Fraud and corruption - the cancer that needs to be exorcised


by Les Dobie, Head of Counter Fraud Training, CIPFA

No one will deny the pervasive and malignant effect fraud and corruption has to the lives of citizens. No country is immune: the recent Transparency International annual corruption perception index highlights lamentable progress, stating that "the majority of countries are making little or no progress in ending corruption". 

No sector is immune: The latest PwC global Economic Crime and Fraud Survey 2018 found that 49% of global organisations said they’d been a victim of fraud and economic crime. However, PwC believes that this number should be higher. In fact, there has been an increase in fraud across all territories. Some of this can be attributed to greater awareness and reporting but not all. 

What do we mean when we refer to corruption? The United Nations’ definitions of corruption defines it as an umbrella term for a number of delinquent behaviours, including: embezzlement; fraud; bribery; cronyism and nepotism; money laundering; extortion; abuse of position; and improper political funding. 

The amounts involved are huge; for example, the ‘1Malaysia Development Berhad scandal’, commonly known as the 1MDB scandal. This an ongoing political scandal in Malaysia which came to international attention in 2015 when the then Prime Minister Najib Razak was accused of channelling over US$700m from 1MDB, a government-run strategic development company set-up and chaired by himself, to his personal bank accounts. 1MBD is estimated to be over $11bn in debt with fraudulent losses thought to be of around $4.5bn. Malaysian police raided Mr Razak’s mansion and recovered cash and luxury goods valued at $273m, the biggest such seizure in Malaysia’s history. 

From the point of view of the Malaysian citizen, it appears that $4.5bn is no longer available for expenditure to the public good, at least not in the short to medium term while investigators try to recover the money, if indeed it can ever be recovered. This in an economy that is already struggling and very recently the Malaysian government announced it was cancelling two large public infrastructure projects due to a lack of cash. It is also evident from news reports that corruption of this magnitude has undermined the confidence of the Malaysian citizen in the institutions of the state and democracy itself. 

Unfortunately, there are numerous examples of such corruption. The so called ‘Russian Laundromat’ ran between 2011 and 2014, and at $20bn is thought to be one of the world’s biggest and most elaborate money laundering schemes, though the key concept at its heart is quite a simple one. It is said to have involved 1,920 firms in the UK and 373 in the US, with the money laundered through 96 countries via some of the world’s best known banks. Businesses which were used to give the appearance of legitimacy to the transactions were nothing more than phantom or shell companies.

Bribery alone is estimated to cost the global economy $2tr every year (or 2% of global GDP), according to the International Monetary Fund. The cost is felt acutely by those that can most ill-afford it – depriving countries of vital public services and much needed infrastructure investment at best, and fundamentally eroding trust and democracy at worst.   

Over the last decade or so there has been an increased focus on calling out fraud and corruption, with initiatives from the International Monetary Fund, and The International Organisation of Supreme Audit Institutions. The International Federation of Accountants (IFAC) too recently announced a joint anti-corruption mandate with the International Bar Association, cementing their shared commitment to continue their work combating corruption in all its forms. This was launched at the Group of Twenty (G20) conference for Finance Ministers’ and Central Bank Governors Summit, where IFAC hosted a high-level anti-corruption event with the Business 20 (B20) and IFAC member organization, Federación Argentina de Consejos Profesionales de Ciencias Económicas (FACPCE). The event brought together leaders from the G20 policy forum, business, and professions, to focus on collective action for tackling corruption worldwide. 

“Grounded in a strong ethical code, professional accountants across the globe play a critical role in the fight against corruption.,” says IFAC CEO Fayezul Choudhury. 

With the corruption menace constantly adapting and changing to the circumstances and environment it operates in, we need to be vigilant. The traditional way to countering corruption is heavily reliant on static controls and detection mechanisms that can become outmoded relatively quickly. This asymmetry of approach hands an advantage to the corrupt. Accountants and auditors therefore need to redress the balance and increase their awareness of the ever-changing corruption threat. Better training and education on the subject within the profession is a key step in winning this vital battle.

This article first appeared in The Accountant. 

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