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External fraud threats – Supply and demand

Times are tough for many businesses, as they struggle with the economic disruption and uncertainty of COVID-19 and face mounting pressures to maintain the viability of their business. Faced with supply chain challenges and fluctuations in customer demand, businesses may be engaging with new third parties as they turn to alternative suppliers or seek out new trading opportunities.

However, in the rush to protect the future of the business, there is a risk that policies and procedures in place regarding interactions with third parties are overlooked or corners are cut to expedite processes. This, coupled with a change in the working environment and a potentially weakened controls system, can expose businesses to heightened external fraud risks.

Why should corporates take note?

Supply chain

Supply chains have been tested during the pandemic. Businesses have had to quickly re-establish their supplier networks, as trusted suppliers may have ceased trading or experienced delays in distribution and manufacturing, due to travel restrictions or staff shortages.

In a drive to adapt quickly, the usual procurement procedures and controls may be abandoned, which could expose businesses to an increased risk of engaging with fraudulent or inexperienced suppliers, or of employee collusion with third parties. Items may be accepted at inflated costs, or the business may unwittingly purchase counterfeit products, or services which a supplier is not licenced to provide.

New customers

In adapting to the current situation, some businesses are seeking out new trading opportunities.
There is pressure to ensure not only the renewal of current customer contracts but also to win new business. In this challenging environment, there is an increased risk of bribery and corruption, both by employees or by third party agents acting on the company’s behalf.

Government interaction

The heightened government activity in the response to the pandemic has brought with it increased engagement by businesses with government officials globally. Companies are bidding for government contracts in connection with COVID-19 response measures and many are engaged in lobbying government officials for financial relief. In addition, companies might be experiencing pressures to expedite the movement of goods or employees through tightened border controls, or provide charitable support to state-sponsored responses.

With increased interactions with governments, there is a greater risk that these interactions, if improper, could contravene anti-bribery and corruption laws, risk reputational damage and/or result in exclusion from current and future government contracts.

What can you do now to address these risks?

It is unrealistic to assume that all internal processes and controls can remain the same. Divergence from business as usual will, in many cases, be necessary to ensure the continued running of the business. However, in adapting to the new situation, corporates should consider the following mitigation steps.

  1. Fraud risk assessment
    Companies should review their risk profile and ensure that any fraud risks arising from the pandemic are assessed and mitigation procedures agreed. Any agreed modifications to policies and controls should be formally approved and clearly documented.
  2. Interactions with suppliers
    Due diligence procedures may need to be rationalised. Suppliers should be categorised by risk and vetting checks prioritised. On-site visits and face-to-face interviews may not be possible, however, businesses can turn to remote verification procedures and online checks (for example, issuing due diligence questionnaires, reviewing public corporate records, conducting sanctions and adverse media searches and using credit referencing agencies).
  3. Culture and messaging - raising awareness amongst employees
    Organisations should provide employees with tailored compliance updates, explaining any modifications which have been made to usual business processes, whilst also reinforcing the messages on appropriate conduct.

    Management should set the tone from the top and continue to foster a speak-up culture.

    Consider revising key performance indicators, such as sales targets, to ensure that employees are not overly pressured to hit unrealistic performance levels.
  4. Monitoring and ongoing assessment
    Businesses should maintain compliance monitoring activities and continue to re-evaluate fraud risks and their controls landscape as the situation evolves.

    Management should seek feedback from their employees and be prepared to update any modified procedures as required.

If you would like to discuss any of the issues raised in this blog, or find out more about our Forensic services, please contact Ian Hughes or Nicola Cookson.

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