Banks and financial firms most exposed to fraud

The financial services industry has been hit the hardest by fraud in the wake of the global financial crisis, according to recently released report.

The Global Fraud Report, released by consulting firm Kroll, surveyed 10 industries around the world. It found that while losses to fraud by companies across industries in the last three rose by only seven per cent, to an average of US$8.8 million per company.

However, the report also found that sectors which are closer to source of the financial contagion which spread around the world were more prone to fraud. The financial services industry was hit the hardest, losing a average of US$15.2 million in the three years to 2009 per company, an increase of 18 per cent compared to the 2008 figure.

The number of financial services companies that say they have suffered at least one form of fraud rose to 87 per cent, from 79 per cent last year. Half of respondents from the finance sector said that the global financial crisis has caused an increase in the number of cases of fraud at their organisations.

Other industries which saw an increase in fraud include professional services, health care, pharmaceuticals and biotechnology, retail, wholesale and distribution, and travel, leisure and transportation. The other five sectors actually saw a decrease in fraud. They were manufacturing, technology, media and telecommunications, natural resources, and consumer goods and construction.
The report said that, combined together, the decreases in fraud in some sectors cancelled out the rise in other sectors. Overall, fraud remained relatively steady, its authors concluded.

Kroll said that the financial services sector faced the broadest exposure to fraud in the wake of the economic downturn, dealing with issues such as money laundering, financial mismanagement, regulatory and compliance, internal financial fraud and informational loss or theft.

“Traditionally, every downturn brings about a rise in fraud, but what we are seeing in 2009 is something far more complex. Companies are seeing greater vulnerability due to reduction in internal controls, pay cuts, and reduced revenue across the board, but counteracting this increased risk are the realities of today’s constrained business environment, where factors such as high staff turnover, entry into new markets, and inter-firm collaboration are far less common than in years past. In short, the current economic crisis has increased the motive for fraud, but decreased the opportunity,” said Blake Coppotelli, senior managing director at Kroll’s business intelligence and investigations unit.

“Of course, this shift in business behaviour is only as lasting as the economic crisis itself, which is why companies must work to bolster their existing anti-fraud strategies in preparation for the economic changes to come,” he added.

The survey was conducted by the Economist Intelligence Unit, of 729 executives.