Deceit, bribery and corruption proliferate in economic recessions presaged by financial, health and social emergencies. Myriad factors contribute to the rise in incidents of fraud. Foremost among them is the financial pressure felt by companies and employees. Other reasons include:
- A breakdown of processes to detect fraud.
- Changes to strategy and operations without corresponding modifications to financial controls.
- Shifts in competitive conditions.
- Lack of oversight caused by workforce reductions, remote work arrangements or easing of established rules and processes.
- Concerns of job insecurity.
- Desire to obtain financing or government stimulus funds.
Companies and investors must be vigilant in their responses to fraud concerns, both during the time of crisis and in its aftermath.
Fraud in the 2008 Financial Crisis
Although the scope of the current crisis is unprecedented, the widespread fraud companies experienced amidst the 2008 financial crisis serves as a stark warning of the challenges to come.
- $160 billion in fines: In the eight years following the financial crisis, banks paid more than $160 billion in fines and settlements for fraud and other abuses, included a $16.7 billion settlement of fraud allegations paid by Bank of America in 2014.
- $4 billion in penalties: The SEC has charged more than 200 entities and individuals for misconduct that led to or arose from the financial crisis—including 93 CEOs, CFOs and other senior corporate officers—resulting in almost $4 billion in penalties, disgorgement and other monetary relief.
- 530 open fraud cases: In 2009, the FBI reported that its mortgage fraud investigations had doubled over the course of two years and that it had more than 530 open corporate fraud investigations, including 38 corporate fraud matters directly related to the financial crisis.
- Fined £45.5 million: In 2019, the UK Financial Conduct Authority (FCA) imposed its largest fine to date—GBP 45.5 million—on Lloyd's Banking Group for its failure to disclose fraud at Halifax Bank of Scotland (HBOS) following Lloyd's acquisition of HBOS during the height of the financial crisis.
The present crisis has already prompted regulatory authorities to warn of their intention to pursue fraud investigations.
- The U.S. Attorney General stated that “it is essential that the Department of Justice remain vigilant in detecting, investigating, and prosecuting wrongdoing related to the crisis.”
- The U.S. Securities Exchange Commission emphasized “the importance of maintaining market integrity and following corporate controls and procedures” and urged “public companies to be mindful of their established disclosure controls and procedures, insider trading prohibitions, [and] codes of ethics.”
- The FCA indicated that it “stand[s] ready to take any steps necessary to ensure customers are protected and markets continue to function well,” also noting that regulated firms should be aware that “we have significant resources focused on our response.”
Anticipated Areas of Exposure
We anticipate fraud to arise in several areas during the crisis and as companies deal with its devastating financial impact.
- Supply Chain, due to disruptions caused by geographic impact and border closures, modifications to diligence procedures and other factors.
- Sales and Distribution, including disruptions to distribution channels, efforts to counteract decreases in demand, and highly-impacted industry sectors.
- Taxation, especially techniques to avoid taxes.
- Management, such as efforts to use the crisis as a justification for deviating from established controls and obligations.
- Compliance, including inadequate systems to detect fraud and circumvention or relaxation of compliance controls.
- Accounting, due to manipulation of books and records and liquidity and leverage concerns.
- Financial Reporting, such disclosures regarding the impact of the crisis and sufficiency of financial controls.
- Investment Due Diligence, including disclosures regarding business continuity plans, availability of critical third parties, impacted customers, and adequacy of risk assessments.
- Cybersecurity, including malware and theft of financial information
Just as in the wake of the 2008 crisis, companies are also likely to discover historical malfeasance through increased scrutiny brought by efforts to maximize the bottom line. Notably, Bernie Madoff’s Ponzi scheme came to light when his fund was unable to satisfy the flood of redemption requests spurred by the plunge in the market in 2008.
In addition to protecting their businesses and personnel from the effects of the crisis, companies must be prepared to contend with the elevated risk of fraud that is sure to follow. Drawing on the knowledge of industry and area experts from across the globe, we help companies assess and manage their exposure to fraudulent and corrupt conduct. We also equip our clients with the tools they need to detect and respond to misconduct.
Consistently recognized for its innovative approach to compliance counseling, Ropes & Gray has a long and successful track record of representing clients on the full spectrum of anti-corruption and risk management matters.
The firm’s white collar team was named a Law360 “Practice Group of the Year” for 2019. Ropes & Gray is ranked in Chambers Global 2020 for Corporate Investigations: Anti-Corruption; Chambers USA 2020 for FCPA; The Legal 500 US 2020 for White-Collar Criminal Defense; and The Legal 500 UK 2020 for Regulatory Investigations and Corporate Crime, among others. The Financial Times, as part of its Innovative Lawyers awards, commended the firm for the creation of a suite of anti-corruption analysis tools, including a Global Anti-Corruption Update.