Economic crime is on the rise 76%

Transcription

1 PwC s 2014 Global Economic Crime Survey Engineering & construction Canadian supplement Economic crime is on the rise in the engineering & construction sectors 49% Nearly half of respondents reporting economic crime say it includes bribery and corruption. That s the highest level of any industry. 76% Asset misappropriation tops the list of types of economic crime experienced by engineering & construction respondents. 70% Seven out of ten of the most serious economic crimes suffered by engineering & construction organizations were perpetrated by insiders.

2 Contents Key highlights Economic crime continues to threaten the sector More than one way to lose Bribery and corruption can have a pervasive effect Operating in markets with high levels of corruption risk Engineering & construction industry in Quebec More effective controls are needed Facing threats from within Is the sector too soft on external perpetrators? Looking forward Implementing an effective anti-fraud regime Let s continue the conversation Contact us

3 Key highlights Engineering & construction sector survey responses Crime rates are increasing 33% have suffered economic crime during the survey period, slightly fewer than across all industries but significantly up from a low of 24% in 2009, which may be due to an increased level of corporate requirements to report economic crime. More than one way to lose Asset misappropriation is still the primary type of reported economic crime, and at higher levels than across the total sample. But a whole range of other crimes are threatening too, from procurement fraud to human resources fraud to insider trading. Bribery and corruption can have a pervasive impact The engineering & construction sector has the highest rate of bribery and corruption of any industry. That s probably increasing the rate of other types of frauds too; for example, since bribes and related payments are not usually recorded accurately in financial statements, a corruption issue can quickly turn into an accounting fraud issue as well. Some high growth markets can be high risk markets Expanding globally brings opportunities, but operating in high corruption risk markets can bring additional challenges too. Engineering & construction organizations are taking action to cope. Sometimes that includes being willing to walk away when corruption risks are too severe. Controls aren t catching as many frauds In most industries, corporate controls detect far more crimes than tips or whistle-blowing systems. Not so in the engineering & construction sector, where the rates are nearly even. So there s room for improvement For some organizations, this should include implementing annual fraud risk assessments. In our view these can be a valuable addition to your economic crime fighting toolkit. Engineering & construction organizations face a threat from within Compared to the total sample, far more perpetrators of the most serious economic crimes are coming from within the organization. And over half are from senior management ranks. That indicates a serious problem, as fraud by senior management is more likely to pervade the entire organization. And need to get tougher on criminals outside... When the most serious economic crime an organization faced was perpetrated by an external party, engineering & construction respondents were much less likely to say their organization took civil action, informed law enforcement or notified relevant regulatory authorities. And 31% of engineering & construction respondents say their organization took no action at all against the main external perpetrator. Consistent action can help drive change Funding institutions and major client or owner corporations should codify best practices and act consistently when they purchase engineering & construction services in order to create equal opportunity and change attitudes towards forms of economic crime. Exposing corruption and communicating the negative impact on society of the waste of resources, public funds or loss of opportunity to improve standards of living should continue to provide a focus for everyone to support a consistent approach. Global Economic Crime Survey Engineering & construction 1

4 Economic crime continues to threaten the sector Economic crime continues to be a significant issue for the engineering & construction industry. In 2011, economic crime was up significantly, rising to 31% from 24% in In this year s survey, that level has increased to 33%. That puts the sector slightly below the overall average. The engineering & construction sector is less regulated and has a greater proportion of private ownership than many other industries. Further, fewer incidents are detected through control mechanisms, compared to our sample overall. In our view it s likely that the sector may be failing to detect some incidents of economic crime. While the engineering & construction sector is slightly below the global average for instances of economic crime experienced on an overall basis, there are several types of economic crime for which engineering and construction respondents experienced higher rates than our overall sample. This pattern results from engineering and construction respondents characterizing their economic crime experiences under more categories than other sector respondents. By far the most commonly reported type of economic crime for the engineering & construction sector is asset misappropriation, with more than three-quarters of those executives reporting fraud saying they ve experienced it within the last 24 months (see Figure 1). As was true across the overall sample, the other most common types of fraud included bribery and corruption, procurement fraud, accounting fraud, and cybercrime. The engineering & construction sector also reported an unusually high incidence of human resources fraud. Figure 1: Types of economic crime experienced by engineering and construction respondents Asset misappropriation Bribery and corruption Procurement fraud Accounting fraud Human resources fraud Cybercrime Competition Law/Anti-trust Law Insider trading % of respondents who experienced economic crime over the survey period; not all types of economic crime shown. Engineering & construction Overall sample 2 PricewaterhouseCoopers LLP

5 More than one way to lose The engineering & construction sector has historically had a serious problem with asset misappropriation. Construction materials are relatively easy to steal and sell on the black market. Indeed, material losses have long been seen as part of the cost of doing business for contractors. But while outright theft may seem like the biggest problem, other types of asset misappropriation can pose greater threats. Substituting inferior materials or knowingly failing to meet quality standards can be far more damaging than outright theft as it can potentially threaten the stability of the structure, be it a house, office building or bridge. Injuries or even death can be the result. The industry typically uses a large number of subcontractors and billing fraud overstating the amount of labour, materials or equipment needed for a particular project is common. This year we included procurement fraud as a separate category for the first time. It s a significant problem and the engineering & construction sector is one of the industries most affected, with 42% of those reporting economic crime experiencing it. The crimes reported are happening throughout the entire process, from the invitation of bids, through vendor selection and vendor contracting, during quality reviews and during the payment process. Again, some of the standard operating processes used in the sector are particularly susceptible to this kind of manipulation. One example is change orders, which may be used by contractors to recover costs during a project after a low bid has been accepted. Another is cost transparency where financial amounts or percentages for head office overheads, risk contingency and profit can be misconstrued or manipulated. Bribery and corruption can have a pervasive effect The engineering & construction sector is the industry most affected by bribery and corruption. Nearly half of respondents experiencing economic crime say it included bribery and corruption, far more than the next closest sector (see Figure 2). The nature of the construction industry, where the procurement of goods and services and the selection of contractors and suppliers on large-scale projects may be decided or influenced by individuals within an organization, provides a number of opportunities for bribery and corruption. This can be amplified by a lack of transparency or governance of the processes established to judge and report on the levels of performance and value for money actually achieved. In many circumstances, capital project owners may have difficulty establishing objective, defined criteria to determine the best contractor or supplier for a particular project. As a result, an environment still exists where individuals can influence the process and outcome. With the Royal Canadian Mounted Police s (RCMP) increased focus on enforcement of the Corruption of Foreign Public Officials Act (CFPOA) as well as the recent fines, convictions and media attention of cases, organizations stand to lose more than ever if they do not properly safeguard against the risks. Figure 2: Reported bribery and corruption, by industry Transportation and logistics Communication Industrial products Pharmaceuticals and life sciences Global Retail and consumer Technology 27% 28% 30% 30% 31% 32% Hospitality and leisure 2% Government/state owned enterprises Insurance 24% 24% 3% Other industries 22% 42% Energy, utilities and mining Financial services Professional services Entertainment and media 19% 18% 14% 49% Engineering & construction % of all respondents who experienced economic crime over the survey period Global Economic Crime Survey Engineering & construction 3

6 The sector s high level of bribery and corruption may be having an impact on the rate reported of other types of economic crime too. For example, engineering & construction executives also report a higher-thanaverage rate of accounting fraud (39% vs. 22% overall). As bribes and related payments are not usually recorded accurately in financial statements, a corruption issue can quickly turn into an accounting fraud issue as well. Additionally, construction and engineering projects often use complex accounting estimates to record revenue, leading to potential irregularities. Many sector executives are aware of the threat bribery and corruption poses, particularly as it relates to operating abroad; 64% of engineering & construction executives see bribery and corruption as the highest risk of operating globally. More than one in four (29%) acknowledge that they ve been asked to pay a bribe. And 39% say they ve lost an opportunity to a competitor who they suspect paid a bribe. Operating in markets with high levels of corruption risk More than half of engineering & construction respondents say their organizations have operations in markets with high corruption risks. That s not surprising due to the global nature of the industry 47% of engineering & construction respondents say they ve pursued an opportunity in one of these markets in the past 24 months. But the challenges are changing how they operate; 44% of sector respondents pursuing growth opportunities in regions with high levels of corruption risk say they ve needed to adapt their business strategies. Just what are they doing? There s no one answer. As is true across the sample, additional due diligence is the most popular choice, although slightly fewer respondents say they ll make this change (see Figure 3). Many engineering & construction executives say they ll add contractual terms. And around a third are planning to provide additional training to the target s staff. But in some cases, even these efforts aren t enough. Fortytwo percent of engineering & construction respondents say they walked away from an opportunity in response to corruption risk, more than across the overall sample (34%). Figure 3: Changes to business plan or strategy in response to high corruption risks Perform additional due diligence procedures Add contractual terms relating to pre-acquisition risks related to corruption Walk away from the opportunity because of the corruption risk Provide additional training to target s employees Change the valuation of the target and/or price offered Force adoption of accounting system Carve out certain assets and/or subsidiaries of the target s business 1 11 Seek an opinion from the regulator Engineering & construction Overall sample % of respondents who have changed strategies in response to high levels of corruption risk 4 PricewaterhouseCoopers LLP

7 Engineering & construction industry in Quebec In the past few years, the engineering & construction industry in the province of Quebec has seen a significant increase in bribery and corruption allegations. As allegations of collusion and corruption were hitting the engineering & construction sector, the Quebec government enacted a Commission of Inquiry on the Awarding and Management of Public Contracts in the Construction Industry in Quebec ( Charbonneau Commission ), with the mandate to: 1. Examine the existence of schemes and, where appropriate, to paint a portrait of activities involving collusion and corruption in the provision and management of public contracts in the construction industry (including private organizations, government enterprises and municipalities) and to include any links with the financing of political parties; 2. Paint a picture of possible organized crime infiltration in the construction industry; 3. Examine possible solutions and make recommendations establishing measures to identify, reduce and prevent collusion and corruption in awarding and managing public contracts in the construction industry. 1 This public inquiry was conducted from 2011 to 2014 and revealed connections between several engineering firms, construction organizations, public organizations, and organized crime, and the financing of some political parties. Among the allegations revealed during the public inquiry were instances of: Political contributions to influence the decisions of the people responsible of granting contracts (through false invoicing or reimbursement of political contributions from employees); Approval of false extras to generate cash; Bribery of officials; and Collusion such as bid-rigging (arrangements between bidders), officers or employees of engineering firms providing inside information to contractors in a tendering context and entrepreneurs underestimating their bids knowing that extras will be available later. Charbonneau Commission hearings were completed in the last quarter of 2014, with its recommendations expected to be submitted by early 201. Among Quebec s responses to these matters was Bill 1 Integrity in Public Contracts Act ( Bill 1 ), a legislation to enhance integrity in contracting with public bodies. This Act requires that an organization must obtain authorization from the Autorité des marchés financiers ( AMF ) 2 in order to enter into a construction work or services contract or subcontract with a public body for a value equal to or greater than $ million. In general, an organization wishing to obtain such authorization must demonstrate that it meets the high standards of integrity that the public is entitled to expect from a party to a public contract or subcontract. 3 Since enacted, Bill 1 has significantly affected engineering & construction businesses, as some of them have seen their authorizations refused by AMF and had to take actions, such as internal investigations and reorganization in management, in order to stay in operation and demonstrate their adherence to the integrity principles. As such, engineering & construction organizations are implementing mechanisms to ensure fair dealing, preserve the integrity of the management and employees, as well as develop and implement mechanisms to prevent and detect economic crimes. 1. Source: Decree adopted November 9, 2011 by Quebec government. 2. The AMF is the organization responsible for financial regulation in the province of Québec. 3. Source : Bill 1 Integrity in Public Contracts Act. Global Economic Crime Survey Engineering & construction

8 More effective controls are needed In most industries, corporate controls like internal audit, fraud risk management, and suspicious transaction reporting detect far more incidents of economic crime than whistle-blowing systems or tip-offs. Not so in the engineering and construction sector. While 44% of economic crimes were detected by corporate controls, 38% were discovered through whistle-blowing systems or tip-offs (see Figure 4). Figure 4: Economic crime detection methods in engineering & construction organizations Suspicious transaction reporting Corporate controls Internal audit (routine) Fraud risk management Data analytics Corporate security (both IT and physical security) Rotation of personnel 3 2 Corporate culture Beyond the influence of management Tip-off (internal) Tip-off (external) Whistle-blowing system By law enforcement By accident Other detection methods Don't Know Investigative media Engineering & construction Overall sample % of all respondents who reported economic crime over the survey period 6 PricewaterhouseCoopers LLP

9 Compared to our overall sample, fewer engineering & construction respondents say their organizations conduct fraud risk assessments annually or more frequently. What s more, 34% of sector respondents say their organizations don t perform assessments at all, and 10% don t know whether their organizations do or not (see Figure ). For those who don t perform fraud risk assessments, the most common reason isn t cost it s that respondents aren t sure what a fraud risk assessment is. We think there s a need for greater awareness. In our view enhancing such systems can be a valuable tool in an organization s economic crime-fighting toolkit. Figure : Only a minority of engineering & construction organizations are conducting fraud risk assessments at least annually 10% 41% 34% 1% In the last 24 months, how often has your organization performed a fraud risk assessment? Don t know Not at all Once Annually or more often % of all respondents Facing threats from within The majority of perpetrators of the most severe economic crime faced by engineering & construction organizations (70%) were internal actors. That s far above the overall average of 6%. Presumably, there is a silver lining to having most of one s fraud losses attributable to internal players you have a better opportunity to mitigate these risks through improved internal policies, processes and controls when the fraudster is someone employed by the organization. Mitigating the actions of external criminals may not be so easy. 70% of the most serious economic crimes in the engineering & construction industry were committed by internal perpetrators Global Economic Crime Survey Engineering & construction 7

10 But there s a complication for engineering & construction organizations, in that more than half of frauds are actually committed by senior management (see Figure 6). That s probably related to the high levels of bribery and corruption and procurement fraud seen in the sector; senior executives are more likely to be in a position to influence bids and manipulate contracts (for example contract terms, program requirements, technical specifications or quantities required). That makes certain types of controls, e.g. levels of authority and segregation of duties even more important. Dishonesty in the ranks can erode employee trust. Nearly a third of engineering & construction executives describe the impact their most serious incident of economic crime had on employee morale as significant. Figure 6: Engineering & construction organizations need to fight the threat from within 2% 28% 18% 2% Senior management Middle management 70% Internal perpetrators Junior staff members Other Is the sector too soft on external perpetrators? Once a perpetrator has been identified, what should organizations do? To deter future crime and improve employee morale it s important to take action. For internal perpetrators of serious economic crime, the most likely result is dismissal; many engineering & construction respondents also say they are taking civil action or reporting perpetrators to the authorities. But what about external parties? Engineering & construction organizations were less likely to take action against the main external perpetrator of the most serious incident of economic crime they experienced. Far fewer engineering & construction respondents say their organizations took civil action, informed law enforcement or notified relevant regulatory authorities (see Figure 7). Alarmingly, 31% of engineering & construction respondents say their organization took no action at all against the main external perpetrator. This is most likely due to the impact on an organization s reputation if it reports that it has suffered a fraud. 8 PricewaterhouseCoopers LLP

11 Figure 7: The engineering & construction sector is taking less action against external perpetrators of the most serious economic crimes Law inforcement informed Cessation of the business relationship Did nothing Civil action was taken, including recoveries Notified relevant regulatory authorities Engineering & construction Overall sample % of all respondents who reported that the most serious economic crime experienced by their organization was committed by an external perpetrator Looking forward Given the global nature of supply chains and therefore the potential involvement of contractors and suppliers from many different countries, languages and cultures, the potential for economic loss (or fraud/corruption) is considerable. Moving forward, embracing and embedding the necessary behaviours requires funding institutions and major client or owner corporations to codify best practices and act consistently when they purchase engineering & construction services in order to create a level playing field and change attitudes towards forms of economic crime. Whilst infrastructure is a vital element of socio-economic development, governance of public procurement is not only difficult to achieve consistently outcomes can also be driven by political will. Organizations choosing not to work with clients or suppliers that do not have a good track record of supporting anti-bribery and corruption measures will increase the speed at which the market changes. Exposing corruption and communicating the negative impact on society of the waste of resources, public funds or loss of opportunity to improve standards of living should continue to provide a focus for everyone to support a consistent approach. Global Economic Crime Survey Engineering & construction 9

12 Implementing an effective anti-fraud regime Explore PwC s 2014 Global Economic Crime Survey Canada supplement When assessing and reviewing an organization s anti-fraud regime, management should consider obtaining professional advice on effective compliance programs, including effective preventative and detective controls with ongoing monitoring against company policy, laws and regulations. Organizations need to ensure that anti-fraud guidelines and practices remain current in the face of a changing economic climate, and that measures taken consider the laws and cultures of relevant operating jurisdictions within the global marketplace. We believe that the key anti-fraud controls should include the following: 1. Governance oversight by the audit committee and board of directors; 2. Fraud risk assessment; 3. Code of business conduct and ethics; 4. Incident reporting mechanisms;. Investigation protocol (including suspicious transaction reporting); 6. Remediation protocol; 7. Hiring and promotion policies and procedures; and 8. Management evaluation and testing. PwC s 2014 Global Economic Crime Survey Canadian supplement Economic crime is on the rise but you can fight back 36% More than one in three Canadian organizations reported being victims of economic crime. 38% Over one third of Canadian organizations surveyed pursued an opportunity in a market with a high level of corruption. 47% Almost half of respondents said their perception of cybercrime risk increased at their organization Deals-Forensics_v03.indd :37 AM Looking for more sector insights? Check out: 10 PricewaterhouseCoopers LLP

13 Let s continue the conversation Does your procurement process include anti-fraud controls? What are you doing to face the threat of bribery and corruption? Have you considered the impacts of economic crime on your organization s brand? What measures are you taking to foster a strong anti-fraud culture and improve controls to safeguard against fraud risks? Do your plans for global expansion include an assessment of corruption risk and appropriate actions to cope? Have you considered the risk that third party vendors, agents, distributors, and other intermediaries can impose on your organization? Have you assigned an individual responsible for ensuring organization compliance with applicable laws and regulations (e.g. Chief Compliance Officer)? Global Economic Crime Survey Engineering & construction 11

14 Contact us For more information on the Global Economic Crime Survey, the Canadian Supplement and the survey methodology, please refer to Economic crime: A threat to business globally at and If you would like to find out more about the information contained within this report, or to discuss any issues around economic crime and how our team can help you, please get in touch with one of our PwC leaders. Steven P. Henderson Partner, National Forensic Services Co-Leader [email protected] Lori-Ann Beausoleil Partner, National Forensic Services Co-Leader [email protected] Sal Bianco Partner, Engineering & Construction Leader [email protected] Calgary Ottawa Krista A. Mooney Director [email protected] Steve Malette Managing Director [email protected] Frederic Miller Managing Director [email protected] Halifax London Montréal James A. Pomeroy Vice President [email protected] Chris Gray Partner [email protected] Marie-Chantal Dréau Partner [email protected] Benoit Legault Vice President [email protected] Toronto Jason Armstrong Director [email protected] Sarah E. MacGregor Partner [email protected] Kelly Ohayon Partner [email protected] William Platt Partner, Forensic Technology Services Leader [email protected] Winnipeg Jeff Bowen Director [email protected] H. Ray Haywood Director [email protected] Jeffrey Johnson Partner [email protected] Dave Johnson Vice President [email protected] Kyla Kramps Vice President [email protected] 12 PricewaterhouseCoopers LLP

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16 To view a copy of our reports scan the QR code with a QR reader app on your smart phone or tablet Value, on your terms We focus on four areas: assurance, tax, consulting and deals services. But we don t think off-the-shelf products and services are always the way to go. How we use our knowledge and experience depends on what you want to achieve. PwC Canada has more than,700 partners and staff in offices across the country. Whether you re one of our clients or one of our team members, we re focused on building deeper relationships and creating value in everything we do. So we ll start by getting to know you. You do the talking, we ll do the listening. What you tell us will shape how we use our network of more than 184,000 people in 17 countries around the world and their connections, contacts and expertise to help you create the value you re looking for. See for more information. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisers. Parts of this report were originally published as Economic crime: a threat to business globally in the US, used with permission from PwC US. 201 PricewaterhouseCoopers LLP, an Ontario limited liability partnership. All rights reserved. PwC refers to the Canadian member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details