.

•  Customer fraud, cybercrime, falsification of financial documents are common in the field of finance.

•  Cybercrime, financial accounting, corruption are common in the state and public sector.

•  Embezzlement of company assets, cybercrime, corruption are common in the field of production.


What are possible losses of the company?


The losses of the company after fraud incidents are difficult to calculate unambiguously. Though some of them are possible to calculate:

•  direct financial losses;

•  costs due to fines;

•  court expenses;

•  expenses on PR campaigns to improve the reputation.


But some expenses are not easy to calculate in terms of quantity:


•  damaged reputation of the brand;

•  loss of the market position;

•  loss of opportunities;

•  moral damage to employees due to stressful situations.


13% of respondents who experienced fraud in the past year reported a loss of $50 mln across all incidents.


Top-5 most “expensive” types of fraud in terms of financial losses are anti-trust violations, unauthorized trade, tax fraud, money laundering, bribery and corruption. This is the height of inconvenience in terms of restoring the reputation and paying penalties.


How Do Companies React to Fraud?


• Six out of 10 companies do not use any systems and programs to control and track potential risks. Almost half of the respondents either do not assess the risks or carry out an informal “by eye” assessment. Half of the respondents do not use monitoring of third parties.

•  Only 3 out of 10 companies check the efficiency of risks control.

•  Half of organizations allocate resources for the monitoring and management of a third party.

•  60% of companies that have faced fraud initiate an internal investigation. One third report fraud to the director.

•  50% of companies support the internal control and strict adherence to procedures.

•  44% take disciplinary measures against employees.

•  37% report an incident to the law enforcement agencies.

•  32% regularly train employees in the policy and working procedures of the company.


Companies in Ukraine often neglect even these methods of fighting internal and external fraud. Internal investigations are often met with employees’ outcry. It is expensive to use the services of third parties for internal investigations. In addition, heads do not always see all the benefits and effects of risks prevention procedures.


So What Are the Most Efficient Actions?


1. Identify and assess all your risks, including external factors. Do this regularly, at least once every six months, as the market and the situation around the company are constantly changing;


YouControl has a new service: examination of compliance risks. Our lawyers will assess risks based on your business objectives. The examination expenses will be recouped already after the first operation;


2. Issue clear instructions of reacting. The ability to react to a problem in time is crucial for counteracting fraud and risks of the company. The ability to quickly mobilize people, processes and technologies will reduce potential damage;


3. An audit often helps identify signs of fraud;


4. Information security is also important. Make backup copies of company data;


5. Check directors, middle management, affiliates, suppliers and partners for their reliability before starting cooperation. Data from registers of Ukraine and Europe are available in YouControl for checking of a person and a company in 5 minutes.


The companies that use technology to prevent fraud spent 42% less on reacting and 17% less on recovery than those that do not use it. Fraud is the risk that should have no place in business.


Order an assessment of risks!


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