Economic fraud

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The business environment has become fertile ground for the commission of economic fraud. It is rare for a company to feel completely secure. Entering foreign markets and expanding their scope of activities take companies into unfamiliar business environments, where they are less protected and easily fall prey to criminals. With the improvement of computer technology, the degree of risks associated with illegal activities of employees increases, which today is one of the main threats for companies. The enterprises themselves are not completely flawless either, which often use prohibited methods of making a profit in relations with counterparties, customers, and the state.

Definition of the term

Economic fraud is not tantamount to such an act as a criminal offense. In practice, this type of crime is understood as various types of acts that may be of the nature of pseudo-business, violation of securities legislation, money laundering, and tax evasion. A common characteristic for them will be the commission of fraudulent actions aimed at causing economic damage to another entity, legal entity or individual or the state by means of actions that can be qualified as deception. Such deception will be falsification of documents, and the creation of fly-by-night firms, and the issuance of bonds based on falsified data of the emission prospectus. A separate form of economic fraud will be violation of competition law, where you can find the use of someone else's brand, and falsification of products, and the difficulty of entering the market for competitors. Almost any sphere of business turnover becomes a breeding ground for criminals.

Legal basis

The growing trend towards committing fraud in the economic sphere forced to introduce the fifth part into Article 159 "Fraud" of the Criminal Code of the Russian Federation. This part introduced the criminal prosecution of fraud or theft of someone else's property, committed by deception or abuse of trust. Part five is devoted specifically to criminal acts committed in the field of entrepreneurial activity.

Also, a significant part of fraudulent activities in the field of business at the same time falls under the scope of article 160 "Misappropriation or waste". It provides for liability for the theft of property previously entrusted to an employee, manager or a person acting on the basis of an agreement or power of attorney.

Some acts committed along with economic fraud, facilitating the criminal's actions and related to the theft of other people's property, are classified as “pseudo-business” under Article 173 of the Criminal Code. Its essence is the creation of a legal entity without the intention of doing business, but with the aim of using it as an instrument of crime. The practice of bringing to justice only under this article has not yet formed, it is more often used as an additional to article 159. In 2009, for transferring several billion rubles from the accounts of such a one-day company abroad, the court sentenced its head only to a fine of 10 thousand rubles. The leaders of the scheme were mainly responsible for tax evasion and gray imports, which are also a form of economic fraud.

Types of fraud

Among the economic types of this crime, two main ones should be distinguished: crimes committed by external agents, other legal entities, and crimes committed by employees. Also, fraudulent actions of companies or corporations themselves and their management, directed against customers, the state or other third parties, become a separate phenomenon. Fraud in the economic sphere is rarely unambiguous, and most often it violates other legal norms.

When an employee is to blame

An employee committing theft of company property by deception or misappropriation is a common and familiar phenomenon. The most common types of crime in this area are appropriation or embezzlement. Among the defendants are cashiers, gas station operators, and managers. A classic case of fraud in the form of embezzlement was the issuance of huge bonuses by managers to themselves and their proxies at the expense of shareholders, the issuance of "golden parachutes" and other methods of theft of funds. A striking example of this type of fraud was the criminal case brought against the deputy director of the state-owned OZK company. He stole tens of millions of rubles by concluding contracts for the supply of goods with companies that did not intend to fulfill their obligations. Violations were revealed only after the audit carried out after the privatization of part of the company's shares. Such abuses are frequent cases in the practice of large companies with state participation.

Interestingly, the studies were even able to compose a portrait of the average alleged perpetrator. It was a man aged 36–45 with higher education and at least 6 years of senior management experience in the company. During this period, he learns all the security flaws and gets the opportunity to implement fraudulent schemes.

There are a number of indications that a suspected economic fraud can be detected:

  • in cash and settlement transactions - atypical payments, double payments, the absence of a counterparty in the directory, irregular payments;
  • in inventories - identification of a decrease or increase in inventories, shortages or surpluses during audits, a sudden increase in inventories in the balance sheet;
  • in interaction with counterparties - too profitable, unexpectedly unprofitable or zero transactions, delays in payment for products or delivery of goods, conclusion of contracts that do not correspond to the statutory activities of the company;
  • in the workflow - the disappearance of documents, amendments and erasures, late registration of postings in accounting;
  • reporting - unexplained changes in key financial indicators within 10%, for example, an increase in income with a decrease in inventory, an increase in turnover with a decrease in inventory balances.

When the audit finds such deviations, it is necessary to investigate the causes of their occurrence.

Who is the business suffering from?

According to the auditing company PwC , in 2016, about 48% of Russian companies faced some form of fraudulent activity. PwC presents the following statistics for the distribution of fraud types by group:

  • asset misappropriation, faced by up to 72% of companies;
  • up to 33% of companies face fraud in the procurement of goods, works, services;
  • cybercrimes, while no more than 23% of companies were affected by them;
  • providing counterparties with false financial information, manipulating accounting data. About 23% of companies faced this problem;
  • 14% of legal entities had to meet with crimes in the field of intellectual property protection (counterfeit, use of other people's trademarks).

Analyzing the statistics presented, one must not forget that although PwC is one of the largest auditors in the world, access to Russian information is limited by the specifics of its activities. At the same time, it is impossible to obtain complete and accurate information on the Russian Federation due to the latency and secrecy of most crimes in this area, which do not reach the stage of judicial review.

Not considered separately in the given data, but important and typical phenomena in the business environment are non-fulfillment of contracts by counterparties, refusal to repay loans, placement of securities, payment for which is not expected. A frequent sign of this type of crime is the distortion of financial and accounting information, committed to mislead the counterparty.

False mediation has become a separate type of economic fraud. Offering various preferences, grants, benefits, participation in government programs for a certain fee is a widespread method of fraud. When it turns out that the intermediary does not intend to fulfill the promise, the deceived entrepreneur does not apply to law enforcement agencies, since he himself may be held liable for bribing an official.

The growth of instigated bankruptcies, which were previously one of the main methods of asset theft, decreased slightly. To implement these plans, one of the company's shareholders appointed a general director under his control, who received loans or other payments that he did not intend to repay. In the process of bankruptcy, the property of the organization was assigned to controlled legal entities from among the creditors, and as a result, a new legal entity with a completely different composition of shareholders arose in the place of bankruptcy. With the amendment of the law “On insolvency”, it became more difficult to implement such schemes. Criminal bankruptcy activities are prosecuted under Article 196 of the Criminal Code, but the accompanying actions to withdraw assets are an independent structure aimed at stealing the assets of an enterprise. A separate act is the creation of legal entities - dummy creditors. The property of the enterprise can be transferred to charitable foundations, false creditors, third parties, while in violation of the law, its assessment is made significantly below the market value and the transaction is not qualified as large.

Also, the usual withdrawal of assets of a legal entity in the same ways, without bankruptcy proceedings, becomes a separate type of fraud. The main sign of this type of crime is the underestimation of property and its transfer to the balance sheet of a legal entity controlled by the criminals, without payment or with a delay.

The Criminal Code classifies computer-assisted fraud as a separate entity. It is considered in part 6 of article 159. The use of information, hacker actions becomes a way of performing a fraudulent encroachment on company funds. This type of cyber fraud is now coming to the fore among the risks that companies face. Despite the fact that their funds are kept in bank accounts, the use of the Client-Bank and similar technologies for remote access to accounts and deposits makes it possible for a hacker to remotely control these funds.

Among the types of fraud that are common for professionals but unexpected for society, there are completely unpredictable ones. Thus, Russian Railways JSC, which is obliged to ensure the safety of railways, has the right to stop a carriage on any section of the track, the serviceability of which it is not sure of. After determining the malfunction, the car is sent for repair, the costs of which are borne by the owner. Recently, most of these repairs have been fictitious , depots receive funds for repairs and sell parts to replace faulty ones. On a national scale, this phenomenon causes significant damage not only to owners, but also to tenants and other companies whose cargo is delayed. Economic fraud here acts as a systemic characteristic of a monopoly company, for which it will hardly be possible to bring it to criminal liability.

When the victim is a citizen or a state

The fact of the creation of legal entities specifically for the commission of a crime is an independent criminal structure. This is “pseudo-business” regulated by Article 173 of the Criminal Code of the Russian Federation. The creation of such a person often pursues the goal of tax evasion, cashing out funds, attracting funds from citizens on a non-refundable basis.

A common type of crime is the release of falsified or counterfeit products. Criminals use other people's trademarks or product names, releasing goods under this brand that are not of the same quality. The sale of counterfeit products often occurs with the simultaneous forgery of documents - certificates of conformity, and documents confirming the origin of the goods. Such sales are carried out in the markets and in small shops, where product quality control is not carried out. When falsified , any property of the object can change, for example, the composition, this form of fake is called "fog". The presence of the necessary characteristic, but in a different quality, is called a "mirage".

The state is strengthening measures to combat counterfeiting, tightening customs and certification rules, introducing new technologies for checking the quality of goods. The product labeling system (EGAIS) has become a separate way to suppress the production of counterfeit goods. At the same time, citizens who buy products in the field of e-commerce are in the greatest risk zone, where its quality and compliance with the declared characteristics are practically not confirmed by anything. Diluted gasoline will not be counterfeit, but it will also be a clear manifestation of economic fraud. The classic forms of petty fraud in trade continue to be shorthand and underweight. You can fight them only by involving the trade inspection.

If citizens directly suffer from counterfeit, non-payment of taxes indirectly damages their interests. But non-payment of taxes by the counterparty may become the basis for causing damage to a legal entity. Creating fly-by-night tax evasion harms not only the state, but also contractors. When purchasing goods, works, services from such companies and transferring their full value, including VAT, an entrepreneur is faced with the fact that the amount of VAT is not paid by the counterparty to the state. The legislation is designed in such a way that funds paid to companies with signs of fictitiousness may not be accepted for offset, which will cause the entrepreneur to incur serious losses.

The state will suffer from this type of crime in the area of procurement. Here, the risk zone is not only the quality of the supplied goods or services, but also the execution of contracts. If the company has to confirm the fulfillment of the tender obligations with a guarantee, the guarantee will be forged. If during the construction of an object it becomes necessary to use building materials of lower quality or to abandon the production of hidden work - this risk is not insured and is rarely revealed by expert examinations. The fight against this phenomenon has not yet acquired a systemic character, which is why both the state and citizens lose billions annually.

In addition to these types of crimes, fraudsters often suffer from clients of brokerage houses created with the intention of stealing client funds. Private investors entrust their funds to such brokers and lose millions of rubles. You can identify a fraudster by examining data such as the period of presence on the market, the availability of a license, reviews of other customers. Unscrupulous brokers often end up on specially compiled "black lists".

Making information about criminals public is one of the most effective ways to combat fraudsters operating in the consumer market or in the private investment sector. Word of mouth is faster than government enforcement.

State and the prosecution of fraud

If we trace the changes in the criminal legislation and the legislation in force in the field of entrepreneurship, we can highlight the tendency of strengthening the regulatory role of the state. At the same time, the thoroughness and detail of the criminal-legal classification of individual acts is developing and the regulatory norms in the field of lending, placing and investing in securities, and money laundering are being strengthened.

In recent years, legislation on the securities market, on joint-stock companies, on insolvency has been revised, which has helped to reduce the theft of corporate assets and the number of fraudulent transactions with securities. The Criminal Code continues to improve, introducing liability for all new qualifications.

The parallel decriminalization of a number of economic crimes puts law enforcement agencies in front of the need to clearly distinguish fraud from business error, deliberate default on loan from the inability to return it due to changes in the economic situation. In each case, their own sets of signs will be used, but the moment of the formation of intent will remain the main one. If it arose before the execution of documents or the commission of actions related to the theft of property, the act will be qualified as a fraud, and its author will face a full sentence, while the error will lead to a suspended sentence.

Fight against corporate fraud

All the variety of threats faced by entrepreneurs is within the competence of corporate security services. Often, apart from the general, security and information security divisions, separate divisions are created to ensure economic security.

The same PwC study provides statistics on the ways in which companies detect and prevent crimes committed. These are paths such as:

  • internal audit, effective in 20% of cases;
  • work of security services and services ensuring physical security - 15% of cases;
  • hot lines work - 11%;
  • accidental disclosure of scams - 9%;
  • operation of risk management systems for economic fraud - 9% of cases.

Among the measures that can be applied to combat internal threats, the main ones will be:

  • introduction of electronic document management systems and monitoring compliance with regulatory documents;
  • creation of a “hot line” for informing about crimes or suspicions of them;
  • mandatory verification of all new counterparties, not only on the basis of constituent documents, but also as conscientious taxpayers, this can be facilitated by special information bases that help to check counterparties;
  • the introduction of an anti-corruption clause in all contracts of the company indicating the persons who need to report the facts of kickbacks and fraud;
  • risk insurance. Title insurance (insurance of ownership of the property), insurance of performance of obligations under contracts, cargo insurance will help to compensate for losses from fraudulent actions;
  • conclusion of an agreement with companies that insure their civil liability and the risk of possible losses caused by their activities to counterparties;
  • strengthening the role of internal audit, strengthening these units with specialists, developing methods for detecting criminal encroachments on the organization's property;
  • use of software tools specifically designed to detect fraudulent attacks.

Successful work to prevent the risks of economic fraud is possible only through the interaction of internal audit and security structures with law enforcement agencies. At the same time, the risk control and study systems used in companies must be constantly audited and improved, since the tactics of the actions of criminals are being improved along with the development of software tools.