The emerging threats around ESG (Environmental, Social, and Governance) reporting fraud, anti-embargo fraud and supply chain fraud could cause major business disruption over the coming years. On the positive side, Indian companies have been undertaking fraud prevention measures to combat fraud which are working
The outbreak of the COVID-19 pandemic along with the uncertainties associated with it and the subsequent shift to digital operations and remote working, has exposed the businesses to new risks related to digital security, employee safety and disinformation.
These in turn have led to new incidents of fraud. Nearly 52 per cent of Indian companies have experienced fraud or economic crime in the last 24 months and an overwhelming 95 per cent of these have experienced new types of fraud as a result of the disruption caused by COVID-19.
This is came following the PwC’s recent report Global Economic Crime and Fraud Survey 2022: India Insights.
It says, around 67 per cent of Indian organisations experiencing fraud reported that the most disruptive incident came through an external attack or collusion between external and internal sources. This proportion was recorded at 56 per cent in its 2020 survey.
On the positive side, Indian companies have been undertaking fraud prevention measures to combat fraud which are working.
Partner and Leader, Forensics Services, PwC India, Puneet Garkhel, said ‘With organisational perimeters becoming more vulnerable over the past two years, it is imperative for businesses to not only continually focus on policies, training and internal controls but also prioritise investing in sophisticated technologies to manage and mitigate the evolving nature of frauds.
“It is increasingly becoming important for organisations to understand the end-to-end life cycle of customer-facing products and also strike a balance between user experience and fraud controls. Over time, formidable actors become better at exploiting cracks,” he added.
The new types of fraud experienced by companies include misconduct risk, legal risk cybercrime, insider trading and platform risk 67 per cent, 16 per cent, 31 per cent, 19 per cent and 38 per cent, respectively.
According to the report, misconduct was the biggest challenge faced by organisations as bad actors began collaborating and taking advantage of pandemic-related uncertainty and volatility. Amongst organisations that reported fraud, conduct risk (or risks associated with individuals within the firm, or vendors, agents and customers) was the biggest threat at 90%.
Fraud and economic crimes impact both big and small firms. However, the survey found fraud to be more prevalent amongst big firms. In total 60 per cent of companies surveyed in India having global annual revenues above USD 1 billion experienced fraud during the past 24 months (globally, 52 per cent of organisations with revenues over USD 10 billion experienced fraud). The impact on smaller companies was less extensive as only 37 per cent of companies in India with global annual revenues below USD 100 million experienced fraud during the past 24 months (global: 38 per cent).
Rise in customer fraud
The 2020 survey had found cybercrime, accounting/financial statement fraud, and bribery and corruption to be the top three frauds in India. Though globally, the findings of this year’s survey are similar to those of our 2020 survey, for India, the top frauds have changed significantly. In India, customer fraud (e.g. frauds involving mortgage, credit cards, claims, cheques) was the top fraud reported by 47 per cent of companies. Cybercrime came a close second, with 45 per cent of Indian organisations reporting this type of fraud. Further, KYC failure was experienced by 34 per cent of Indian firms that experienced fraud, corruption or economic/financial crime in the last 24 months.
Emerging threats
● Indian organisations are facing multiple emerging risks that have the potential to cause greater disruption in the coming years. One such area is ESG reporting fraud (the act of altering ESG disclosures so that they do not truly reflect the activities or progress of an organisation). Almost, 12 per cent of organisations experienced ESG reporting fraud. Companies in India are facing several challenges in managing risks associated with ESG targets and reporting requirements, such as a general lack of understanding about ESG (reported by 45 per cent of organisations surveyed), lack of ownership over ESG in the organisation (at 42 per cent) and inability to accurately monitor or report ESG metrics within the organisation (46 per cent ). As ESG continues to increase in importance for stakeholders, the incentive to commit fraud in this area is likely to grow.
● Another emerging area of disruption is anti-embargo fraud (participation in unsanctioned foreign boycotts, or when an organisation is tricked into breaking an embargo). Though just 9 per cent of organisations experienced anti-embargo fraud over the last 24 months, this may change in the next two years as global sanctions rise to the highest levels in recent history.
● Supply chain fraud also has the potential to cause greater disruption in the coming years – 19 per cent of organisations experienced it in the last 24 months.
● Organisations also experienced increased risk due to customer fraud (30 per cent) and KYC failure (22 per cent) as a result of disruption caused by COVID-19. Globally, these percentages were much lower – 17 per cent for customer fraud and 10 per cent for KYC failure. With an increase in digital banking and payments, KYC fraud is another emerging risk that organisations need to watch out for.
The report of Global Economic Crime and Fraud Survey (GECS) 2022 by PwC came after surveying 1,296 organisations across the world, out of which 112 were from India and represented 32 diverse industries. More than 76 per cent of the respondents from India sit in the C-suite. The India survey covered both small and large organisations.
