Combating corporate fraud

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C orporate fraud - the subjects of entrepreneurial activity turnover, aimed at increasing their profits or income of individual officials, which has at its core the unlawful nature. This concept does not always mean only the composition of "fraud", complex crimes can also be committed, containing several compositions from the number provided for by the Criminal Code of the Russian Federation. From the point of view of law enforcement agencies, this type of crime is characterized by latency, complexity of investigation and collection of evidence.

Legal and practical concept of corporate fraud

The theory of criminal law does not offer a disclosure of the concept of "corporate fraud" in general, but rather makes it possible to define it using a number of features. Among them:

  • a company, a legal entity can be used as an instrument of crime;
  • the crime is committed in the area of business transactions;
  • the offense is often associated with forgery of documents, financial statements, willful misleading of the creditor;
  • the primary recipient of the benefits of a committed crime may be a legal entity, but then the funds are redirected in favor of a specific individual, which, in turn, becomes the reason for committing new crimes - tax evasion, money laundering and others.

Article 159 of the Criminal Code of the Russian Federation becomes the main part of the responsible fraudsters, but along with it, others often appear - from fictitious bankruptcy to commercial bribery. The subjects of such crimes in Russia are often shareholders and top managers of companies who are well versed in the legal environment, have good lawyers and connections in law enforcement agencies. Their training is enough for careful concealment of evidence, minimization of all evidence aimed at revealing the intent to commit fraud, that is, an act aimed at appropriating other people's funds through deception or abuse of trust. As a rule, they are not alone, but as part of an organized group of persons helping to withdraw assets, transfer money offshore, and forge reporting. It is not uncommon for such groups of "false entrepreneurs" to have connections with the underworld.

In most cases, the expectation of concealing corporate fraud is based on the fact that the deceived are not interested in informing law enforcement officers about the fact of the crime, since for one reason or another they can be held liable, for example, for receiving cash. An example would be illegal receipt of a loan, in which funds are withdrawn abroad, and the supervising bank manager will not identify the critical condition of the loan, since he can be found guilty of at least negligence or receiving commercial bribery, at most, it will be considered an accomplice in fraud, in which the punishment can reach 10 years in prison. A stable system of criminal relations is being formed, and only a lot of experience and understanding of the structure of connections will help the investigator to understand it.


Experts offer several types of classification of corporate fraud: by subject, by the way the crime was committed, by purpose. If we consider the classification by subject, then there are three groups:

  • corporate fraud committed by the staff or management of the company with the aim of taking possession of the property of third parties;
  • a crime committed by employees (insiders) against the company itself and its shareholders;
  • fraud that is committed by third parties against the corporate entity itself.

By the way the crime is committed, fraud is divided into two groups:

  • committed by deception;
  • committed by abuse of trust.

For example, falsifying financial documents to mislead an investor is a fraudulent crime, and falsifying a business plan and reporting to obtain a loan from a partner bank with which the company has long-standing business relationships would be an abuse of trust.

Law enforcement agencies most often identify corporate frauds committed by staff against the company itself. Their subjects are not highly qualified, their criminal activities are easy to detect, and the evidence is not hidden in such a way that it is impossible to find them.

Typical acts for which accountants, purchasing managers, chiefs of AXO go to trial:

  • conclusion of fictitious contracts;
  • acceptance of works with unfinished volumes, unfinished works;
  • falsification of financial statements in order to conceal shortages;
  • theft by misappropriation or embezzlement;
  • receiving a bribe for concluding a contract;
  • write-off or withdrawal of assets from the company;
  • unlawful use of company funds (placing on deposits, providing loans) in order to extract personal profit.

If the crime is committed by the company itself in order to make a profit by deceiving other business entities, among the compositions there may be:

  • fictitious bankruptcy;
  • deliberate overstatement of the company's profits or assets with the aim of defaulting on loans
  • illegal receipt of a loan;
  • forgery of financial statements;
  • the withdrawal of assets or profits from the company in order to reduce the profit of minority shareholders, causing them significant financial damage;
  • forgery of decisions of general meetings;
  • making major or related party transactions with elements of fraud.

Valuation and insurance companies, audit or law firms, banks can be accomplices in committing this type of business crimes. They can be identified at the request of the affected client, investor, lender, minority shareholder, but the investigation will be associated with many difficulties. In this case, corporate fraud is a complex and complex crime, and many participants in the business turnover will be interested in concealing evidence of the commission.

Crimes against a company can be just as varied. It:

  • the offer of goods, works, services of obviously lower quality;
  • willful failure to fulfill contractual obligations;
  • fraud with money, assets, securities belonging to her.

Each of these cases requires its own investigation methodology. The theory suggests looking for one of three elements in each separate type of corporate fraud:

  • theft (asset stripping);
  • bribe (receiving, giving, extortion);
  • forgery of financial documents.

Most often, in each of the complex cases of corporate fraud, all three elements can be found together with deception or breach of trust.

Most Commonly Used Internal Fraud Schemes

Considering typical cases of internal fraud, one can see that Russia has developed its own, already traditionally used corporate fraud schemes. Many of them arose back in the days of the USSR and have practically not changed. Among such schemes:

  • registrations in the reporting, creation of large volumes of goods than is actually available;
  • the so-called re-grading, when a cheaper or expired product is presented as a quality one;
  • writing off assets, fixed assets, low-value items without reason and turning them into their own property;
  • purchases of components and other goods unnecessarily;
  • commercial bribery;
  • fictitious volumes of contract work.

Most often, at enterprises of wholesale and retail trade or those working with a large volume of parts and components (repair, construction), they do not occur immediately, but only as a result of a thorough inventory of fraud with material values.

In this case, combating corporate fraud falls entirely on the shoulders of the management of the company or its branches, the economic security service. Sometimes such actions can be qualified as fraud, more often they contain the composition of waste.

All types of fraud with goods and materials are easily detected when checking the availability and quality. It is more difficult to identify individual elements of fraud in the production process, when goods, raw materials, components go into production immediately after being delivered to the warehouse. This allows:

  • use raw materials and goods of inferior quality, benefiting from the difference in the purchase price;
  • use less raw materials, selling unaccounted for to third parties;
  • organize the launch of unrecorded production. This problem can be encountered when studying the production of counterfeit alcohol produced from such unrecorded raw materials.

In the latter case, the detection of fraud can be simplified, since the legislation on the circulation of alcoholic beverages is also violated.

Contract works, their ordering and acceptance become just a source of legal proceedings for district courts. Most of the cases of corporate fraud at the grassroots level are connected with them, just look at the practice of recent years. During execution and acceptance, the following fraudulent schemes are allowed:

  • unjustified acceptance of outstanding work;
  • registration of contracting agreements that are not actually implemented, but are paid;
  • overestimation of the price of contract work and materials several times.

Thus, in the activities of most companies (both inside, in the production process, and outside the scope of their activities, in the service and repair sector) there are risks of financial losses as a result of internal corporate fraud.

Subjects at risk

Organizations most likely to be harmed by corporate fraud include:

  • large trading, wholesale, warehouse, manufacturing companies, construction and repair enterprises, where thousands of transactions with material assets are performed every day;
  • companies that are minority shareholders of large enterprises, the controlling shareholder of which is not distinguished by good faith;
  • owners of enterprises with valuable assets who are unable to establish regular control over the activities of top managers and the safety of assets;
  • companies investing in securities, the value of which can be artificially inflated by falsifying financial statements;
  • banks working with a large number of private clients.

Each of these companies should think about how to protect themselves from internal fraud and how to create a system of preventive measures that will not suffer from the activities of the participants in the business turnover - fraudsters.

Identification of illegal actions

The responsibility for detecting illegal actions lies with the companies themselves and with law enforcement agencies in equal measure. If we talk about intra-company fraud, then the economic security and internal audit services must constantly monitor current operations and their documentation. The symptoms of the possible occurrence of such cases are the following:

  • violation of the procedure for using forms of invoices, receipts and debit orders, forms of powers of attorney;
  • if the enterprise has electronic document flow - increased frequency of use of the system by one or more employees;
  • refusal of one of the employees from vacation, frequent detentions at workplaces, refusal to transfer or delegate some of the powers, which is motivated by unwillingness to shift responsibility;
  • when calculating the degree of efficiency of employees - significant deviations of the indicators of one of the employees from the general level upward;
  • a large number of inquiries about the income of one of the employees from the tax authorities, the FSSP, as well as an unexpectedly increased level of his welfare;
  • correction of financial and accounting statements by top managers before submitting them for consideration to shareholders or auditors without coordination with the relevant services;
  • shortages;
  • turnover of management personnel.

Identifying all these points should be the immediate task of the economic security services, but along with this, there should be a hotline at the enterprise through which staff could report their suspicions. But security services alone are not enough. Practice shows that an effective way to combat corporate fraud is to create an atmosphere of rejection in the team as such. This is facilitated by the adoption of the Code of Corporate Conduct, and the conduct of explanatory conversations with the personnel, and thus the built-up system of motivation that the case of detection of fraud in the unit would lead to a decrease in the level of additional remuneration for all employees of the brigade or shop.

In addition, it is necessary to apply disciplinary sanctions in all identified cases, and, if possible, try to bring the perpetrator to criminal responsibility with compensation for the harm caused.

To be able to collect the evidence base sufficient to bring the perpetrator to criminal responsibility, you can use your own resources, or you can invite auditors. Checking them should help identify:

  • which assets have disappeared from the balance sheet of the company, the path of their possible disappearance, who of the counterparties could be an intermediary;
  • who specifically from the management staff is interested in committing fraud;
  • who had access to objects, documentation, electronic databases, who could make fictitious records;
  • ways of committing fraud, employed for this human or information resources of the company.

Obtaining written evidence of the fact of theft will give grounds to initiate a criminal case on the fact and in the course of operational-search and investigative actions to identify the culprit and bring him to justice.

Combating corporate fraud

There are two levels of corporate fraud prevention - public and private. Private refers more to internal fraud. But at the level of countering fraud, the subjects of which are the companies themselves, the fight should be built by their clients, counterparties, shareholders in a different way, with the involvement of law enforcement agencies.

At the shareholder level, a well-functioning corporate control system is needed, the key elements of which should be:

  1. Board of Directors.
  2. Revision Commission.
  3. External auditor.

In addition to the statutory audit, a proactive audit conducted at the request of a shareholder can bring significant benefits. Often it allows you to identify those risks that could not be found by a permanent audit company. Each action of the managing executive body must go through a double control system and is within the permissibility zone established by internal documents.

On the part of clients, creditors, investors, the task is to carry out checks of the accounts and financial documents of the counterparty by the forces of attracted experts and, if signs of fraud are detected, inform law enforcement agencies. It is easier to stop a criminal at the stage of attempted crime than to try to recover the stolen funds for a long time. The Central Bank of the Russian Federation plays an important role in document checks, which controls the financial statements of securities issuers and bank borrowers. But much also depends on the management of banks or investment funds, which are offered assets with clearly inflated liquidity.

Corporate fraud is multifaceted. It is possible to cope with it only through joint efforts of corporate control bodies, the state and society. The damage from it to the economy is too great to ignore its risks.