Over one third of Middle East businesses subject to fraud in past two years

26 April 2018 Consultancy-me.com

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.Increasing global economic crime ratesOn 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.Types of economic crimes in the Middle EastFurthermore, 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.Middle East business spending increases on fraudThe 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.Impacts of economic crime in the Middle EastThe 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. 


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Financial crime measures dip in MENA due to regulatory overload

27 February 2018 Consultancy-me.com

The focus on financial compliance and security measures has diminished in the MENA region according to a financial crime report from Deloitte, for the first time across the life of its local surveys. And it may be that regulatory overload is playing a part.

In its fourth annual report into financial crime in the Middle East and North Africa, the Big Four assurance and advisory firm Deloitte has for the first time found a reversal in company compliance and spending measures, recording both a notable drop in the number of financial crime programmes employed across organisations and a decline in the regular assessment of exposure to risks.How has your investment in anti-financial crime activityThe survey report, which was conducted in conjunction with financial data firm Thomson Reuters, questioned organisations active across a range of industries, with a leaning toward the financial services sector but including those in the fields of professional services and consultancy, with the typical respondent in a position of senior management in the governance, risk and compliance operations of the company. 

Along with the reduced attention to compliance, the survey also recorded its first flattening in the rate of investment into technology and resources as well as into improving the sophistication of existing technologies. Together, with the reports other findings as to the functional burden on compliance departments, the reduced compliance measures and downturn in projected tech spend – contrary to the increase in risks, regulations and penalties – may suggest a widespread sense of fatigue and inundation.How do you expect your technology to changeIndeed, the report notes that the number of daily regulatory updates required just a decade ago when Thomson Reuters first began its tracking totaled around ten, whereas now the daily obligation for firms sits closer to 200. In a previous Thomson Reuters compliance report, executives widely expressed fatigue and overload as to the regulatory bombardment while board members indicated that such matters were consuming a disproportionate amount of time.

Such sentiments appear to persist. When questioned on their biggest expected upcoming challenges in managing financial crime and compliance, the current respondents cited ‘securing new resources’, ‘justifying the costs’, and ‘securing support from key business leaders’, as three of the top priorities, joined by ‘attracting and retaining key skills’ and ‘communicating tone at the top overall’ in overall citations.

As stated by the report; “It has become apparent throughout the years of our study that many compliance executives are constantly seeking more – more support, more resources, more skills, and more analysis – in a bid to relieve some of the stress of the compliance function.What do you believe will be the biggest challengeThis overburdened and despondent mood it would seem is further impacting all-round confidence in the abilities, competencies and programmes for governance, risk and compliance management, with the commonplace gloom expressed by executives even more greatly elevated in the most recent survey. Altogether, more than half of the respondents were at most somewhat confident of their crime prevention measures meeting compliance regulations, with nearly one quarter not very confident or not confident at all.

As for the primary reasons cited for the poor levels of confidence, close to half of the responses (47%) pointed to the perceived lack of senior management support, followed by an ‘absence of clear implementation plan, including training and awareness’, ‘competing business goals and objectives’, and a ‘lack of availability of specialist resources’. As perhaps a measure of the prevailing pessimism, some 5% of respondents weren’t even sure of the specific reason for why they lacked confidence.What are the main reasonsIn terms of investments, while 66% of respondents expected their technology to become more sophisticated over the next two years, the figure represents a substantial drop on the 90% positive response rate from the previous survey. Rather than regulatory fatigue or complacency however, there may be another factor contributing to the falling stated levels of projected technological investment, with the report asking, “Are decision makers waiting for direction from regulators before they invest in innovative technology?”

The report posits; “It may be that all the talk of disruption, the coming financial and regulatory technology that is about to change our lives so dramatically, may, in fact, be holding back investment activity in technology. There is as yet no clear direction forward… Investing in technology is a substantial investment and once a particular system is employed, it is very difficult to undo, as any IT manager struggling to unravel legacy systems can attest to.”