Procurement fraud soars in China

Procurement fraud has substantially increased this year among companies operating in China, according to a recent survey report on global fraud from risk consultancy Kroll.

Respondent companies affected by “vendor, supplier or procurement fraud” (18 percent) were markedly higher than in 2012 (12.5 percent).

Twenty percent of companies in the survey said they had been affected by management conflict of interest in China compared to only 12.5 percent the previous year.

Respondents citing intellectual property theft (15 percent) doubled from the previous year.

At the same time, “theft of physical assets appears to be a shrinking problem in China”, the report added.

Most respondents believed increasing outsourcing was the main reason behind the change in the type of fraud. Additionally, 75 percent said fraud was an insider problem.

The findings come at a time when Western governments have signaled a crackdown on bribery and corruption abroad. In the US, the Foreign Corrupt Practices Act is being more heavily enforced, while in the UK and Canada, similar anti-corruption campaigns are being launched by officials. Private equity firms are being advised to increase their due diligence on portfolio companies exposed to industries and sectors more prone to corruption or risk being held liable for violations.

The survey also included questions about the types of fraud to which companies believed they were “highly vulnerable”. The most worrisome was vendor, supplier or procurement fraud, which soared to 23 percent from 2 percent in 2012.

Companies in China have responded by investing more than they did last year in preventative measures such as background screening and staff training, to include whistleblower hotlines, according to Kroll.

The report also noted an increase in incidents and perception of vulnerability to IP theft, which includes trade secrets, piracy and counterfeiting.

“We advise our clients to take an integrated approach to trade secret protection, looking at the vulnerabilities from operational, cyber and physical security perspectives,” added Violet Ho, in the statement. “Looking at these elements in isolation will not sufficiently combat the complex trade secret theft schemes we are seeing in Asia.”