Government stimulus money vulnerable to fraudsters

Governments have ploughed billions of dollars into stimulus packages to breathe new life into flagging economies, however, they could be handing fraudsters an "unintentional" meal ticket, according to the latest Kroll Global Fraud Report.

Of the $5 trillion in stimulus funding various governments have doled out, Kroll estimates that as much as $500 billion could be lost to fraudsters as the investment amount and the highly complex procurement processes involved mean these kinds of "big-budget capital projects" are often targets for corruption. 

"The unprecedented amount of financial support that governments have pledged to help stabilise their economies leaves the door wide open to fraudsters," said Richard Abbey, managing director, Kroll's Financial Investigations practice. "It’s a once-in-a-generation opportunity for those engaging in corrupt practices to cut themselves a large slice of the pie and it’s important that governments and businesses alike are aware of the risk and are prepared to counteract them.”

Kroll says focusing on the "middlemen" who are entrusted with large sums of money is essential if this type of crime is to be prevented. That means procurement processes need to be highly transparent. Resources must also be made available to "root out" corruption and Kroll advises that salaries should be appropriate to discourage employees from committing fraud. 

So can we be sure that government stimulus and taxpayers' money has ended up in the right hands? And will the processes around how this money is assigned and spent be transparent to the public?

FBI knew of Stanford, according to Vanity Fair

According to Vanity Fair magazine, Sir Allen Stanford, who the SEC alleges ran a Ponzi scheme, was on the FBI's radar for a number of years since he was investigated for money laundering back in 1989.

The article in the July issue of Vanity Fair, quotes a former FBI agent who claims that there were a series of interagency investigations into Stanford, but none of them resulted in any legal action.

The article also claims that there were various "red flags" within Stanford International including a 70-year-old compliance officer.

SEC on the war path?

When the tide goes out, it is amazing what you can find washed up on the beach. The latest jetsam to be found on US shores is Countrywide Financial's former chief executive officer, Angelo R. Mozilo who has been charged by the Securities & Exchange Commission (SEC) with securities fraud and insider trading.

Countrywide Financial, a mortgage provider in the US, was one of the victims of the recent credit crisis and was eventually bought by Bank of America. The Federal Bureau of Investigation has launched investigations into the collapse of a number of high profile credit crunch victims including AIG, Lehman's and Fannie Mae and Freddie Mac.

Focusing on cases it says are at the "root of the financial crisis", the SEC alleges that Mozilo misled investors about its "high-risk" lending practices, and claims he described Countrywide's loan products as "toxic" and "poison". The SEC is also querying profits Mozilo earned on selling shares in Countrywide.

Lawyers believe this is the first of many such suits the SEC is likely to bring in the wake of the financial crisis as it looks to restore its reputation which was tarnished by its failure to uncover the Bernard Madoff Ponzi scheme.

Due diligence in a post-Madoff world

Following the exposure of the $50 billion Bernard Madoff Ponzi scheme, investors and fund managers are under increasing pressure to perform more rigorous due diligence of hedge funds. But is that easier said than done?

If you look at some of the facts surrounding the Madoff scheme; lack of clear separation of duties, an unregistered auditor and the promise of high returns; then it is clear that feeder funds and other investors in Madoff's scheme failed to perform sufficient due diligence. In fact it seems as if their only rationale for putting money into Madoff's fund was his previously untarnished reputation (he was a former Nasdaq chairman) and the spectre of high returns.

Corgentum Consulting, a hedge fund operational risk consultancy based in New Jersey, has some interesting insights into how the exposure of Madoff's $50 billion Ponzi scheme is likely to change the world of hedge fund due diligence.

"Successful operational risk management in the post-Madoff world will require hedge funds to walk a tightrope of continually boosting investor confidence in a fund’s operational risk management capabilities, while not destroying and competitive advantages or informational edges through the dissemination of this information," says Corgentum.

Instead of outsourcing operational due diligence to "hedge fund allocators", Corgentum's believes that investors will want to exert greater control over the process and that the scope and depth of operational issues covered in a due diligence review will be more exhaustive. The frequency of hedge fund reviews will also be increased, says Corgentum.

"No longer will it be sufficient for investors to rely on generic due diligence questionnaires or to be granted a meeting with a hedge fund’s senior operational professionals for a few hours once a year for an annual review," says Corgentum. "Investors will likely request much greater detail on a host of different operational issues ranging from legal and compliance issues, information technology, cash management and valuation."

The upshot of all this is that hedge fund's "already strained" resources are likely to come under further pressure, resulting in lower profit margins, says Corgentum. Only those funds that make the due diligence process run as smoothly as possible for investors are likely to attract capital.

But that does not account for the age-old problem of human greed - investors and fund managers are driven to seek high returns. So despite all this talk of more rigorous due diligence of hedge funds, will it still be easy for a Madoff-type character to pull the wool over investors' and fund managers' eyes purely by promising market-beating returns?

"Mini-Madoffs"

In the wake of the Bernard Madoff revelations, Ponzi schemes, on a much smaller scale than Madoff's $50 billion scam, are being unearthed.

Eager to be seen to be proactive rather than reactive, the US Securities & Exchange Commission (SEC) is charging funds left right and centre with running Ponzi schemes. Some of the latest victims on the SEC's watch list include Shawn R. Merriman, who according to reports, is accused of fraudulently obtaining between $17 million and $20 million from investors in three US states through his company Market Street Advisors. Similar to Madoff, Merriman is alleged to have promised investors "impressive" returns.

Other reports claim that "mini-Madoffs" are you using the video-sharing web site, YouTube, to promote "cash gifting" programs. According to a Los Angeles Times report, the Better Business Bureau claims to have uncovered 23,000 clips promoting these so-called 'gifting' schemes. Viewers are reportedly directed to a web site where they are asked to sign up at a cost of between $150 and $5000. A spokesperson from the Better Business Bureau is quoted as saying, "They make it seem like it's legal and an easy way to make money, but it's nothing more than a pyramid scheme."

Madoff "feeder" funds in spotlight

Civil law suits pertaining to "feeder funds" in the Bernard Madoff Ponzi scheme continue to play out with Connecticut-based hedge fund, Fairfield Greenwich the subject of allegations that it failed to carry out adequate due diligence on Madoff.

According to newspaper reports, the fund, whose manager reportedly worked with Madoff for 18 years, is accused of being "blinded" by the hefty performance fees it earned for funneling funds into the alleged Ponzi scheme. The fund funnelled a reported $7.2 billion into Mr Madoff's company. Fairfield Greenwich is believed to be contesting the charges brought by Massachusetts authorities.

Companies plagued by cheque fraud

Payments fraud is on the increase, including old fashioned forms of fraud such as cheque fraud according to the findings of the 2009 Association of Finance Professionals' (AFP) Payments and Fraud Control Survey.

More than 70% of companies surveyed experienced actual or attempted payments fraud in 2008, with 40% experiencing increased fraud activity during the second half of 2008 as economic conditions worsened in the U.S. Overall 30% of respondents said incidents of fraud increased in 2008 compared to 2007.

The pickings appeared to be richer for fraudsters from larger companies, with 80% of companies with annual revenues in excess of $1 billion falling victim to payments fraud in 2008, compared with just 63% of companies with annual revenues under $1 billion.

Also old fashioned payment methods such as cheque appeared to be more susceptible to fraud with nine out of 10 companies that experienced attempted or actual payments fraud in 2008 being victims of cheque fraud. Other common forms of fraud were ACH debit (28%); consumer credit/debit cards (18%); corporate/commercial cards (14%t); ACH credits (7%); and wire transfers (6%).

US companies are being encouraged to write less cheques with solutions such as ACH and commercial cards being offered as an alternative, but it seems there is still some way to go before all payments migrate to electronic channels, which are still susceptible to fraud, but perhaps not to the same extent as fraudulent cheques.

Government stimulus funds could increase fraud

Ponzi schemes and other old fashioned forms of fraud are growing, and efforts by governments to combat the credit freeze are presenting new opportunities for fraudsters. That is the conclusion drawn in the latest Kroll Global Fraud Report. According to Kroll the greatest threat is misuse of government stimulus funds, particularly in areas such as infrastructure funding.

"Those impacted by the economic instability who are inclined to engage in fraudulent business practices will work to secure stimulus funds by any means possible,” said Blake Coppotelli, senior managing director in Kroll’s Business Intelligence and Investigations practice. “One prime area is infrastructure projects. With the near collapse of the real estate and construction markets, traditional fraud and rackets, such as bribery, kickbacks and bid-rigging, will find a wealth of opportunity in the stimulus funds. In our experience, without extensive anti-fraud policies, oversight and enforcement, 10% of these funds will be lost to fraud and criminal activity.”

Fraudsters will also be provided with new opportunities, says Kroll such as preying on companies as they move into "riskier geographies" in search of growth, to cheating to obtain a piece of the huge government stimulus pies. In its latest fraud report, Kroll says Ponzi schemes and other "old classics" are growing –for example, various financial scams and straight-forward corruption. According to Kroll, " smaller scale" pyramid schemes are multiplying in Latin American countries and elsewhere.

Often some of the most difficult frauds to predict are those committed by so-called "corporate saviours", as they "cook the books" not so much for personal gain but out of the misguided belief that they are acting in the best interests of the company or its employees. "They do not even realize that their actions would be considered fraudulent, or the damage that they might cause to others," says Kroll.

Kroll also says that the risks for companies that look to do more business in other geographies are also more acute in developing regions. Its survey found that the incidence of the top 10 major
frauds is generally higher in the Middle East and African countries, and lower, except for IP (intellectual property) fraud, in Europe and North America.

Despite the proliferation of fraud, Kroll says more regulation may not be the answer. After the Enron and WorldCom scandals at the beginning of the millennium, the US government introduced Sarbanes-Oxley legislation, but Kroll says despite such legislation fraudsters continue to penetrate and defraud companies in any industry, in any country around the world.

The battle against fraud steps up a gear

For some time now I have been drawing links between the economic crisis and the increased discovery of fraud. It is not rocket science really, as economic hardship can make people that may not normally commit fraud, find themselves suddenly fiddling the books or altering accounts in order to cover up losses or poor performance.

Of course, there is always the more criminal element that looks for vulnerabilities to commit new and varied forms of fraud. Most of the fraud experts I have spoken to have said that the crisis is not likely to lead to a greater incidence of fraud, but greater discovery of frauds that may have been going on for some time. The Madoff Ponzi scheme is a case in point.

However, a survey conducted by Vanson Bourne on behalf of predictive analytics software provider, SPSS Inc., has found that one in four (26%) financial companies reported increased levels of fraud, which it claims is double the UK average of 12%.

But it is not necessarily a lack of preparation that is exposing financial service providers to fraud, as 82% of respondents said they were very or well prepared to combat fraud, compared to 73% across all industry sectors. Now this is obviously where SPSS comes in and says predictive analytics is one tool that financial service providers should have in their anti-fraud armoury.

Yet, having the latest whizz bang anti-fraud solutions in place does not necessarily mean you are less exposed to fraud. Firstly it depends what solutions you have in place, whether they are joined up enterprise-wide or operate in silos, how well educated and trained your staff are to uncover various types of fraud and to interpret various data inputs and analytics that could suggest fraud.

We have all heard the stories of fraud technologies that generate "false positives", which means staff spend more time responding to false alerts or red flags than they do to real incidences of fraud. Professional fraudsters are also fairly adaptable and can change certain behaviours in order to circumvent technologies, which may only be programmed to look for past known behaviours of fraudsters, not new permutations.

While the bulk of the responsibility and liability for fraud has historically been with the companies that are the victims, increasingly the government appears to be assuming more responsibility with the setting up of a National Fraud Reporting Centre (NFRC) where people and businesses will be able to report suspected cases of fraud.

The UK National Fraud Strategic Authority has also given the Crown Courts extended powers to bar solicitors and estate agents from working if they are convicted of fraud. It is all part of the Government's efforts to change the perception that fraud is a "victimless" crime, but while businesses take fraud seriously, will this get the police to treat fraud more seriously?

There was an interesting report on the BBC's Panorama program recently about the government's inability to successfully recover the assets of organised crime or money earned through illicit means. While a reporting centre is a step up as information sharing can often uncover patterns of fraud across various enterprises, the authorities need to make the evidence stick and the information needs to be adequately followed up by the police, which to date have not made significant inroads when it comes to catching fraudsters.

FSA faces multimillion pound compensation claim

The Securities & Exchange Commission in the US has copped serious flack over its handling of the alleged Madoff Ponzi scheme and it looks like it is the turn of the UK's Financial Services Authority (FSA) to cop some flak - in fact it is facing a multimillion pound compensation claim from investors in collapsed fund, GFX Capital Markets.

According to a report in The Times, the FSA knew about concerns pertaining to GFX's business practices and that its boss Terry Freeman had changed his name after earlier being disqualified until 2012 as a company director.

Lawyers for investors in GFX which collapsed with estimated losses of £44 million, claim that the FSA could have acted sooner based on the knowledge it possessed. Is this the first of many such claims that we are likely to see against the FSA as angry investors seek retribution for their losses?

While it is all to easy to use the regulators as a scape goat for a lack of due diligence by investor or investment funds, this crisis raises serious questions about the regulatory oversight and due diligence conducted by the FSA and perhaps suggests that more regulation or granting more powers to the FSA is not going to be the panacea some hope it might.

Learning the lessons of due diligence

A few months back when the alleged Bernard Madoff Ponzi scheme was first exposed, I remember writing on this blog that the alleged $50 billion fraud was only the tip of the iceberg, and that the recession would result in other scams or alleged frauds being exposed.

Not that I want to beat my own drum, but it doesn't take much to realise that a deep economic recession and tightened credit availability are all it takes to bring suspected frauds that have gone undetected, to light. When banks don't want to lend and investors panic and want to withdraw funds, things start to unravel.

I don't think we can say that the credit crisis is causing fraud to spiral out of control, however, it is resulting in greater levels of discovery. Since Madoff, there has been the $1.5 billion fraud at Indian IT firm Satyam Computers, other Ponzi schemes and dodgy investor scams are being uncovered on a regular basis and now the SEC alleges that Allen Stanford duped investors who bought bonds from his Stanford International Bank in Antigua and claim that he also lied about the performance of their savings and the extent of investors' exposure to Bernard Madoff's alleged Ponzi scheme.

Not only is more fraud likely to be uncovered in trying economic times, but also financial regulators are on the war path, eager to redress the perception that they failed to adequately supervise financial firms when times were good. Now that times are not so good we can expect to see the heavy hand of regulation come down on banks.

In the UK the Financial Services Authority is calling for a sea change in the way commercial banks, investment banks and building societies manage their liquidity. The new liquidity standards, which are scheduled to come into force in October, will also impact US banks with branches in the UK and are designed to try and prevent an event like the Lehman's collapse in the US, spilling over into the UK by forcing bank branches to become self-sustaining when it comes to liquidity.

While managing liquidity is not directly related to fraud, what is perhaps more interesting is that observers believe the FSA is likely to not only make an example of those banks that fail to comply with its new liquidity standards, but they may also "disbar" those company chairman and executive directors of banks that don't measure up.

Corporate governance is back on the agenda again and it is the guys at the top that are likely to take the heat, however one has to question how serious the regulators really are when you read reports that a former disqualified company director was able to foil the FSA merely by changing his name and becoming a director of three companies.

We have all heard the corporate governance rant before - isn't that what Sarbanes-Oxley was all about? Yet financial accounting scandals are still very much with us and some suggest it is only going to get worse as company executives resort to fiddling the books in order to preserve banking covenants, meet analyts' expectations or avoid bankruptcy.

But heightened levels of corporate governance in the form of greater regulatory oversight is not the panacea some think it is. If anything is to be learned from the Madoff and Stanford cases it is the lack of due diligence by investors and investment funds. All the warning signs were there; fly-by-night accountants and a lack of separation of duties; and if anyone had bothered to do their due diligence they would have uncovered enough to raise alarm bells.

However, it seems everyone wanted to believe the unbelievable; market beating returns; and it seems we all want to believe that some of the gold dust will rub off on us, which means a lot of financiers are not subjected to the level of scrutiny that they should be.

More Ponzi schemes

While the alleged Bernard Madoff Ponzi scheme is capturing most of the headlines, other Ponzi schemes are also coming to light.

According to newspaper reports, Japanese police have arrested a 75-year-old bedding company executive on suspicion of running a "pyramid scheme" that promised investors high returns.

According to some experts, Ponzi schemes are increasing and are recurrent. Estimates suggest that in 2002, US citizens lost $9.6 billion to Ponzi schemes. Some suggest that Ponzi schemes are happening with increasing frequency and point the finger at unregulated hedge funds or alternative investments put together by investment advisors.

Madoff - who is to blame?

The US Securities & Exchange Commission (SEC) continues to cop flak over its handling of tip offs regarding the alleged Bernard Madoff Ponzi scheme.

According to a report in the UK's Financial Times newspaper, Lord Jacobs a peer who lost money in the alleged $50 billion scheme, is pointing the finger at the SEC for "the grossest negligence it is possible to conceive" for not fully investigating a whistleblower’s detailed exposé.

He is not alone in his condemnation of the US regulator. Members of the US Senate Committee on Banking, Housing and Urban Affairs also expressed disbelief and amazement at how regulators did not uncover the alleged Madoff Investment Securities Ponzi scheme, citing numerous "red flags" such as the fact that he did not use a separate custodian for his investment advisory business, and that his accountant was not registered with The Public Company Accounting Oversight Board (PCAOB).

However, as a privately held broker-dealer, the Senate hearing heard how Madoff was able to avoid adhering to these requirements. At the same Senate hearing, senior representatives from the SEC defended their investigations of Madoff saying their examinations which were limited to the scope of his broker/dealer business, not his investment advisory business, did not find fraud.

Madoff registered as an investment advisor in 2006. The SEC said it could not examine every investment advisor and that 10% of registered advisors were examined every three years, but that these examinations were limited in their scope and targeted specific activities. The SEC also pointed towards resource constraints.

Nevertheless it seems that the SEC is going to cop a lot more flak over its handling of the alleged Ponzi scheme as a number of investors that have lost money question how detailed tip offs from a reliable source failed to uncover anything. The truth perhaps lies somewhere in the fact that the SEC said it only examined Madoff's broker/dealer activities, not his investment advisory business. Regulatory loopholes appeared to have allowed Madoff's investment advisory activities to escape rigorous scrutiny.

AIG in the spotlight again

US insurance company, AIG, one of the high profile victims of the credit crunch, is in the spotlight again with one of its former vice presidents being jailed for four years for falsely inflating the company's share price and reserves.

According to reports, Christian Milton, who was convicted back in 2008 of conspiracy, mail fraud, securities fraud and making false statements to the Securities and Exchange Commission, participated in a scheme whereby AIG "secretly paid" General Reinsurance to take out reinsurance policies with the company in 2000 and 2001. The scheme reportedly cost investors up to $597 million.

It is not the first time that AIG has been implicated in fraud. According to Wikipedia, an accounting scandal resulted in former CEO Maurice R. Greenberg being ousted in 2005. The allegations made at the time included fraudulent business practice, securities fraud, common law fraud, and other violations of insurance and securities laws. All criminal charges were later dropped however and Greenberg was not held responsible.

AIG, and other victims of the credit crunch are also being investigated by the FBI. The investigation is believed to be looking at whether these firms unduly influenced agencies to "inflate" their ratings and misled investors about the true state of their assets.

How did "India's Enron" come about?

"We will see a significant increase in
[ financial accounting scandals], however the jurisdiction is shifting from the more regulated markets where Sarbanes-Oxley, independent audit committees and the significant level of oversight make it more difficult to get away with, to emerging markets where supervision and broad oversight is not as advanced," said Richard Abbey, managing director, Financial Investigations for risk consulting company, Kroll.

I have reported these comments from Abbey before in an earlier posting, but I wanted to highlight them again in light of the Financial Times publishing its account of B. Ramalinga Raju, the former chairman of Indian IT firm, Satyam Computers and how "India's Enron" unfolded.

According to the newspaper report, Mr Raju became "obsessed with market capitalisation", which is what Abbey is alluding to in his statement above.

The report goes on to say that Mr Raju also appeared to benefit from the silliness that prevailed during the dot.com boom when the market cap of companies was wildly overinflated and no one, including those financing dot.com companies, really paid any attention to a company's earnings or P&L .

According to the FT, Mr Raju listed Satyam Infoway on the Nasdaq in 1999, and was able to immediately raise money despite the fact that the company had lost money. But once the dot.com bubble burst, according to the police the accounting fraud began in 2001 when the share price deflated.

Fund heaped praise on Madoff

As more details come to light about the alleged Madoff Ponzi scheme, lawyers representing those investors that lost millions are pointing the finger at the apparent lack of due diligence conducted by the banks and the funds that invested money with Madoff.

According to a report in the Financial Times, Santander's Swiss-based alternative investment arm, Optimal, "heaped praise" on Madoff before his arrest, for his ability “to find great entry and exit points to benefit investors”.

With parent bank, Banco Santander admitting losses of up to €2.33 billion as a result of the alleged Ponzi scheme, lawyers will be clambering all over this latest revelation.

Another Ponzi scheme?

Bloomberg is carrying news of the latest alleged Ponzi scheme coming out of Japan. Japanese housewives have reportedly been hit by the alleged currency trading scam.

Recession - the mother of invention

A recession is the mother of invention, and never one to miss an opportunity, fraudsters are reportedly targeting investors whose money is trapped in Icelandic bank, Kaupthing Singer & Friedlander.

According to Citywire, depositors with money trapped in Kaupthing Singer & Friedlander, on the Isle of Man, which went into administration late last year, have been approached by a company calling itself Kristen Heather Investments (Isle of Man). The company claimed it could return depositors' funds in Kaupthing Singer & Friedlander for a fee.

The Isle of Man Financial Services Commission says the firm has a fake address and had copied the real bank’s website. PricewaterhouseCoopers, which is liquidating Kaupthing, says it appeared to be "an entirely fraudulent endeavour".

As I mentioned in my previous post, Madoff - who is culpable?, with irate investors and shareholders having lost substantial sums of money, there is likely to be a raft of legal action in the wake of the credit crisis. Some of the big class action suits may be some time in coming, but meanwhile, according to The Press & Journal, an 83-year-old QC is suing Royal Bank of Scotland claiming that the bank was "insolvent" when it "fraudulently" sold him shares in a rights issue.

As part of his small claims action, the QC is trying to prove that the bank was "technically insolvent" when it sold him stock valued at £1,282 as part of a rights issue. If the case is successful, it could lead to similar action being taken by other bank shareholders.

Madoff - Who is culpable?

Given the amount of corporate fraud cases and lack of due diligence that has been brought to light as as a result of the current financial crisis, litigators will be clambering all over it trying to find some means of recourse for their clients who have suffered substantial financial losses.

In the case of the alleged Madoff $50 billion Ponzi scheme, there could be a number of potential targets in the firing line for litigators to take action against. Investors whose money ended up in Madoff's scheme are likely to turn to the managers of the "feeder funds" who earned commissions from feeding funds into the alleged Ponzi scheme. Questions also remain over the due diligence conducted further down the line by those banks that have revealed exposure to the Ponzi scheme.

Some experts also question whether the US securities regulator, the Securities Exchange Commission (SEC) is culpable. According to the latest newspaper reports, the SEC missed "red flags" regarding Madoff's alleged Ponzi scheme when it investigated an accountancy firm with ties to Madoff back in 1992. The New York Times claims that the SEC's probe found that the accountancy firm kept "almost no records", and that one of the partners told investigators that the $441 million it controlled was managed by Mr Madoff.

Forensic accountants currently working on the Madoff case in New York and London, say there appeared to be a “patent lack of segregation of duties” as the management, administration and custody of the fund in question was conducted either by Madoff or associated parties. However, standards of due diligence in this area are still developing and there was no apparent legal onus on Madoff to separate these duties.

One source I spoke to involved in the Madoff investigation recalled the BCCI scandal in the UK in 1991 when the Middle Eastern bank collapsed with £7 billion of undeclared debts. The financial regulator at the time was the Bank of England and victims of BCCI, led by the liquidator Deloitte & Touche, later brought a lawsuit against the Bank of England claiming up to £1 billion in damages. The victims alleged the Bank of England was "guilty of negligence amounting to 'misfeasance', or wilful misconduct." The case later collapsed.

Questions now remain about whether the SEC could have done more to uncover the alleged Madoff Ponzi scheme. As to whether it could face its day in court is debatable as the SEC may be able to declare immunity from being sued. As the BCCI lawsuit also demonstrated it may also be difficult to prove that the SEC "deliberately" failed in its duties.

Learning old lessons about fraud

With "Ponzi" schemes and "rocketing levels of discovery" of insider fraud that has gone undetected for years finally being exposed by the credit crisis, corporate fraud will be an area of renewed focus this year as companies go back to basics to defend themselves against malicious and non-malicious attacks perpetrated by insiders.

With so much press and industry focus on the multitude of threats looming outside the corporate firewall, until recently insider fraud attracted few column inches. Given the impact exposure of corporate fraud has on a company's brand and reputation, it is not surprising perhaps that most incidences of insider fraud (50% in the case of insider fraud in banks, according to Celent) goes unreported.

Yet, with figures published by analyst firm Celent indicating that insider fraud accounts for 60% of all bank fraud cases involving a data breach or theft of funds, corporate fraud is an endemic problem and fraud experts anticipate it will be ratcheted up a notch or two by the recession.

Richard Abbey, managing director, Financial Investigations, for risk consulting company, Kroll, says the recession could give rise to the "non-malicious" corporate fraudster - those that commit fraud not for personal gain, but to save their company and employees' jobs. "It's misplaced loyalty if you like as they do not really think they are committing fraud," says Abbey. While anti-fraud measures tend to be focused on new employees, Abbey says the typical fraudster is the long-serving, loyal employee that knows their way around a company's systems.

Despite the introduction of Sarbanes-Oxley in the US, which placed more rigorous reporting requirements on a company's financials in the wake of the Enron and WorldCom corporate accounting scandals, Abbey expects to see more financial accounting scandals in the wake of the recession as corporate executives falsely inflate profits and cover up debts in an effort to maintain core ratios or to protect themselves from breaching banking covenants.

"We will see a significant increase in that type of fraud, however the jurisdiction is shifting from the more regulated markets where Sarbanes-Oxley, independent audit committees and the significant level of oversight make it more difficult to get away with, to emerging markets where supervision and broad oversight is not as advanced," says Abbey.

No surprises then that the latest accounting scandal has rocked Indian IT outsourcing firm, Satyam Computers, where the company's chairman has admitted to a $1 billion fraud, which is being billed as "India's Enron". Kroll is also seeing more companies reporting allegations of corporate bribery and corruption, which if proved true can attract hefty fines far in excess of the original bribe.

Given the threat landscape, it may be tempting for corporate executives and chief risk officers to reach for the latest gadgets: biometrics; enterprise anti-fraud systems; software that detects the potential for fraud in emails; however, fraud experts caution that brandishing the sword of technology is not necessarily the answer.

According to Abbey most corporate fraud is detected not as a result of controls companies put in place, but by accident or whistle blowers. There are, however, more immediate measures firms can put in place to protect themselves against insider fraud, segregation of duties being the main one, to ensure that no single person, regardless of how long they have been with the company, has "end-to-end" control over a business processes or processes.

In its latest Global Fraud Report, Kroll concludes that the financial crisis will lead to more fraud claims, legal disputes and regulatory action. Greater due diligence and levels of corporate governance will also be required and cross-border transactions are likely to increase exposure to "complex fraud and corruption".

“There are some wonderful technologies that can help solve fraud,” says David Porter, head of security and risk at consultancy, Detica, “but it is not just about wielding the sword of technology. It is about con artists scamming people. There is a soft human element to combating fraud. This year, companies are going to be learning a lot of old lessons about fraud.”