Kroll Report: Fraud Will Rise as Economic Crisis Deepens

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Kroll Report: Fraud Will Rise as Economic Crisis Deepens

The AmLaw Daily

January 22, 2009
Posted by Brian Baxter

The risk consultants at Kroll predict an increase in white collar crime and significant changes in the manner in which corporate criminals operate in today’s world, according to a 16-page quarterly report released on Wednesday.

“The risk for companies right now is not just economic–they don’t have to just deal with decreased revenue and how to stay afloat,” says Blake Coppotelli, a senior managing director in Kroll’s business intelligence and investigations practice. “There’s increased fraud risk. As technology and markets become more sophisticated, so does fraud.”

Corporate criminals are becoming more sophisticated in concealing their illicit activities and the proceeds from those activities, says Coppotelli. Consequently, once domestic and international law enforcement agencies–including the Justice Department and SEC–turn their attention to a particular type of fraud, corporate criminals adapt quickly and devise increasingly complex schemes. The regulatory apparatus will have to adapt as quickly to adequately respond to criminal activities.

Congress already has held hearings on the issue of transparency in business conduct. Coppotelli says that the Justice Department and SEC have already pursued similar actions to increase transparency and combat fraud in light of the subprime meltdown that entered the public consciousness early last year.

The Foreign Corrupt Practices Act of 1977 is one historical example of an innovative regulatory measure enacted to combat criminal conduct, says Coppotelli, noting that the FCPA was “ahead of the curve” in requiring due diligence investigations of parties used by certain companies within their jurisdiction to determine their risk to foreign corrupt practices.

As Coppotelli sees it, companies today will have to be more proactive in protecting themselves against fraud, while at the same time engaging in more stringent financial and investigatory due diligence to assess regulatory risk and its impact on future investments.

The risks are everywhere, whether it’s increased exposure to complex fraud and corruption abroad–as highlighted by the accounting scandal at Hyderabad, India-based Satyam Computer Services–or failing to encourage whistleblowers to come forward when they discover irregular or inappropriate actions. (Kroll has issued its own Satyam-specific fraud report.)

The report recommends various approaches to identifying and combatting fraud, including adopting a more open and accepting stance on whistleblowers. Companies must demonstrate support of whistleblowers, encouraging them to come forward to disclose wrongdoing. Failing to do so can be devastating both to a company’s reputation and to its financial standing.

The occurrence of fraud–as established by investigations and prosecutions–and increased awareness of fraud risk has been documented and quantified in previous studies. What separates this financial crisis from the fraud and subsequent litigation spikes that dovetailed with economic downturns in 1987, 1991, and 2001?

The interconnectedness of international markets, Coppotelli says.

“None of those downturns were as global and significant as the one we’re facing now,” he says. “A real indication of that is how much the federal government has committed in bailout funds to institutions in a number of different industries. The economic instability right now is something we haven’t really seen in quite a bit of time.”

Coppotelli admits that the circumstances surrounding the collapse of Bernard L. Madoff Investment Securities make his pitch to corporate clients much easier.

“That’s one of the beauties when writing a report like this,” he says. “Madoff proves the point, it’s ready made.”

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