Covid-19 Crisis- Perfect Storm For Fraud

Covid-19 Crisis- Perfect Storm For Fraud

The Covid-19 crisis has gravely affected the world’s labour market and it is having a significant impact on many people globally. The debilitating effects of this crisis has crippled economies and the quality of life for individuals across the globe. Global markets are declining at unprecedented rates and may take much longer to recover. The lockdowns, social distancing and restrictive measures have played a pivotal role in the downturn in most economies.

The OECD reported an increase in the unemployment rate of 2.9 percentage points, up from 5.5% in February to 8.4% in April 2020, or from 18.4 million to 55 million people in the OECD nations.

We are seeing the effects locally and regionally. Trinidad and Tobago’s local airline, Caribbean Airlines is set to send home approximately 600 employees within the coming months. Another regional airline, LIAT, was forced to suspend operations until further notice. There are an estimated 100,000 job losses expected in the hospitality and food and beverage industries.

Local welfare offices are packed to capacity with lines flowing to the streets as the affected cry for government assistance. These cries are real!

The negative effects will have long-term implications, one of which echoes from the mountain top “Fraud! Corruption! Corporate Crime!”.

History has shown that in times of crisis, there is a spike in the incidence of fraud. For example, courts in the UK reported more that £1.1billion worth in fraud cases during the 2008/2009 financial crisis, a 9% increase in fraud cases.

As of May 2020, 68% of antifraud professionals responding to an Association of Certified Fraud Examiners (AFCE) survey had already experienced or observed an increase in fraud levels in the wake of COVID-19, with a quarter saying the observed increase was significant.

Perfect Storm of Conditions

How does a crisis create the Perfect Storm for Fraud? Let us look at Dr. Donald Cressey’s Fraud Triangle Model.

Opportunity

With the radical change in the workplace environment, many employees are now required to work remotely, while others are required to work from their office on a roster. This creates a cozy environment for a fraudster as more relaxed supervision can create opportunities to perpetrate fraud. Employees now have access to assets and information that allow them to commit and conceal fraudulent activities as controls become weakened or suspended entirely.

Rationalization

“I am working for less money, many bills to pay, I need it”

“It has been done many times before, no one is ever punished” “My targets and budget need to be met”

“I am entitled to a bigger bonus and never received it; I would inflate my expense claim” “When things get better, I will replace it”

During economic hardships, people have the capacity to rationalise fraud and corruption, by mentally justifying their actions as “means to an end”. With persuasive justification, the perpetrator has now broken down mental and ethical barriers that would ordinarily guide his conduct.

Pressure

From a legal perspective a company cannot perpetrate fraud. Only individuals through their actions can engage in fraudulent activity. There is one perspective that people commit fraud for personal gain, in particular monetary rewards. However, it runs a bit deeper. Lister (2007) describes the pressure to commit fraud as “the source of heat for the fire”, however, the presence of the pressure does not necessarily mean that fraud would be committed.

When there is a threat of loss, job security, power or prestige the pressure to commit fraud is increased. When a person’s livelihood is threatened, or the future of the company rests in their hands, there is a chance they may engage in a wrongful act to secure the company’s financial future or look the other way.

Criminals are counting the dollars during Covid-19

Grants “Free Money”

The Ministry of Social Development warned against attempts by persons who are trying to defraud the government through grants. Locals are applying for grants intended to supplement domestic rent to pay commercial rent. There have also been incidents of falsifying employment documents stating that they have been laid off or their salaries have been cut. The Ministry has advised against these acts and indicated that persons caught would be punished to the full extent of law.

Supply Chain Fraud

During this crisis, there have been many attempts by suppliers to overcharge or shortchange on amounts of goods delivered. Employees also collude with suppliers for kickbacks. Supply chain fraud is occurring across multiple sectors, especially in the health care industry.

Interpol has reported a number of websites selling fake protective products. Under Operations Pangea XIII the police seized counterfeit facemasks, substandard hand sanitizers and unauthorized antiviral medications. Collective efforts in 90 countries lead to 121 arrests worldwide and the seizure of potentially dangerous pharmaceuticals worth more than USD 14 million.

Europol reportedly investigated a transfer of 6.6 million euros from a European company to a supplier in Singapore selling alcohol gels and protective masks. The goods were allegedly never received.

Financial Statement Fraud

Companies may be motivated to disguise their true financial performance to stakeholders to maintain the appearance that their business have succumbed to the ill effects of the crisis. In some instances, work from home measures have eroded and weakened controls and in other cases controls are non-existent. This has created opportunities for employees to “cook the books”.

Some of the more popular areas that are vulnerable to manipulation are:

  • Overstatement of Revenue
  • Understatement of allowances and reserves
  • Restructurings and “big bath charges”
  • Capitalization of Expenses
  • Disclosure of fraud

Cyber Fraud

Drastic shift changes in e-commerce and mobile banking, have created opportunities for malicious attempts to exploit the weaknesses in remote corporate networks, merchant e- commerce sites and financial institutions dealing with massive increases in online transactions.

The Head of Cybersecurity Strategy at VMware Inc. Tom Kellerman testified that cyber-attacks against financial institutions rose by 283% between February and April 2020 at the peak period when the virus began spreading and government imposed stay at home orders.

Perpetrators are also targeting organizations that use popular cloud-based email services to conduct scams. The FBI has been alerted to an increased number of criminals trying to steal personal information and intellectual property.

This is usually done through phishing emails or websites responsible for providing information relating to Covid-19.

Mitigation Strategies

Set the tone from the top

During a crisis, communication is key, it is critical that Boards of Directors and Senior Management engage employees and find ways to motivate them during times of uncertainty. It helps reduce anxiety and help employees find strengths they did not know they had. It is critical in this time of crisis that Leadership displays the Three C’s: Competence, Confidence and Compassion.

Prepare for extended remote working

The workforce should be provided with secure access to critical assets and applications to work effectively, while being educated and alerted to the risks of remote access. Robust security and privacy controls should be implemented to mitigate against the exposure to fraud.

Fraud Policy

Whether or not an organisation is faced with a crisis, an essential tool in the fight against fraud is a fraud policy. It is a critical tool in communicating the organisation’s position and processes in addressing fraud related issues. It also sets the tone from the top which is a key strategy for employees to be aware that they are committed to preventing fraud, it also creates a culture of honesty, integrity and trust.

Fraud Response Plan

An effective fraud response plan should be designed in a meaningful way to respond quickly to contain and reduce fraud losses. This plan should include:

  • Procedures outlining processes for initiating reporting allegations of fraud and suspicions of misconduct
  • The manner in which those alerts are to be handled and who they are to be communicated to
  • Persons charged with the responsibility of handling alerts
  • Decision making authority
  • Methods for investigating alerts
  • Procedures for reporting the results of the incident’s investigation and to whom
  • Remedial action

Whistle-blower policy

The ACFE’s 2020 Reports to the Nation indicated that 43% of fraud committed was detected through tips which came from employees. Organizations with a hotline detected fraud more quickly than those without. Organizations should implement an effective whistle-blower framework and strategy.

The strategy should be communicated with employees whereby they can speak without fear of retaliation when their concerns are reported.

In attempts to combat corruption and discourage improper conduct and activities, The Government of Trinidad and Tobago proposed the Whistle-blower Protection Bill in 2018 for both the public and private sector. Companies regulated under the Central Bank of Trinidad and Tobago are required to have such policies in place.

Review Fraud Risk Assessment (FRA) Plan

When performing an FRA, identify the changes which would have occurred and those areas that can be exploited. It is key to understand the more vulnerable areas of the business and strengthen anti-fraud controls.

When preparing an FRA key consideration should be applied:

  • Revisit the existing FRA
  • Monitor emerging risks resulting from changes in the control environment
  • Consider workplace disruption including processes that are reliant on few resources
  • Review highly manual processes
  • The extent and impact of remote access
  • Fraud detection and analytic systems

Swift Investigation of Fraud

Swift investigations can act as a deterrence to fraud and those considering engaging in fraudulent activities. Another deterrent is employees’ awareness, that there is a zero-tolerance policy. When employees perceive that controls are weakened, they may use the opportunity to take advantage of the vulnerability.

The immediate investigation of fraud incidents can reduce the incidence of high losses. Once an effective investigation is established and amounts can be determined, remedial action could be taken to recover losses, perpetrators can be identified and controls can be implemented to prevent further losses.

Conduct Know Your Customer (KYC) Procedures

Do not shortchange the process, ensure the relevant KYC procedures are conducted, and your organization’s onboarding requirements are fulfilled. Cross check credentials in trusted databases to ensure they are genuine.

Remember it is difficult to recover funds sent via money transfer, international funds transfer or digital currencies. Avoid making upfront payments to suppliers in this manner.

Seek the assistance of a trained Professional

Many organizations may not have an established Fraud Risk Management function or resources, in that case, a trusted and reliable Anti-Fraud Professional should be contacted. Remember it is never too late to start!

Share your experience comment below if you have experienced changes in your organization.