Across The Border

Chinese companies report high number of fraud cases in 2016, Kroll survey finds

PUBLISHED : Tuesday, 17 January, 2017, 6:58pm
UPDATED : Tuesday, 17 January, 2017, 9:42pm

Almost nine of 10 Chinese companies encountered fraud cases last year, with many reported cases involving senior management, according to consulting firm Kroll’s annual survey.

About 86 per cent of Chinee companies were victims of fraud in 2016, which is higher than global average of 82 per cent, according to the 2016 Kroll Annual Global Fraud and Risk Report. China’s fraud cases and cyberattacks last year were up 13 percentage points from 2015.

The Kroll survey, which polled 545 senior executives worldwide, found 82 per cent had fallen victim to fraud in the past year, up from 75 per cent in 2015 and 70 per cent in 2013.

Regulatory or compliance breaches is the most common type of fraud in China, with 41 per cent of Chinese respondents citing infractions in this area. Others common types of fraud involve vendor, supplier, or procurement fraud.

In many fraud cases, the Chinese companies lost inventory, assets, or company data.

The Kroll report showed 86 per cent of Chinese companies had faced cyberattacks. About 82 per cent had lost client data or records, while some lost trade secrets or other intellectual property.

About 52 per cent of Chinese respondents said their joint venture partners were responsible for the thefts, which is more than two times the global average.

“Fraud in China has become increasingly complex and challenging. A quarter of survey respondents, a higher proportion than all other countries and regions surveyed, indicated that they were dissuaded from operating in China due to concerns over fraud and corruption,” said Colum Bancroft, managing director and co-head of Kroll’s Greater China investigations and disputes practice, in a statement.

Apart from junior employees, fraud in China was often committed by senior or middle management, resulting in potentially more significant losses. he said.

Violet Ho, senior managing director and co-head of Kroll’s Greater China investigations and dispute practice, said the increasing number of fraud reports in the mainland was related to the fact that many Chinese companies have strengthened their internal control system, which has helped to find fraud cases.

“This is a positive sign as it shows the corporate governance and internal compliance standards among the Chinese companies have improved in recent years,” Ho told the South China Morning Post.

To prevent fraud cases, Ho said it would be important to have control in many areas, from recruitments, suppliers, payments and data protection.

“Recruitment is very important as you can hire the right people who are honest and have good conduct. It would prevent fraudsters from joining companies to steal their assets and data,” she said.

To help combat fraud, she said Chinese companies would need to set up a whistle-blowing system to allow employees or trading partners to report any unusual activity. Such reporting systems should be structured such that the whistle blower is free from reprisals.

“There are many fraud cases in the mainland involving the senior executives of companies. It would therefore be important for the whistle blowing system to be established in a way that was handled by independent compliance departments or authorities,” she said.

“Managing fraud risk in China is achievable with a clear and consistent strategy. Getting the most out of the whistle-blowing system, ensuring independence of investigations and building a strong compliance culture with the right tone from the top could be effective approaches to mitigate risks,” Ho said.

Nathan Bush, partner and head of investigations of Asia of legal firm DLA Piper, said fraud risks for multinational companies in China increase when individual managers become choke points in discussions of commercial, legal, and reputational risk, and when employees circumvent global compliance programmes out of personal or professional loyalty to local management.

“Other pitfalls include relying on non-Chinese speaking managers to authorise expenditures based on Chinese-language documents, and failing to integrate global accounting and compliance policies into local labour agreements and employee manuals,” Bush said.

 “Companies should ensure that internal policies and procedures are translated into Chinese, and that periodic training is also conducted in Chinese. Companies should incorporate fraud and corruption risks into their internal audit protocols, targeting records of activities with heightened fraud risks and testing employees’ adherence to internal controls designed to prevent fraud,” Bush said.