“Managing the Risk of Fraud – How to turn hidden losses into Profits” (a.k.a “Defence against the commercial “dark arts”) For the British Chamber of Commerce / Surveilligence 14th June 2012 Nigel Iyer Today • Demystifying Fraud and Corruption…in our midst • Where will it occur and how do we prevent it • Cutting through the rhetoric and protect our organisations This week… Russia, Turkey, the “Wild West”? ….or…… are we in fact in Denmark ? Winning the battle... • True Awareness and culture (not just nice speeches for each other) = Resilience • Fraud Risk Assessment (“Think Like A Thief”) • Don’t be fooled that compliance with rules equals commitment • Healthy scepticism – Look for Red Flags • A balanced approach - its easy to come down too hard on the small “offences” Enron and the rotten apples Elf Parmalat Siemens British Aerospace, the Saudi’s and ”Tony B”  Worldcom Tycho UBS Bernie ”Made off” with the money  and more.... The true cost A typical company with sales of €100 million. How much do you estimate is (on average) lost because of fraud and corruption each year? € 0 – € 100,000 € 100,000 - € 1 million €1million – €5 million € 5 million - € 7 million > €7 million The true extent • Deliberate/Dishonest • Controls bypassed • The truth is Hidden • Rules are broken Examples Overcharging Conflict of Interest False Claims False expenses Exaggerated results Kickbacks INDIRECT COSTS > Direct costs Fraud and Corruption False reporting False Claims Conflicts of Interest Supplier overcharging Theft Fraudulent Bankruptcy Kickbacks Steal IP Customer does not pay False expenses Exaggerated results And more... • Real Estate Flipping • Leasing frauds – sell assets / repo-sale back • Credit Card Fraud • Money Laundering (both ways) • Theft of passwords • Moving assets offshore/ tax fraud Stolen Cheques Forgery Uninsured deposits Front bank (e.g. Vanuatu) • Pretext account.../ identity • Rogue Trader • Fraudulent loans/ loan applications / grant applications • • • • And even more • • • • • • • • • Forged or fraudulent documents Confidence tricks Fake/ stolen payment cards Skimming of information Fake ATM or exchange counter Prime Bank Guarantees etc “Lottery” Impersonation of officials Etc etc etc Who? The true cost A typical company with a turnover of €100 million. How much do you estimate is (on average) lost because of fraud and corruption each year? € 0 – € 100,000 € 100,000 - € 1 million €1million – €5 million € 5 million - € 7 million > €7 million Makes good business sense Sales Costs Profits Profit Margin 1000 950 50 920 * 80 * 5% * 8% If fraud and corruption costs = 3 % of sales... Milestones  76 Lockheed Bribery Scandal  80s Savings & Loan Frauds  87 Treadway Commission  91 BCCI Crash  Bribery recognized as major obstacle to global development       02 Enron, Worldcom 02 – 04 constant flow of new public bribery cases  77 Foreign Corrupt Practices Act 92 COSO Report 92 Cadbury Commission 95 Code of Conduct 97 OECD anti-bribery convention  02 Sarbanes-Oxley Act  04 UN Global Compact (10th Principle) And more... ISA 240 Federal Sentencing Guidelines Basel III UK Bribery Act ? Do we really need these? “Integrity has no need of rules” Albert Camus (Nobel Prize in Literature 1957) Please don’t take advantage of the room-maid Opportunity Motivation $ $ $ $ $ $ $ $ $ $ $ $ $ Information Cultural Integration OPPORTUNITY Material Desire + MOTIVATION Technology We assume Reality? Honest It depends Corrupt The “slippery slope” Travel Expenses “Smoothing” results Conflict of Interest Extra vacation Bribery Nepotism False invoices Controls and loopholes x x x x x x x o x x x x x x x x x x x x x o x x x x x x x x x o x x x x Out-smart the enemy…T.L.A.T.! Get richer by at least CZK 1 million in the next 12 months! You can be a supplier, customer or anyone in a position of power in YOUR organisation What you will need: Influence To find the Achilles heel in the system ...and plenty of GR€€D!!!!! The concept of a “Red Flag”? ? Vltava Transport and Logistics Ltd a VLTAVA ENTERPRISES A.S. partner company Pavel Svoboda Former Logistics Director (Age 43) Andrew Little Transportation and Logistics Guru and former advisor to UK government (Age 56) The Integrity Health Check (Example 1) Accounts Payable Transactions and Suppliers Analysis of Management Expenses Analysis and Correlation Positions in External Companies The Integrity Health Check (Example 2) Accounts Receivable Transactions and Customers Accounts Payable Transactions and Suppliers Analysis and Correlation Positions in External Companies Episode 3 You do your job! Winning the battle... • True Awareness and culture (not just nice speeches for each other) = Resilience • Know your risks (“Think Like A Thief”) • Don’t be fooled that compliance with rules equals commitment • Healthy scepticism – Look for Red Flags • A balanced approach - its easy to come down too hard on the small “offences” Thinking Globally Cost of corruption and GDP/capita CPI Ranking1 COUNTRY GDP/ Capita ($)2 Cost of Fraud and Corruption % Absolute cost per head of population > 50%? ≈ $ 695 ≈ $ 1553 134 Nigeria $ 1,389 22 United Kingdom Norway $ 36,120 ≈ 4.3%? $ 84,444 > x.x % 10 1Transparency International CPI (Latest). Norway #10, UK #20, Nigeria #134 2 IMF Rankings 2010. Norway ranked #2, UK # 22 and Nigeria #132 Thank you