FCPA Compliance and Ethics Blog

February 6, 2013

Socio-Economic and Cultural Risk Factors That Drive Corruption: A Focus on the ‘Supply Side’ of the Equation

Ed. Note-today we conclude a three-part series by our colleague Mary Shaddock Jones on occupational fraud. 

This is the last installment of my three party series regarding Occupational Fraud.  One can never lose focus on what I consider the key question as they enter or play within the international arena:  What are the socio-economic and cultural risk factors that make companies and individuals conducting business in a particular location more vulnerable to possible corruption schemes?   We cannot adequately address corruption unless we address both the “supply side” and the “demand side”. Yesterday we considered the “Demand Side” of the equation.  Today we will focus on the “Supply Side”.  If your company has a clear policy against corruption- why would your employees risk losing their jobs or worse, going to jail by violating these laws?

A side benefit to being married to a CPA and a Certified Fraud Examiner is the ability to read not only legal and compliance magazines on a monthly basis- but also the Journal of Accountancy and the publications from the ACFE society.  I loved the August 2012 cover of the Journal of Accountancy- “Think Like a Thief”! There were three very pointed articles contained in this publication:  (1) Fraudsters Reveal Weaknesses They Exploited; (2) Detecting a Criminal Mind Before It Strikes; and (3) Antifraud Controls Can Benefit Small Businesses.   In addition to this publication, I will be examining some of the conclusions recently published in the “Report to the Nations on Occupational Fraud and Abuse- 2012 Global Fraud Study” which is recognized as the authoritative annual national report on fraud

Considering the “Supply Side” of the Equation:

The fraud triangle is a model for explaining the factors that cause someone to commit occupational fraud. It consists of three components which, together, lead to fraudulent behavior:  (1) Pressure; (2) Opportunity and (3) Rationalization.

Pressure- According to the ACFE, the first leg of the fraud triangle represents “pressure”. This is what motivates the crime in the first place.  The individual has some financial problem that he/she is unable to solve through legitimate means, so he or she begins to consider committing an illegal act, such as stealing cash or falsifying a financial problem, or entering into an improper payment (perhaps thinking of the bonus he or she will get if they land a lucrative contract for their employer) as a way to solve their problem.   The 2012 ACFE report concluded that “Most fraudsters exhibit behavioral traits that can serve as warning signs of their actions. These red flags — such as living beyond one’s means or exhibiting excessive control issues — generally will not be identified by traditional internal controls. Managers, employees and auditors should be educated on these common behavioral patterns and encouraged to consider them — particularly when noted in tandem with other anomalies — to help identify patterns that might indicate fraudulent activity.”  The report found that “More than three-quarters of the frauds in our study were committed by individuals in six departments: accounting, operations, sales, executive/upper management, customer service and purchasing.

Opportunity- The second leg in the fraud triangle is perceived as “opportunity”, which defines the method by which the crime can be committed.  The person must see some way the he or she can use (or abuse) their position of trust to solve their financial problem with a low perceived risk of getting caught.

Rationalization- The third leg of the fraud triangle is “rationalization”. According to the ACFE, the vast majority of fraudsters are first time offenders with no criminal past; they do not view themselves as criminals. They see themselves as ordinary honest people who are caught in a bad set of circumstances. Consequently, the fraudster must justify the crime to himself in a way that makes in an acceptable of justifiable act”.  Again, according to the ACFE, the most common rationalizations fraudsters use include a) I was only borrowing the money; b) I was entitled to the money; c) I had to steal to provide for my family; d) I was underpaid; my employer cheated me and e)  My employer is dishonest to others and deserved to be fleeced.

As discussed in the first part of this series, Occupational Fraud is broader than just anti-corruption as it relates to the Foreign Corrupt Practices Act or the U.K. Bribery Act.  However, the motivating factors and conclusions reached in the 2012 Global Fraud studies should be examined by companies when examining its overall anti-corruption risk profile.

I will end this series by listed two of the conclusions and recommendations contained within the 2012 Global Fraud Report which I believe are excellent advice:

Targeted fraud awareness training for employees and managers is a critical component of a well-rounded program for preventing and detecting fraud. Not only are employee tips the most common way occupational fraud is detected, but our research shows organizations that have anti-fraud training programs for employees, managers and executives experience lower losses and shorter frauds than organizations without such programs in place. At a minimum, staff members should be educated regarding what actions constitute fraud, how fraud harms everyone in the organization and how to report questionable activity.”

“Our research continues to show that small businesses are particularly vulnerable to fraud. These organizations typically have fewer resources than their larger counterparts, which often translates to fewer and less-effective anti-fraud controls. In addition, because they have fewer resources, the losses experienced by small businesses tend to have a greater impact than they would in larger organizations. Managers and owners of small businesses should focus their anti-fraud efforts on the most cost-effective control mechanisms, such as hotlines, employee education and setting a proper ethical tone within the organization. Additionally, assessing the specific fraud schemes that pose the greatest threat to the business can help identify those areas that merit additional investment in targeted anti-fraud controls.”

What is your company’s risk for corruption?  When is the last time that you conducted a risk assessment for corruption? As yourself these questions:

  1. Do you have a Code of Conduct?
  2. Do you have a policy which clearly addresses the company’s position on anti-corruption? If so, is the policy easily accessible to your employees in their native language?
  3. Do you have an anonymous reporting system or other method in which employees can elevate concerns relating to occupational fraud to the appropriate person within the company?
  4. Do you provide any type of meaningful training on fraud and corruption to your employees?
  5. Do you have internal controls to prevent and detect fraud or corruption within your organization?


Mary Shaddock Jones has practiced law for 25 years in Texas and Louisiana primarily in the international marine and oil service industries. She was the first woman to earn TRACE Anti-bribery Specialist Accreditation. Mrs. Jones has extensive experience in creating and designing compliance programs to reduce the risks of such violations, including policies and procedures, educational and training materials and programs, contract provisions and due diligence protocols. She implements and works with in-house counsel and compliance vendors to execute compliance policies and training programs tailored to the client’s business structure and the market conditions in the client’s target countries.  She can be reached at 337-513-0897 or via e-mail at msjones@msjllc.com. Her associate, Miller M. Flynt, assisted in the preparation of this series.  He can be reached at mmflynt@msjllc.com.

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