Law

Fighting Fraud in Emerging Economies – Challenges for Overseas Business Operations & Expatriates

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By Tetsuya Umehara, Plum Field Advisory

With globalization, regardless of the type of business you run, the management of overseas operations is becoming more and more strategically important, and some overseas subsidiaries are growing for many multinational corporations. This creates challenges for multinational corporations to maintain "sound" management when culture, rules, laws, and customs are different.


In reality, there are only limited numbers of human resources you can assign to foreign subsidiaries, and in most cases, not all expatriates possess strong knowledge and rich experience in the Compliance, Governance, Internal Control, and Fraud Risk Management field. Most likely, those with experience in these fields are actually very rare. They are also not expected to perform as "specialists" in these fields either.

On the other hand, the number of expats in emerging economies and developing economies is increasing and is expected to grow as opportunities and future growth in those economies become more attractive to businesses. However, in these emerging & developing economies, many inherit significant fraud & compliance risks. This is due to differences in education levels, differences in values and customs, as well as gaps between the rich and poor and regulatory systems.

With this background, many expats are forced to face the brutal facts and deal with issues, and a basic understanding of compliance, governance, internal control, fraud risk management is crucial for management in order to deal with these matters correctly, efficiently, and effectively.

When talking about Compliance, Governance, Fraud Risk and Internal Control, we must understand its underlying issues, and we must be able to address key issues, identify key facts, and analyze potential risks so that we may come up with pragmatic solutions. Professionalism with good understanding and experience in local operations and personnel cognizant of key competencies in one's own business operations are crucial in this stage.

Thus, in "Fighting Fraud in Emerging Economies" (or even in developed economies), there are three main factors that must be taken into account when planning fraud risk management. These factors are "Prevention", "Detection" and "Response".

Despite years of on-the-ground experience in emerging economies and developing countries, for even the biggest names in international business, some of the basic management & organizational structures we see in developed countries are absent or at the starting stage. The following are some of the processes that have proven effective in some emerging economies like Mainland China, Indonesia, India, Thailand, Philippines, Vietnam, Malaysia, and Brazil.

PREVENTION

Measures and processes to prevent fraud before it happens in your organization. It involves steps like identification of likely fraud in your business, more common types of fraud in the country you are operating in, then coming up with various measures such as development / penetration of a code of conduct, educating values and ethics, fraud risk & compliance related training to executives and middle management, and setting up effective internal controls, etc.

DETECTION

Detecting or identifying possible fraud in the organization before it becomes any bigger or serious is also an important factor in managing fraud. Two aspects are important from the detection perspective. One is identifying fraud "fast" while the other is identifying fraud "effectively". This involves measures such as internal audit programs designed for fraud detection, whistleblower policies, and cross-check procedures between departments, and so on.

RESPONSE

A poor response to fraud could impact your organization by negatively impacting employee motivation and possibly causing reputational harm. On the other hand, the "right" response to fraud could win further "trust" from your employees. In large fraud cases, it could also defend your business from litigation and regulatory actions. Drafting reporting & decision making procedures, investigation procedures, and ensuring preventative measures are some of the response measures that should be designed in an organization.

The three factors mentioned above are "base factors" of fraud risk management, and there is no one measure that can solve all fraud problems. When planning, some of the measures mentioned above are only examples, different approaches and a mixture of measures should be considered depending on the size and nature of your business. In addition, in order to ensure that we do not send the "wrong message" to staff in an organization, the right steps and order must be taken. Of course, these are not tasks that can be completed in a day and planning and implementing these measures requires sound planning and strategy. In addition, there are number of factors such as local laws & regulations, and cultures that must be taken into account when implementing these measures.

From the headquarters (at the origin country) point of view, specialized managerial & technical support and monitoring to ensure that enough resources are allocated to overseas subsidiaries is required. Furthermore, on-going monitoring of progress from headquarters is necessary so there are no surprises, public criticism, or finding there is a surprisingly bad reputation on the ground in overseas countries.



Tetsuya UmeharaTetsuya Umehara, CEO
Plum Field Advisory, Tokyo, Japan
Tel: +81-3-3661-6119; E-mail: This email address is being protected from spambots. You need JavaScript enabled to view it.
Web: www.pfa-japan.net

Plum Field Advisory is a Japan-based professional consulting firm specialized in Accounting, Finance, Compliance, Fraud Risk Management, Internal Audit and Forensic Investigations. Bilingual professionals including CPAs (Certified Public Accountants), CFEs (Certified Fraud Examiners), and tax accountants are able to provide services in emerging and developing countries. Plum Field Advisory serves some of the world's most prestigious multinational corporations.



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