OREANDA-NEWS. October 17, 2007. Despite heightened efforts at regulation and control, fraud remains a major threat to companies around the world. According to PricewaterhouseCoopers' 2007 Global Economic Crime Survey, conducted in association with Germany’s Martin-Luther University, Halle-Wittenburg, 59% of the companies surveyed in Russia reported being subject to one or more significant economic crimes over the past two years. This is a 10% increase from our 2005 research and is well above the global (43%) and CEE (50%) averages, reported the press-centre of PricewaterhouseCoopers.

The biennial survey of 5,400 global companies (including 125 leading companies in the Russian Federation) revealed that of the 43% that experienced economic crime in the last two years, the total direct losses exceeded US$4,2 billion. The average direct financial loss to companies rose nearly 40 percent to US$2,4 million (from US$1,7 million) during the period.

Russia
The direct cost of economic crime in Russia has more than quadrupled since 2005, with the average reported direct financial damage being US$ 12,8 million. This is more than five times higher than the global average (USD 2,4 million). 63% of the Russian companies surveyed had losses from fraud in excess of USD 1 million, and 20% of companies lost more than USD 10 million.

“Although the headline figures for economic crime have increased in Russia, I believe that there are positive factors underlying these statistics: a greater awareness of economic crime within organisations; a growing desire for transparency, a decrease in the stigma attached to reporting fraud and the introduction of more stringent controls and risk management systems,” said Roger Stanley, Partner, Central and Eastern Europe Forensic services leader, PricewaterhouseCoopers.

Although corruption and bribery continues to be perceived as the most prevalent type of fraud (30% of companies believe it to be so), the most common type of fraud encountered was asset misappropriation (43%), followed by corruption and bribery (34%).

The majority of perpetrators were male, aged from 31 to 40 years old, with a higher education degree. Although the majority of the most serious economic crimes reported by Russian respondents for the past two years were perpetrated by external parties such as customers or business partners, an increasing proportion were perpetrated by individuals within the company (38% in 2007, compared with 13% in 2005). An alarming finding was that in Russia, senior management was responsible for 41% of the cases, which is double the global average (20%), with perpetrators around the world being mainly middle management and line personnel.

According to the survey, reasons cited to explain why individuals committed fraud included financial/materialistic incentive (greed — 73%), low temptation threshold (39%) and lack of awareness that their actions were wrong (33%). In terms of corporate causes, insufficient controls were cited in 20% of cases, but perhaps an even more important role is played by a company’s culture and employees’ relations to it: a low level of commitment to the company (21%), relative anonymity (13%) and lack of clarity about the company's ethics (15%).

“It is simply impossible to eliminate economic crime completely. It's like fighting the mythical Hydra, cutting off one form of fraud merely allows another to grow,” said Steven Skalak, Global Investigations and Forensics Leader, PricewaterhouseCoopers. “Controls alone are not enough. The answer lies in establishing a culture that supports control efforts and whistle-blowing with clear ethical guidelines. Companies need to build loyalty to the organisation, give employees the confidence to do the right thing, and identify clear sanctions for those who commit fraud, regardless of their position in the company.”

The majority of economic crimes in Russia were initially detected by corporate security and internal audit functions (28% and 20%, respectively), which is a significant change from the prior survey, when the overwhelming majority of cases were detected by chance (35% in 2005, down to 21% in 2007) and internal audit was a factor in only 7% of those surveyed. In fact, detection by chance continues to play a predominant role globally (41% of initial detections).

Therefore, it is encouraging that almost all Russian respondents (98%) reported having some prevention measures in place against fraud. 24% of Russian companies had implemented new control measures, and 37% had strengthened their existing control measures during the past two years.

Besides deterring other fraudsters with a prompt and decisive response, recovering financial losses is another important aim for companies. Recovery of financial losses in Russia remains low: 54% of Russian respondents said they did not succeed in recovering any part of the amount lost. Compared to our last survey, this represents a definite improvement (in 2005, 74% of companies did not recover any losses). 71% of companies in Russia do not have insurance to cover the losses and costs of economic crime.

Our survey indicates that Russian companies mainly use the following actions against the perpetrator of a serious offence: pressing criminal charges, civil charges, and cessation of business relationship (35% each), or in case of internal perpetrators, dismissal (25%). Alarmingly, though, 19% of companies stated that they took no action against the perpetrator. In addition, only 10% of charged perpetrators in Russia were sentenced, while in CEE as well as globally, the sentencing rate is higher, 16% and 20%, respectively.

Roger Stanley, Partner, CEE Forensic services leader, PricewaterhouseCoopers comments:

“An important step in creating a corporate culture that does not tolerate fraud is being consistent when responding to economic crime. In our view, once an incidence of economic crime has become known, it is vitally important to make sure that all of the perpetrators are treated the same way, regardless of their position within the company. Low prosecution rates of members of senior management can affect the overall company morale and have a negative impact on the total number and volume of frauds occurring within a firm”.