FAQs

Fraud

Will fraud and other economic crimes increase during the COVID-19 crisis?

General

The spread of Covid-19 infections and the resultant disruption has presented organisations with new risks and challenges that have impacted normal operations, as businesses try to respond to the health crisis. As a result, many organisations have asked their employees to work from home and, in some instances, new government regulations such as curfews and lockdowns have forced some businesses to temporarily close or operate at greatly reduced levels.

The current chaos and confusion as organisations try to respond to the Covid-19 situation has also made organisations vulnerable to fraud, from both internal sources (employees) and external sources (such as hackers, business partners and fraudulent suppliers). For example, the urgent need to procure protective gear and hygiene supplies expose organisations to procurement fraud as normal procedures are abandoned. Unethical procurement personnel may also take advantage of the situation to collude with suppliers to inflate the cost of goods and services or to provide low quality supplies.

The fraud risk may also come from external sources, e.g. shell companies purporting to supply protective gear may insist on pre-payment before delivery only to disappear after payment. The need to procure such supplies urgently may mean that there is little time to conduct thorough supplier due diligence.

It is also important to note that the provision of government support in the form of tax cuts and other subsidies to organisations may present an opportunity for payroll-related fraud to occur. For example, payroll personnel may take advantage of the change in income tax rate to defraud employees by either understating the Pay As You Earn (PAYE) tax deduction or failing to reflect it altogether and diverting the money to personal accounts. Payroll personnel may also take advantage of the situation by retaining names of redundant employees on the payroll and diverting their pay.

Inevitably, the Covid-19 outbreak will provide a lucrative opportunity for fraudsters to strike. Rationalisation and situational pressure that drive fraud will be a notable outcome of the crisis.

What controls and measures should organisations consider putting in place to prevent, detect and respond to some of these risks?

General

Prevent

  • Carry out staff rotations and enforce segregation of duties.
  • Ensure that all expenditure strictly follows the budget and standard operating procedures. Where specific procurement is urgent, its basis should be carefully assessed and senior-level approval should be required.
  • Perform thorough due diligence on all new suppliers – through online checks in case normal due diligence procedures cannot be performed. Additionally, purchase items from only verified suppliers of the items sought (such as IT equipment and hygiene supplies).
  • Actively track variable costs to verify whether these match the actual circumstances of the business. For example, office costs should reduce when employees work from home. Similarly, casual wages and commissions should be nil or minimal when operations reduce or stop.
  • Senior employees should clearly communicate to all stakeholders the need to do the right thing at all times and regularly emphasise this message.

Detect

  • Ensure that whistleblowing hotlines remain open and are actively monitored. Whistleblowing reports should also be prioritised for investigation to disrupt any active fraud schemes.
  • Carry out sample-based audits of high risk areas, such as those with new systems, significant changes in procurement and personnel.
  • Regularly analyse management accounts and reports to identify any suspicious trends or deviations that can then be investigated or immediate action taken to disrupt potential irregularities.
  • Regularly reconcile important financial records to ensure that gaps are identified quickly and explained immediately. This includes independent reconciliation of bank statements and reported income/expenditure.

Respond

  • Conduct staff awareness programmes to sensitise employees about the harm caused by fraud and their role in combating it.
  • Assess the adequacy and effectiveness of fraud response and investigation plans during a crisis such as the current one (are resources available and is information accessible?).

To reduce the impact of external factors of fraud, how can your organisation leverage from governmental, industrial and other public response plans that have been issued to mitigate the economic impact of Covid-19?

General

The pre-existing pressure to meet financial targets will intensify in times of crisis. Economic hardship and desperation may also drive business executives to be more creative in seeking opportunities to manipulate financial reports, with resultant impact on share prices, mergers & acquisitions and divestments.

The Kenyan government has made certain policy changes as part of its initiative to stabilise the economy during the crisis period. Organisations should seek, through industry and professional associations, to lobby government to further extend favourable changes to taxation and financial policies.

Organisations should consider negotiating with commercial banks to restructure existing loans and payment plans to manage cashflows and the risk of default. Additionally, they should adopt reasonable measures to cushion employees and other stakeholders from the expected negative economic outcomes. This may help to ease the pressure and incentive to commit fraud.

If you have detected an instance of potential economic crime within your organisation, what steps should you take to address the situation?

General

The approach to take when faced with a potential fraud will depend on the fraud response plan adopted by the organisation, the type of fraud, the authority level of the perpetrators in the organisation and the potential impact and spread of the fraud.

The first step should be to stop the ongoing fraud scheme to limit the extent of loss and damage. A preliminary assessment should be conducted to establish whether an investigation should be conducted and the approach to the investigation. The normal investigative procedures that might include face-to-face interviews or site visits may be hampered due to curfews, government restrictions on travel and unavailability of employees who are working remotely. Nonetheless, an organisation has to review its existing fraud and human resource policies to undertake the investigation given these circumstances. In the event that it is not possible to undertake an investigation given the circumstances, alternative ways of dealing with the suspected fraud within the confines of the law should be considered.

Initial steps that can be taken include:

  • Disconnecting potentially fraudulent employees from the organisation's IT systems;
  • Stopping payment to suppliers/employees suspected to be involved until a suitable time when an investigation can be undertaken;
  • Suspending employees from work until investigations are complete; and
  • Collecting and securely storing relevant potential evidence.

The Fraud Triangle

General

The fraud triangle defines how an individual is influenced, through opportunity, pressure and rationalisation, to engage in fraud and misconduct.

Click here for details.

Contacts

Aisha Abdallah

Aisha Abdallah

Partner, Anjarwalla & Khanna

Arshad Dudhia

Arshad Dudhia

Managing Partner, Musa Dudhia & Co.

Eric Cyaga

Eric Cyaga

Partner, K. Solutions & Partners

Foued Bourabiat

Foued Bourabiat

Managing Partner, Bourabiat AssociƩs

Francisco Avillez

Francisco Avillez

Managing Partner, ABCC

Fred Onuobia

Fred Onuobia

Managing Partner, G.Elias & Co.

Geofrey Dimoso

Geofrey Dimoso

Partner, A&K Tanzania

Iqbal Rajahbalee

Iqbal Rajahbalee

Partner, BLC Robert & Associates

Julien Kavuruganda

Julien Kavuruganda

Partner, K. Solutions & Partners

Krishna Savjani

Krishna Savjani

Managing Partner, Savjani & Co.

Luisa Cetina

Luisa Cetina

Director, Anjarwalla & Khanna

Mesfin Tafesse

Mesfin Tafesse

Principal Attorney, Mesfin Tafesse & Associates

Sahondra Rabenarivo

Sahondra Rabenarivo

Managing Partner, Madagascar Law Office

Salimatou Diallo

Salimatou Diallo

Partner, SD Avocats

Shemane Amin

Shemane Amin

Partner, A&K Tanzania

Timothy Masembe

Timothy Masembe

Managing Partner, MMAKS Advocates

Willie Oelofse

Willie Oelofse

Director, A&K Forensics & Investigations