Fraud Set to Rise as Financial Crisis Deepens

The current financial turbulence and threat of a global recession will result in an increase in white collar crime as well as significant changes in how fraudsters operate, according to the newly released Kroll Global Fraud Report. Kroll expects to see an increase in full-scale fraud investigations involving legal disputes, regulatory action and prosecution in 2009 as whistleblowing also becomes more common.

“In difficult economic conditions, businesses are struggling to compete for fewer business opportunities. This creates more incentives to deviate from proper business practices and engage in fraudulent activities to protect and maintain revenue,” said Blake Coppotelli, senior managing director in Kroll’s Business Intelligence & Investigations practice. “We saw a marked increase in the number of corporate fraud cases during the market downturns of 1987, 1991 and 2001.”

Fraud has been a factor in the current financial crisis since its inception. For example, the overheated U.S. property market and subprime mortgage boom provided opportunities for fraud in both mortgage originations and secondary mortgage-backed securities.

According to Kroll, comprehensive due diligence is a vital tool for containing fraud in a time of economic uncertainty as companies enter new markets and consider foreign direct investment through acquisition or joint venture partnerships.

“Comprehensive due diligence – not a cursory ‘check-the-box’ review – is the key to managing exposure to these threats through the downturn,” said Richard Abbey, managing director in Kroll’s Business Intelligence & Investigations practice. “Companies should not think that they are safer in certain country markets – this is a global concern that spans all industries.”

Additionally, with regulation expected to tighten in the wake of high profile cases such as the Madoff investment fraud, companies will need to re-examine their financial controls, corporate governance, compliance and transparency policies.

Kroll Global Fraud Report key findings:

• The financial crisis will see an increase in fraud claims, legal disputes and regulatory action
• Corporate governance will become a serious issue for shareholders
• Management will need to understand the process of whistleblowing and formulate appropriate responses
• Businesses will need to assess regulatory risk and its impact on future investments
• Cross-border transactions will increase exposure to complex fraud and corruption
• Greater due diligence will be required to ensure sound investment and meet compliance policies

About Kroll

Kroll, the world's leading risk consulting company, provides a broad range of investigative, intelligence, financial, security and technology services to help clients reduce risks, solve problems and capitalize on opportunities. Headquartered in New York with offices in more than 65 cities in over 33 countries, Kroll has a multidisciplinary team of more than 3,800 employees and serves a global clientele of law firms, financial institutions, corporations, non-profit institutions, government agencies, and individuals. Kroll is a subsidiary of Marsh & McLennan Companies, Inc. (NYSE: MMC), the global professional services firm.

The Global Fraud Report, Issue 7, January 2009 is available upon request and at http://www.kroll.com/fraud.