Corporate Fraud Policy

Apply for SearchInform DLP TRY NOW

P rotivodeystvie corporate fraud - is a system of actions aimed at the prevention of threats to economic security of the state as a whole and of individual economic entities in particular. The central ideology of combating corporate fraud has been developed in countries with the Anglo-Saxon legal system, but Russia has already developed a body of significant methodological developments. The practice and policy of counteraction is based both on criminal law methods and on strengthening the system of corporate control.

Corporate fraud concept

The practice considers corporate fraud as criminal acts, as a result of which the company's employees encroach on the company's assets, the assets of counterparties, shareholders or clients of a legal entity.

Companies and law enforcement agencies are involved in combating fraud. And the court practice shows that the number of employees of companies who are prosecuted for corporate fraud is in the hundreds every year, and the companies suffer multimillion-dollar losses. The very fact of asset theft negatively affects the business reputation and significantly reduces the investment attractiveness of the company.

Cases of white-collar crime - crimes of white collars - in 1939 were first described in the literature by sociologist Edwin Sutherland. The researcher attributed cases of fraud and internal corporate corruption to this phenomenon.

A similar form of criminal activity came to Russia in the 1990s with privatization. For a long time, corporate corruption existed in a latent form as a style of doing business. Beginning in the 2000s, the legislator began to study and identify cases of corporate fraud, creating additional, previously unforeseen corpus delicti in the Criminal Code of the Russian Federation.

But even if a particular act is not yet criminalized, it can be classified as corporate fraud based on internationally accepted audit standards and policies. Typical forms are described in ISA 240, Fraud and Errors, which distinguishes between intentional falsification of financial statements aimed at stealing company assets from unintentional errors. The standard defines corporate fraud as a deliberate act committed by one or more employees or managers of a company with the use of deception and aimed at obtaining an illegal or illegal benefit.

This definition contains two differences from the interpretation of Article 159 of the Criminal Code of the Russian Federation. First, there is a qualifying feature of the subject of corporate fraud, which must be a manager or employee of the corporation. Secondly, in the definition there is no such way of committing an offense as “abuse of confidence”.

  • The American Association of Certified Fraud Detection and Investigation (ASFE) explains that there are several compelling factors that must be present in order to qualify a particular act as a corporate fraud:
  • the presence of a deliberately false statement in the reporting, explanations to it, other documentation;
  • awareness by the subject of the offense of the falsity of the statement at the time of the commission of the act;
  • the credibility of this statement from the entity affected by the fraud;
  • the presence of the fact of causing real damage;
  • proven damage must be expressed in monetary form, that is, must be estimated.

The theorist Howard Davia, author of books on the peculiarities of corporate fraud, nevertheless adds to the concept of "corporate fraud" in addition to deception, a second qualifying feature - abuse of trust, but, like ASFE, narrows the composition of subjects to corporate employees. There is no such corpus delicti in the Criminal Code of the Russian Federation. Fraud in the field of entrepreneurship is more related to non-fulfillment of contractual obligations and considers the relationship of two or more business entities, and not employees or managers from the top management of the company.

Another author Gerald Kovasich in the book Anti-Fraud. How to Design and Implement a Program ”considers corporate fraud as a crime, the participants of which illegally gain access to or misappropriate the property of the company, or misappropriate its assets.

Russian researchers identify the following signs of corporate fraud:

  • the action must be illegal;
  • the subject must be an employee of the company;
  • the goal of the entity is to obtain benefits in any form, not necessarily financial;
  • the methods of commission include deception, abuse of confidence or abuse of office and official authority;
  • damage from the activities of the company bears, and it is expressed in the form of loss of assets, lost profits, weakening of business reputation

Curiously, Western researchers pay a lot of attention to the psychological side of corporate fraud and study the motivation of corporate fraudsters. Donald Cressy established in each of the cases he studied the presence of the so-called triangle of fraud - a combination of three factors:

  • presence of external pressure, urge or internal motivation;
  • the ability not only to commit, but also to hide a crime;
  • own psychological ability to justify the fact of committing a crime.

Combating corporate fraud in Russian companies

Large Russian companies, which fully understand the social danger of corporate fraud, have begun to develop internal documents aimed at identifying and suppressing criminal encroachments.

For example, the document “Corporate Fraud Counteraction Policy” was implemented in JSC “Rosneft”. The document qualifies corporate fraud as actions or inaction of individuals and / or legal entities (obviously subsidiaries or dependent companies or counterparties) in order to obtain personal benefit and / or benefit of another legal entity or individual to the detriment of the interests of Rosneft and / or cause it material and / or non-material damage by deception, breach of confidence, misleading or otherwise. According to the rules of this policy, fraud manifests itself in the form of distortion of financial statements, bribes and other corrupt practices, as well as theft and other abuses, including deliberate damage to Rosneft's property.

The Gazprom Neft group of companies has developed its own Anti-Fraud and Corruption Policy, which belongs to the Security Management series of documents and is based on the principles of honest and open business conduct. The company declares that it does not tolerate any manifestations of corruption and is ready to suppress all fraudulent actions, equally committed by its employees and unscrupulous market participants. The employment contracts of all employees of the company include a clause on the obligation to counteract corruption and fraud.

Among other things, the document provides for the obligation of all senior officials of the company to participate in the fight against corruption and corporate fraud. The policy also stipulates the obligation to regularly monitor and assess the risks of corruption and fraud in-house on a regular basis. It is important that the company excludes the possibility of interacting with counterparties if it has information about their involvement in corrupt or fraudulent activities.

Gazprom Neft implements two groups of measures in the area of corporate fraud prevention policy.

Preventive measures include building a corporate culture of zero tolerance for fraud; introduction and regulation of the personal responsibility of each employee for compliance with the policy requirements; information and training of personnel; measures to avoid conflicts of interest. The latter means that employees provide complete and reliable information about all places of work, all promotions and interests in other companies, their own and relatives. If the information turns out to be unreliable, this may become the basis for terminating the employment contract.

Countermeasures include the right of the company to disclose any information about employee misconduct; internal corporate "hot line"; investigation carried out by the internal audit and economic security services according to established standards; bringing to disciplinary responsibility the direct culprit of corporate fraud and its managers; transfer of information to law enforcement agencies; the application of civil law measures, the recovery of the damage caused in court.

Codes of corporate conduct

Similar documents exist in most Russian companies, for example, in JSC Russian Railways. Most of them are a logical continuation of one of two fundamental documents - the Code of Corporate Ethics or the Code of Corporate Conduct. These documents make it possible to introduce a set of preventive measures already at the stage of hiring an employee, and then limit his activities by regulations and additional clauses in the employment agreement, so that the commission of corporate fraud becomes not only impossible, but also unprofitable. At the same time, the benefit, according to the pyramid of human hierarchical values, can be intangible. Accordingly, rejection by the collective, a decrease in social status as a result of fraudulent activities can become serious limiting factors.

Internal audit and its key role

In addition to company-level regulation, internal audit services play a significant role in preventing corporate fraud. A large-scale problem here is that it is far from always possible to attract qualified and motivated personnel to work in audit structures. Auditors are not trained, and work standards are not implemented. The result is a formal check of the compliance of the divisions' activities with the norms of legislation, control of the quality of contracts and the correctness of the nomenclature of cases.

The establishment of internal audit services should be based on the concurrent development of audit standards and methodologies. The business processes described and implemented in the largest audit companies can serve as a basis for them. It will be useful to use special software products similar to those used by tax authorities to control contradictions or incorrectness in reporting. Internal audits should be ongoing, and specialists should be able to check the reports as they are generated, and not after the fact.

Corporate Fraud and Socio-Economic Situation

The more stable the company and the economic situation in the country, the more difficult it is to commit corporate fraud. The highest inflation rate in 2015 led to higher unemployment, shrinking free cash, and a proportionate increase in the number of small corporate frauds committed at the grassroots level, ranging from overstatement of housing repair estimates to falsification of hotel stays.

The audit company PwC conducted a study of the economic situation in Russia and found that such a factor as the ability or ability to commit an economic crime increased in the country by 8% compared to 2014 and turned out to be the most significant (84%) in recent years. Two other factors necessary for the commission of corporate fraud - external pressure and the possibility of self-justification - remained at 8% each.

In addition, it is not the first year that Russia has been at the bottom of the corporate governance quality rating, which is not always an objective factor, but may be due to the negative business reputation of individual company owners and their involvement in the global corruption process. This directly correlates with the fact that the country ranks 95th and lower in the world population welfare index Prosperity Index, and the “depth of fall” in some years reached 37 points.

PwC experts also prepared their own survey of economic crimes in Russia in 2016 based on a survey of clients (and the client of this Big Four auditing company is market leaders in their industries). The document notes that up to 48% of the respondents surveyed in 2015-2016 faced economic and corporate fraud. In 46% of the cases studied, company employees were the culprits. Among the legal qualifications were not only article 159 of the Criminal Code of the Russian Federation, but article 15 of the Code of Administrative Offenses of the Russian Federation, which provides for liability for misstatement of financial statements.

In a quarter of the cases, PwC's reported damage estimates ranged from USD 100,000 to USD 1 million. But in addition to purely financial damage, companies also incurred significant reputational risks and attracted close attention of tax and law enforcement agencies. Interestingly, only 30% of companies have been seriously affected by internal crime. 95% of those surveyed indicated that the greatest risks of corporate fraud lie in the selection of suppliers and participation in tenders.

Unlike large companies like Gazprom Neft or Rosneft, in most medium and medium-sized organizations, corporate fraud remains latent and does not attract much attention from law enforcement officers. As a rule, this is due to several reasons:

  • shareholders and business owners do not pay attention to the moral qualities of the personnel or even show by their own example the permissibility of illegal behavior, which contributes to the concealment of crimes;
  • the company does not have an internal control system or it does not cope with its responsibilities;
  • the management of the company itself becomes involved in criminal schemes;
  • shareholders and owners who have lost part of their assets do not apply to law enforcement agencies, not wanting to draw attention to other shadow sides of the company's activities. As a result, crimes are not investigated, which distorts the real picture and affects the fact that the law enforcement system does not form specialists who are able to competently disclose corporate fraud;
  • there is a serious risk of publicity in the media and a damaged business reputation;
  • audit and consulting companies help hide, not reveal fraud.

All of this leads to a lack of public policy to combat corporate fraud. There is active opposition at the level of the largest companies with the indifference of the state and most of the business community. In part, the attention of the Russian Ministry of Finance was drawn to the problem, which, in one of its explanations, determined what exactly it attributed to corporate fraud, but that was the end of it. Not even a roadmap was drawn up to combat corporate fraud; neither the Ministry of Internal Affairs nor the Ministry of Economic Development show interest in the situation. Moreover, we are talking about the decriminalization of acts that can be attributed to corporate fraud.

Law enforcement agencies aim to reduce crime in the use of the state budget. Only the activities of the Accounts Chamber made it possible to return 18 billion rubles to the country's budget in 2017. The state and its bodies in the field of budget control are improving procurement legislation. Among the legislative proposals and practical initiatives - the right to conclude an agreement with a second supplier, if the first did not cope with the order, which reduces the bribery of government contracts; expand the powers of the Accounts Chamber; constantly check compliance with budget discipline.

The media are "full of" reports of new criminal cases related to fraud in the sphere of spending budget funds. At the same time, the sector of corporate fraud is in the shadow. Against this background, drawing the attention of the Investigative Committee and the Ministry of Internal Affairs to particular cases of corporate fraud seems less important. On the basis of the Law "On Combating Corruption", they monitor corruption in the private sector, but, as practice shows, it does not allow revealing a significant part of the crimes committed. The Open Government published its investigation, but it showed the decorative nature of most of the anti -corruption and anti -fraud plans adopted by companies and even ministries.

The mere consolidation of such corpus delicti as “corporate fraud” in the Criminal Code would help to improve the situation. However, so far such an idea is perceived as an attempt to “put pressure on business,” and is unlikely to be implemented in the near future.

Thus, in the coming years, large companies will play a leading role in identifying corporate fraudsters. Their active efforts to identify, prosecute, and disqualify intruders will become the main driver of change for the better.