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Fraud in the Digital Era: Is It the Beginning or End of an Arms Race?

July 28, 2016 by Kai Goerlich 33

Fraud and corruption are as old as trade itself. However, as our world becomes increasingly digital, we have to ask ourselves: Will trade and supply chains become more transparent? Or will fraud and corruption become more sophisticated along the way?

Despite our best intentions and hopes, the problem of fraud and corruption will not go away anytime soon. A survey by the Economist Intelligence Unit, commissioned by Kroll, found that overall fraud, unfortunately, is increasing. The impact of fake products alone is worth nearly half a trillion dollars a year, according to a report by OECD. In fact, approximately 70% of businesses have suffered some financial loss from it. And the problem is already so significant that China started to act seriously on supply chain fraud.

In an increasingly globalized market, the rising complexity of supply chains is making it difficult for many businesses, which have thousands of business partners in their network, to identify risks and fraud. Accordingly, the majority of companies believe that their organizations have become more vulnerable. Despite this growing trend, a surprisingly high number of organizations do not protect their supply chains sufficiently, according toDeloitte and Kroll.

In a recent global survey, Kroll lists 10 types of fraud ranked by the percentage of companies affected by them (see chart). A short evaluation shows that IT could significantly reduce the likelihood and impact of most of these categories.

In most cases, setting up a risk and compliance system – in addition to real-time financing and security – could likely reduce fraud significantly. By tackling increasing complexity with digital supplier networks, companies can know every partner in the system and monitor trade and financial flows closely and in real time. For example, theft of physical assets could be efficiently countered by applying the Internet of Things and security systems.

IT Can Help Only So Much

IT can address fraud, but only up to a certain point. High staff turnover is commonly viewed as a top fraud risk, followed by increased outsourcing and offshoring, as well as entry into new and riskier markets, according to Kroll. Plus, outsourcing countries are particularly prone to violate labor rights.

As seen in the chart below from the World Economic Forum, there is a correlation between irregular payments and bribes and the business impact of IT. Most of the countries noted in the context of fraud and bribery (indicated in red) show a lower impact of IT on the business model than average.

Of course, IT is definitely not the only answer. Even highly industrialized countries do not necessarily rank high in the fight against fraud.

As Ernst & Young points out in its global fraud survey 2016, unethical behavior seems to be status quo in many countries. The report revealed that approximately 50% of companies in emerging markets view bribery and corruption as a widespread practice, while 40% of overall respondents are willing to justify unethical behavior to help meet financial targets.

Digitization can certainly help rein in fraud and bribery by using security, risk and compliance, and supplier networks systems. But as most of these studies show, the general makeup of each country’s culture, business systems, and economic situation influences the likeliness of fraud significantly. Ernst & Young recommends the setup of whistleblowing channels and policies, as well as anti-corruption compliance programs, to counteract this issue.

Digital networks will undoubtedly grow, and people will continue to find creative ways to attack these systems to conduct fraud and misuse. However as one barrier is established, fraudsters will inevitably find another opportunity to exploit weaknesses, as Kroll points out. Nevertheless, companies should use all the capabilities of modern IT systems and data analytics to get fraud down to a minimum.

The natural resources needed to do business are dwindling. For more on how digitizing the supply chain preserves resources and saves money, read Live Business: Creating Digital Supply Networks.

Kai Goerlich is the Idea Director of Thought Leadership at SAP.

This story originally appeared on The Digitalist Magazine as part of the 10 Weeks of Live Business series.

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