COVID-19: the perfect fraud and corruption storm

Occupational fraud and corruption occur when there is opportunity, motive and rationalisation.

Leading criminologist Donald Cressey’s fraud triangle explains the factors that contribute to someone committing fraud or corruption. When three factors co-exist: opportunity, motive and rationalisation then the likelihood of a fraud is high. Increases in any of the three factors will see the fraud and corruption risk rise.

COVID-19 has delivered significant spikes in all three resulting in one of the most critical fraud and corruption challenges the market has witnessed. When these three factors rise significantly and concurrently, as is occurring now, the threat of fraud and corruption is substantial.

COVID-19 is putting financial and psychological stress on people that we have not observed for generations. This stress combined with other external drivers results in an increased motivation to engage in conduct that the individual might in different times resist.

Motive

What motivates an individual to engage in fraud or corruption will vary for each person, but common motives in the current environment include:

  • Intense financial hardship due to loss of family income.
  • Noble cause: I need to do this or the company won’t survive.
  • Personal addictions (e.g. gambling or alcohol) that are aggravated in times of stress.

Rationalisation

Unlike other crimes, fraudsters often need to rationalise their behaviour to justify their conduct and the COVID-19 pandemic has provided would be fraudsters with a series of factors that enable them to rationalise, in their own mind, their behaviour, including:

  • “I’ve given so much to the company, in times like this I need something back”
  • “The likelihood of getting caught in the current world is low”
  • “I can’t pay my bills yet the boss is still getting rich. That’s not fair”
  • “The company can afford it – it’s not like stealing from a person”

Opportunity

The COVID-19 pandemic is unprecedented in modern times, however, from a fraud and corruption perspective there are some parallels to the Global Financial Crisis (GFC).

During the GFC companies reduced headcount, rationalised processes and controls, cut back on internal audits and restructured parts of their business. One of the unintended consequences was an increase in fraud and corruption risk.  Today we are experiencing similar control challenges as during the GFC albeit with greater severity. In addition, we are facing the aggravating factor of hastily activated remote working conditions which place intense strain on the control environment and increase the opportunity for fraud and corruption. At the same time, financial distress now, as there was during the GFC gives greater incentives for employees, suppliers, customers, agents and others to commit fraud.

There are a series of fraud threats that should be sharply in focus for all types of organisations in the current environment:

Fraud/Corruption Exposure: 

Workforces working remotely could mean controls become less effective. Controls may not have been designed for complete remote working conditions (e.g. review of supporting documentation for payments, critical pressure on segregation of duties due to limited workforce availability).

Similarly, the current environment increases the opportunity for fraud from contractors and suppliers, especially within major contracts.

Third Party Supplier Exposure: 

Many supply chains will be interrupted with clients needing to augment usual suppliers with new ones. There is a risk these suppliers may not be the right people to do business with, particularly if they are operating in unknown or foreign jurisdictions.

Suppliers who hold out that “they can get things done when others cannot” should be considered very high risk, as often the delivery of these services include breaches of foreign bribery laws and straight out fraud committed against you.

Increased Bribery Risk: 

When supply chains are constrained there is a real risk that bribes are sought by individuals and government officials to “get things done”. The risk is more significant with supply chains or delivery abroad but it is also a risk in Australia. When regulators review this type of conduct in the years ahead they will not be sympathetic to justifications pointing to COVID-19.

The way forward

When opportunity, rationalisation and motive rise significantly and concurrently the threat of fraud and corruption is substantial. There is a significant risk of a substantial and potentially material fraud or corrupt event occurring in organisations.

There are three immediate steps to take in order to reduce the risk:

  1. Immediately, refresh or execute a fraud and corruption threat assessment
  2. Identify controls that are not effective in the current context
  3. Calibrate or augment controls as required

Organisations must mobilise quickly to identify which fraud and corruption controls are not effective and what new fraud and corruption risks have materialised. Now is not the time to be complacent.

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