If history is any guide, corporations can expect a serious increase in internal fraud, legal disputes and regulatory action in the weeks ahead as a result of the current U.S. economic crisis. Now more than ever, CFOs and compliance officers must take careful measures to strictly follow financial risk management standards and ensure new employees have spanking clean records, says Peter Turecek, senior managing director at New York City-based Kroll Inc.
A new report from the global fraud and litigation consultant cites sharp increases in arbitration claims by investors seeking to recoup losses after Black Monday, Oct. 19, 1987, and following the market downturns of 1991 and 1992. The Financial Industry Regulatory Authority (FINRA) reports that new arbitration cases rose 54% from 2007 to 2008 alone, according to Kroll.
Demand for litigation support and asset tracing work for companies with failed investments has increased and so has white-collar crime enforcement, says Turecek. The Securities and Exchange Commission (SEC) pursued 115 enforcement actions related to securities offering frauds–as in Ponzi schemes–compared with 68 in 2007 and 61 in 2006. An FBI official recently told Congress that the agency expects its fraud investigations at major corporations to jump from 38 cases to hundreds as the crisis deepens.
Internal fraud is more prevalent than many expect, Turecek says. “Often we'll get a call from the CFO or compliance person saying our bookkeeper was terminated and something looks off,” he says. More of these cases–perpetrated by those who are usually first in to work and last out and don't take vacations–are discovered during massive layoffs.
Fraud in treasury increases in tough times, too, says Jeff Wallace, a partner at Greenwich Treasury Consultants, though these cases aren't generally acknowledged. “In the treasury department, someone may somehow direct the money to his own pocket, or traders doing foreign FX deals with a bank at off-market rates might get a kickback from the bank's FX traders,” says Wallace, who focuses on financial risk management consulting. Company-wide lay-offs that touch typically short-staffed treasury departments can also weaken internal treasury controls over operations.
To mitigate this risk, companies might again consider the “classic technique” of bonding treasury officials, Wallace suggests, which protects a company from an individual conducting fraud, and insures against employee theft. Bonding requirements for treasurers were dropped as companies believed they had sufficient controls built into their treasury and bank systems.
However, he notes,”if the CFO or treasurer wants to move money, it is going to get moved regardless,” and he also favors instituting employee hotlines where workers can anonymously report abuse.
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