Report: Fraud risk up in China, India

The perception of fraud is higher this year, but the types of fraud are changing, according to a recent Kroll study.

Multinational companies operating in China report an increased exposure to fraud, though the most worrisome type of fraud has changed, according to a recent global survey report by risk consultancy Kroll.

The report showed that 80 percent of multinational companies in China responding to the survey noted an increase in fraud exposure from 2012-2013 compared to 69 percent in the 2011-2012 period. 

A key change was in the type of perceived risk. Respondents cited the most vulnerable areas as a regulatory or compliance breach (40 percent) and internal financial fraud (33 percent). In the 2011-2012 period, corruption and bribery were the predominant vulnerable areas.

At the same time, companies who believe they are highly vulnerable to “vendor, supplier or procurement fraud” soared to 23 percent from 2 percent in the 2011-2012 period. 

“Fraud in China is becoming more complex,” Violet Ho, head of Kroll’s Greater China operation told Private Equity International. “It’s being perpetrated by people in more senior positions such as the CEO and CFO or the founder of the portfolio company.”

Ho added that as China’s landscape becomes highly competitive with many companies chasing fewer deals, LPs are becoming highly selective and investing only in GPs with a solid track record. 

“The safety of the principal after investment is increasingly becoming a topic for LPs.”

In India, 71 percent of respondent companies perceived an increase in exposure to fraud compared to 67 percent in the prior two-year period.

The biggest drivers of increased exposure in India remained the same as the previous two-year period: “IT complexity” which Ho defined as cyber-related crimes.

“A lot of companies now have their trade secrets and intellectual property stored in multiple locations on servers and that leaves them vulnerable for hacking or for theft from an insider,” Ho said.