Report: Business Risk of Fraud, Corruption Up Amid Economic Crisis

Control Risks' report suggests businesses heighten efforts to guard against fraud and comply with stringent regulations

The global economic crisis will lead to more cases of large-scale business fraud and corruption as the situation continues to unfold, according to a new report from Control Risks, an international business risk consultancy (See also: 3 Global Risks to Business in 2009).

Control Risks this week released "Corruption, compliance and change: Responding to greater scrutiny in challenging times," a report examining the trends of corruption as a result of the global financial meltdown. In it, the firm predicts as a consequence of increased fraud and corruption, businesses will be subject to even tighter regulation complicated by inconsistent enforcement that will vary from region to region.

The inconsistency of enforcement will be the greatest challenge for mainstream international companies, the report states. Organizations cannot afford to ignore tighter legal enforcement, especially if they are based in the US or are listed on US stock exchanges.

"Countries that have never done so before, such as China and Japan, have begun enforcing corruption laws while those who have been enforcing regulations are now seeking steeper fines and, in some cases, lengthy prison sentences," said John Bray, director, analysis for Control Risks, in a statement.

The report also points to an increased number Foreign Corrupt Practices Act (FCPA) cases initiated by the Department of Justice and the Securities Exchange Commission. They initiated 38 FCPA matters in 2007 followed by 25 in 2008, said Control Risks' report. In late May 2009, Mark Mendelsohn, the deputy chief of the DoJ Fraud Section, reported that as many as 120 companies were currently under investigation on suspicion of FCPA violations, compared with 100 at the end of the previous year, the report noted.

The report cites several landmark FCPA cases as well, including a case in February involving US oil services company Halliburton and its former subsidiary KBR, both of which were accused of taking part in a series of bribes paid to secure contracts to build a natural gas plant in Bonny Island, Nigeria. The firms agreed to pay a penalty of $579 million, made up of a $402 million fine plus $177 million disgorgement of company profits; one of the largest fines in history paid by a US company in an FCPA case.

To mitigate risk of corruption, Control Risks advises businesses to:

-Develop and communicate an effective compliance program;

-Secure the CEO and management teams commitment to high standards of integrity;

-Rely on good business intelligence: choose the best people and partners;

-Cultivate diplomatic skills and cultural sensitivity;

-Be prepared for setbacks

"Corruption will continue to be a serious issue," states Elaine Carey, national director of investigations, in a statement. "There is no doubt that the U.S. maintains the strictest regulations and enforcement for anti-corruption violations, which is precisely why U.S. companies operating internationally need to take a serious look at safeguarding their operations."

Copyright © 2009 IDG Communications, Inc.

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