BrazilOver one third of Middle East businesses subject to fraud in past two years
Reported rates of economic crime are growing both in the Middle East and worldwide. Though the higher reported rates may be the result of increased awareness and frameworks for fraud identification, the economic impact of fraud is very real. In the past two years, the most disruptive fraud suffered by 46% of firms cost them between $100,000-$50 million each.
Economic crime, or fraud, covers a wide range of financial crimes that negatively impact organisations and consumers. Likewise, the crimes can be perpetrated by both organisational actors and consumers. Economic crimes include asset misappropriation, bribery, cybercrime, money laundering, accounting fraud, and procurement fraud, among a list of others. Worryingly, the frequency of these financially damaging offences appears to be increasing both in the Middle East and worldwide.
Professional services firm PwC’s 2018 Global Economic Crime and Fraud Survey reveals that 34% of Middle East organisations reported that they experienced fraud in the last 24 months – up from 26% in 2017’s survey. Globally, the number of organisations that reported experiencing fraud increased to 49%, up from 36% last year.
On a global scale, the Middle East had the lowest number of respondents reporting an occurrence of fraud at their organisations, while Africa had the highest proportion – at 62%. Nonetheless, all global regions reported an increase in the occurrence of fraud, a worrying result on the surface.
However, the report’s authors surmise that this could be a reflection of increased awareness of economic crimes and of improved detection mechanisms within organisations. For example, UK respondents reported higher levels of bribery in 2018’s PwC survey; however, much of the increase can probably be attributed to higher awareness and better detection frameworks spurred on by new British anti-bribery legislation.
According to PwC, the rise in fraud reporting in the Middle East and globally has been fueled by increased awareness and scrutiny of economic crime by businesses, employees, and the general public. Indeed, the Middle East’s increasing focus on fraud is borne out by the increased spending on combatting fraud/economic crime. 42% of Middle East respondents said that their firms had increased spending on anti-fraud measures in the last two years – the same proportion as global respondents.
Furthermore, 49% of Middle East respondents said that their organisations would spend more money combatting fraud in the next two years, a higher proportion than the global response of 44%. The results suggest that the focus on fraud will rise even more quickly in the Middle East than in the rest of the world.
Organisations in the Middle East are increasingly investing in formal business ethics and compliance programmes, with the proportion of firms boasting these programmes rising by 3% this year. In contrast, the proportion of companies with ethics and compliance programmes fell by 5% worldwide, suggesting that the Middle East is increasingly committed to fighting fraud.
When breaking down the occurrence of economic crime into subcategories, the report finds that asset misappropriation, business misconduct, fraud committed by consumers, and cybercrime are the most common frauds experienced by Middle Easter organisations. The results differ from the global results, where cybercrime ranked second behind misappropriation, and ahead of fraud by consumers.
The results suggest a lower regional cybercrime risk, possibly because of a lower development level of digital networks and lower digital data volume. In the Middle East, though, it is apparent that fraud from consumers is more of a central issue in terms of economic crime, according to the survey results.
Likewise, business misconduct – including bribery and corruption – is a central economic crime in the Middle East, tied for first place with asset misappropriation at 38%, and is 10 points higher than the global reporting rate of 28%. PwC’s research reveals that 10% of Middle East respondents were asked to pay a bribe in their home countries, while 7% were asked to pay a bribe on foreign soil. Furthermore, 10% of respondents believe they lost business to a competitor who paid a bribe in their country, while 8% believe the same situation occurred in a foreign country.
The effects of bribery are further compounded by the fact that people often do not pay bribes out of their own pockets, instead dipping into company coffers – creating “a fraud cycle of illicit funds being churned,” according to PwC. It is worth noting, however, that two-thirds of Middle East firms already have ethics and compliance programmes in place in order to battle corruption.
The financial impact of economic crimes is substantial: the most damaging fraud suffered over the past two years cost 46% of respondents in the Middle East between $100,000-$50 million. Another alarming fact is that in 4% of cases, the most damaging fraud was not even reported to the board, while in 8% of cases respondents were not sure if the fraud had been reported.
The largest perceived impact of fraud, however, is not financial. According to respondents, the most damaging effects are on public perceptions of the firm and on people’s well-being. Employee morale was cited as the area most affected by economic crime, with 52% saying that fraud had a high to medium impact on it. Tied for second, brand reputation was cited as being medium-to-highly impacted by fraud. In contrast, only 10% said that share prices felt a medium-to-high impact from fraud.
In a recent industry survey by fellow Big Four advisory Deloitte, the firm found that financial crime measures and spending had in fact dipped in the MENA region, attributing the results in part to a potential regulatory overload for local organisations.
