Fraud

Securities violations – corporations as perpetrators of economic crime

• recent high-profile, large-scale cases of market fraud (e.g., Enron, Worldcom, Tyco, Shell and Parmalat)
• includes misleading or misrepresented financial statements, theft, stock manipulation schemes and insider trading
• often involves multiple incidents of fraud, as well as with other forms of criminal activity, e.g. bribery, embezzlement and cheque, mortgage or loan fraud
• involves inflated financial statements or falsified information critical to investment decision

Significant economic integrity impacts:

• defrauds investors of $Bs (including pension regimes)
• undermines confidence in financial markets
• integrity/professionalism of consulting, auditing firms and other financial services increasingly in doubt

Fraud…

Strengthened multi-jurisdictional cooperation

The International Organization of Securities Commission lead a MOU on cooperation enforcement and greater emphasis on prevention and detection:

• enhances mutual assistance and exchange of information
• signed by 20+ securities commissions – complements a series of bilateral MOUs

Corporations, consumers and governments as victims of economic crime

• 37% of global firms (across all industries) sustained significant economic crime
• substantially increasing since 2001
  • 29% – 34% in Western Europe
  • 26% – 37% in Central and Eastern Europe
  • occurrence highest in Africa (51%) and North America (41%)
• higher detection rates partially explains the increase
• Russia and Turkey report nil economic crime – raising concerns around detection and/or transparency
• larger companies (52%) report greater incidence of economic crime than smaller ones (37%)
  • possible causes: higher transactional complexity; greater opportunity for collusion among employees; greater devolution of operational responsibilitie

Fraud…

• asset misappropriation – theft or use of company assets for personal benefit a common occurrence
  • majority of crime unveiled through audit (47%) or accidental detection (32%)
• average loss per company in proximity of US $2 M, contributing to declining share value
• reputation, brand image and employee morale negatively impacted
• increasingly active measures adopted by the private sector – i.e., employee screening, awareness raising

Consumer fraud in the Internet age

• online consumer fraud rising – losses of over US $200M in 2003
• top five reported “scams”: Internet auctions (19%); Internet services (11%); advance fee loans and credit protection (6%); shop-at-home/catalogue sales (5%); and, foreign money offers (5%)

Fraud…

Identity theft – both consumer and corporate fraud

• a global problem – enabler of other economic crimes such as other forms of fraud and counterfeiting
• unauthorized use of credit cards and bank accounts to defraud consumers
• 9 M US citizens lost a total of $53B in 2004 as a result of ID theft
• 120,000 cases in 2004 in the UK – 20% rise from 2003 and up 600% since 1999
• a rising concern in developing countries due to increasing electronic transaction capacity
  • proliferation of credit cards and ATMs
  • development and installation of communication technologies
• driven by globalization of commerce and banking industry and advancing communication technologies