Inside jobs: tackling corporate fraud as risks further evolve

"A downturn in the economy could give rise to more instances"

Inside jobs: tackling corporate fraud as risks further evolve

Risk Management News

By Kenneth Araullo

The landscape of workplace fraud is rapidly evolving, marked by increasingly sophisticated schemes that often go undetected for years. What were once isolated incidents have become indicative of a broader trend that threatens the integrity of businesses worldwide.

Miranda DesPain, senior vice president at Gallagher, points out a significant challenge in detecting fraud.

“The issue with crime is that there’s often a lag of two to three years between someone perpetrating a scheme, and that loss being discovered,” DesPain said.

This lag time allows fraudsters to siphon off significant sums before their actions come to light. The pandemic, with its shift to remote working and the resultant economic strain, has potentially exacerbated this issue by reducing the effectiveness of traditional checks and balances.

The implications of insider fraud are profound, as noted by the broker. Not only does it erode equity value – with corporate fraud eroding 1.6% of equity value annually – but it also has the potential to undermine global brands, destroy reputations, and devastate livelihoods. Despite the rising incidence of such fraud, reports suggest that the percentage of cases reported has declined in recent years.

More sophisticated fraud

2023 witnessed a variety of corporate misdeeds, from accounting abuses to bribery and corruption, amid ongoing economic uncertainty. Yet, as we look ahead to 2024, the concern is not just the increase in fraud cases but the sophistication with which they are executed.

The advent of AI-leveraged social engineering attacks and the rise in supply chain and ESG-related fraud present new challenges for businesses and regulators alike.

“We will see more social engineering and business email compromise-type losses over the coming year, and a downturn in the economy could give rise to more instances of staff embezzlement,” DesPain said.

In response, regulatory bodies are stepping up their efforts to combat these trends by introducing new rules and expectations for companies to tackle crime more proactively within their ranks. There's a growing scrutiny of senior managers and an expectation that they will take concrete steps to improve and uphold internal controls.

Gallagher also said that the relationship between economic health and the incidence of corporate fraud cannot be overstated. Economic downturns often create motivations for financial crime, as executives under pressure may resort to fraudulent activities to meet financial targets or hide losses. The Global Financial Crisis of 2008-2009 serves as a clear example, where financial pressures led to an uptick in fraud.

Steve Bear, head of sales and distribution — D&O at Gallagher, reflected on the complex nature of human motivation behind these acts.

“Humans are complex, though, and the motivation isn’t always financial and personal gain,” he said. “There’s an immense amount of pride in many businesses and the directors or owners will sometimes do anything, including breaking a lot of rules, to avoid the company going to the wall.”

The cost-of-living crisis adds another layer of complexity. With many feeling the financial pinch, the temptation to engage in fraudulent activities may increase. The pandemic period, characterized by a shift to remote work and financial uncertainty, has been particularly ripe for new incidents of fraud, highlighting the need for rigorous controls and oversight.

Regulators globally are taking aggressive actions to maintain market integrity and improve standards of corporate governance. The UK's Economic Crime and Corporate Transparency Bill, for instance, is a step towards strengthening anti-money laundering powers and enhancing information sharing to combat economic crimes more effectively.

The digital age, with its explosion of generative AI and other sophisticated tools, has opened new frontiers in fraud. These technologies, while beneficial for detecting and preventing fraud, also provide criminals with new methods to perpetrate it. The rise of deep fake technology and more convincing social engineering attacks pose significant new challenges for businesses.

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