India and China second-most fraud-prone nations: Report

India has “promoted” itself to the second spot in a list of nations with the highest prevalence of fraud.

According to a Global Fraud Report by risk consultancy firm Kroll, India was at the fifth spot last year. China is on a par with India, but fares better than last year when it was at the top spot. Africa has topped the list this year and North America is at the bottom.

Seventy-eight per cent of the 124 executives from private firms surveyed in India, indicated that their organisations are highly or moderately vulnerable to corruption or bribery.

For all the markets surveyed, India has the highest percentage of companies hit by information theft.

According to Richard Dailly, managing director for Kroll in India, “The high staff turnover was one of the major reasons for fraud exposure, as reflected in the survey. Though it cannot be said that firms are not doing anything to prevent fraud, it can be inferred that they are not doing enough.” The report also mentioned that there was an absence of strong anti-corruption laws and enforcement in the BRIC nations — Brazil, Russia, India and China — compared to the UK and the US. However, Dailly is of the view that with anti-corruption activism picking up pace in India, the law would be in place soon.

The survey said fraud remained a large and growing concern for virtually every type of company in every part of the world. Respondents from India cited corruption and bribery (approximately 31 per cent) and information theft, loss or attack (27 per cent) as the most common frauds experienced over the past year. Internal financial fraud or theft (23 per cent), theft of physical assets or stock (23 per cent), vendor, supplier or procurement fraud (22 per cent), financial mismanagement (22 per cent) and management conflict of interest (19 per cent) are the other frauds reported by companies in India.

The results indicated that less than 50 per cent of respondents in India invest in employee background screening, partner or third-party due diligence and risk management systems — a surprising finding given that 59 per cent of those that suffered from fraud and knew the culprit said it was an inside job.

Companies needed to assess their vulnerability to fraud and should incorporate strong prevention and detection controls, according to Dailly. Talking about the measures, he said that apart from having mere auditors who merely inspect the paperwork, proper investigation through independent agents is required.

“What is actually needed is proper accountability and effective sanctions in place among the corporates. A combination of education and legislation is needed in addition,” he stated. He also explained that awareness of international legislation like the UK Bribery Act and the Foreign Corrupt Practices Act of the US was low among Indian firms.

The survey was conducted in partnership with the Economic Intelligence Unit across five regions and more than 1,200 senior executives from a broad range of industries and functions responded to the survey. “The wider internationalisation of Indian firms is bringing their compliance practices followed outside India back into the activities within the nation. The private sector in India is leading the way forward for others. It is a slow process but it is definitely moving in the right direction,” concluded Dailly.