The Fraud Triangle: Rationalisation, Opportunity and Pressure
Any elementary student of fraud will be aware of the “Fraud Triangle”, a theory developed by Edwin Sutherland and Donald Cressey. This theory posits three elements of fraud:
- Rationalisation (the ability of the fraudster to rationalise their behaviour);
- Opportunity (the fraudster’s ability to commit the fraud); and
- Pressure (financial or situational pressures that provide the impetus for the fraud).
One common form of rationalisation is the “us vs them” mentality – it is easier for an individual to steal from an opposing “them” than from a community the fraudster belongs to (“us”). This is particularly applicable in Asian societies, which are commonly regarded as more collectivist in attitude than Western societies.
As more international companies train their eyes on new or expanding opportunities across Asia, complexities will continue to arise. Years of governmental misconduct and poor enforcement of the rule of law have resulted in emerging economies which favour compliance with the letter, rather than the spirit, of the law. Policies imposed by overseas headquarters may be complied with in name only, not in substance. In one investigation, staff of the South East Asian subsidiary of a global manufacturing firm adhered to the practice of obtaining three quotes from different companies before awarding any work. However, a deeper review of the quotes obtained showed that all three quotes were sourced and presented by the same supplier. These “competing” quotations were either from companies related to the supplier or companies that did not exist.
The Rise of Investment (and Risks) in South East Asia
As the trade war between China and the United States escalates, more and more manufacturers look to South East Asia as a potential manufacturing base, relocating production from China to avoid rising costs from tariffs. South East Asia is seen as the largest beneficiary of this shift, with South East Asian countries receiving more foreign direct investment in the first half of 2018 as compared to a year ago.
As foreign companies increase their level of investment across South East Asia, whether through organic growth or acquisition, much attention is usually paid to the selection, acquisition and due diligence (or development) process. However, the level of attention paid to the integration of local operations with overseas processes or systems rarely extends beyond a cursory staff introduction to a new handbook or process workflow.
Over the course of our investigative work across Asia, we have worked with multiple companies managing overseas operations, including companies which had senior expatriate staff in place to oversee local operations. One clear recurring theme during our investigations was a lack of identification by local staff with the larger parent company. In one company, local staff would refer to expatriate staff with unflattering nicknames. In another, local senior staff unilaterally awarded a dismissed (local) staff member a larger payout than approved and under-reported the sum to expatriate management who did not validate this information.
Effectively Managing Risk in a Cross-Cultural Environment
There are a number of small steps international companies can take to facilitate greater integration between local and overseas operations:
- Knowledge sharing: Companies should create a sense of solidarity between local staff and the global organization, rather than with just the local subsidiary. This can be achieved by ensuring that local staff are aware of the role they play within the larger organization and their contribution to the company’s global performance. This can take a multitude of forms, from corporate newsletters which highlight local or regional contributions, to regular town hall calls that highlight local performance, to clear developmental opportunities within the larger global organization for local staff.
- Institutional knowledge: Companies with regular expatriate rotational programmes should ensure that the local knowledge gained by each expatriate staff member is shared with subsequent expatriate rotations. A vault of institutional knowledge for each local operation should be created so that future expatriates can build on the learnings of their predecessors.
- Regular audits with local insight: In an effort to streamline operations and reduce costs, many international companies undertake pre-scheduled audits with centralised global or regional teams. Unfortunately, many of these audits are staffed with teams from global or regional headquarters and lack local language capabilities and insights. Supplementing these teams with external support can add significant value. External support can provide both local language capabilities, as well as the benefit of localised knowledge, including developing fraud trends and schemes prevalent in that jurisdiction.
- Reduce over-reliance on process: International companies tend to exercise oversight of subsidiaries by focusing on controls and processes. However, an over-reliance on processes can create a false sense of complacency and incentivise fraudsters who then have a road map for how to perpetrate fraud. In one instance, the Vietnamese subsidiary of a large international firm was submitting applications for kickback payments by referring to them as an “engineering fee”. Further investigation revealed that there was no commercial need for an “engineering fee” to be charged and no actual engineering service was provided by the payee. However, an over-reliance on forms and processes meant that the applications were approved by headquarters despite clear red flags.
Managing fraud risk will always be an ongoing and evolving process. However, creating a truly effective culture of compliance can only begin when employees of a company feel a sense of responsibility to their organisation, reducing (among other factors) their ability to rationalise the negative consequences of inappropriate or illicit behaviour.