Managing fraud risks during Covid-19

History teaches us that extraordinary global events such as the current Covid-19 pandemic can lead to an increase in fraud and other forms of corruption. Companies have rightly prioritised health and safety, business continuity and recovery programmes. This is quite distinct from previous economic crises when companies focussed heavily on cost reductions and revenue protection activities. But managing fraud risks will also be paramount.

Businesses have had to transition at speed. For some this has meant that organisational processes such as transparency, integrity compliance, due diligence, stakeholder impact analysis and communication and whistleblowing have taken a back seat.

While such an approach may be understandable, it nonetheless presents significant risks for businesses over the longer term. To paraphrase Warren Buffett, organisations cannot wait until the tide goes out to see who was swimming naked.

Despite the massive disruption, there are indications that some businesses are responding holistically. Many are recognising the growing need to consider the impact on stakeholders and plan for the long-term. This is in addition to the fundamental business of securing financial health. Critical to this will be prioritising the steps that need to be taken now to identify and manage any fraud risks.

Risk assessment

Identify the business areas most at risk from fraud and corruption. This should include any high-risk geographies where the business operates. Particular attention should be paid to areas most adversely affected by the virus. There should also be a focus on key operational areas such as: –

• sales (agents, sales channel partners…),
• finance (new customer due diligence, payment terms…),
• procurement (collusion, technical specification of goods receivable…),
• operations (permitting agents, environmental approvals, health and safety…),
• logistics (import/export permits, country of origin documents…) and
• government affairs (representations made when claiming government support schemes, qualification for and access to public sector contracts…).

In many jurisdictions, contracts are being awarded at speed, without the usual tender or due diligence processes. In these circumstances, exceptional procedures may need to be implemented. Care must also be taken to ensure that all decisions are thoroughly documented to avoid any repercussions. Financial transactions and government donations should be carefully scrutinised to ensure no improper payments were made to secure fast-tracked contracts. In addition, spot checks should be generally announced and carried out on functions at heightened risk.

Collusion and kickbacks

There is also an increased likelihood of in-bound corruption. Procurement teams are likely to come under pressure to approve decisions quickly without the usual due diligence procedures. There may also be pressure to renew contracts with existing suppliers struggling for survival without the normal checks. Where sales and procurement teams are working remotely, new monitoring systems may need to be devised. This will help ensure appropriate oversight of these vital functions.

Third-party intermediaries

Payments to third-party agents and intermediaries can be susceptible to bribery risks in normal times. This is unlikely to dissipate in the current crisis. Indeed, where contracts are being awarded at speed without the usual checks and controls the risk is likely to be heightened. Where possible, conduct additional checks on payments to third parties. Re-issue a “heightened Covid risk” version of the organisation’s code of conduct. This should highlight what is expected from those operating on the company’s behalf.

Where operational activities may be curtailed by the current situation, consider using the time to review current arrangements and in particular payments made to agents or intermediaries which may identify new or existing fraud.

Due Diligence

Knowing who you do business with remains a key priority. Where new contracts are being agreed with suppliers, agents or other third parties, ensure due diligence checks are still carried out. While site visits may not be possible for some time, much of the usual research such as reputation enquiries, government watchlists, ownership information and media coverage can be conducted remotely.

Gifts, hospitality and travel

With most businesses under lockdown, a curtailment in such expenditure would be expected, consequently, expense claims should be carefully scrutinised for any suspicious claims that may warrant further investigation.

Communication, training and capacity building

Maintaining clear and regular communication across the organisation is vital to upholding values and maintaining high standards of conduct. This is essential for highlighting the current risks and necessary mitigation strategies.

Devise a communications programme that includes messages from senior management reinforcing the company’s zero-tolerance of corruption. If the Board has initiated Covid related initiatives that include addressing corruption or fraud risks, such as coercion related to the supply of agency labour this should be communicated. Maintain visibility and ensure colleagues in different locations know they are supported and that the usual monitoring process is still in force. If systems have been adapted, communicate the changes and provide training where necessary using webinars and online interactive workshops.

These sessions can be used to strengthen existing knowledge but also build capacity in the wider team and in different locations.

In summary

Remote working and travel restrictions have placed additional pressures on compliance teams. GoodCorporation can devise checking systems and processes that can help identify red flags and heightened potential corruption or fraud risks. We have also been working with clients on how to carry out effective remote due diligence checks, creating bespoke systems to enable companies to take the necessary steps to manage fraud risks . Contact us for more information.