Corruption & Fraud – Small "Favors" Quickly Become Crimes

Corruption and Fraud are Absolute No Gos. This Article Covers What These Terms Mean and How to Prevent These Compliance Violations.

Corruption and fraud are sometimes glossed over as "small favors. In reality, however, corruption and fraud cause significant economic damage, undermine public trust and compromise the integrity of organizations. They can also have profound consequences for the individuals responsible. In the face of these challenges, it is imperative for companies to implement effective compliance measures to protect themselves against corruption and fraud. However, reactive behavior is not enough.

Rather, protection against corruption and fraud requires proactive action: Risks need to be identified, employees trained and suitable prevention strategies developed. These initiatives are key to prevent corruption and fraud and strengthen compliance. In this article, we look at the concepts of corruption and fraud, as well as best practices and tools that support companies in crime prevention.

How can Corruption happen in Companies in the First Place?

Corruption (bribery) is the abuse of a position of trust in order to gain a personal advantage. A typical scenario is when person/company A pays money to person/company B so that A receives an order, even though A is not the best provider. This type of "bribery" is the most common form of corruption.

As this example shows, two parties are involved:

Person A, who wants to use illegal means to influence a decision in their favor
Person B, who makes their decision dependent on their personal advantage

It is important to emphasise: Both parties in this example are committing criminal acts, and this applies to the majority of countries around the world. Authorities have zero tolerance for corruption. If a company is suspected of corruption, it faces heavy fines, damage claims and loss of sales, as it can be barred from further business. The company's reputation suffers considerably. The responsible individuals must also expect drastic consequences: Depending on the case, fines, claims for damages, termination without notice or even imprisonment are imminent.

To avoid these serious consequences, there are measures to combat corruption. The goal is to develop an inner compass for "right" and "wrong" and to catch illegal activities in their nucleus.

Preventive Measures: How to Combat Corruption & Fraud

Measure	Details
Code of Conduct	The Code of Conduct serves as a guideline for employees and management and defines the appropriate behaviour in various situations. The more specific the Code of Conduct addresses corruption, the better the chances of promoting correct behavior.
Compliance Dashboard	By documenting gifts, invitations and conflicts of interest, there is less opportunity for corruption in the first place. Also useful to check the integrity of new business partners.
Secure Reporting Channel for Whistleblowers	The earlier a violation is discovered, the better. Secure reporting channels are indispensable for this, because this is where whistleblowers can (anonymously) submit information about cases of corruption and suspicion.
Compliance Trainings for Employees	Communication and education play a key role in compliance and violation prevention. With training courses such as our compliance training, you can communicate guidelines and processes to your employees.

Fighting corruption is only half the challenge, because there are other compliance violations and fraud variants that companies need to guard against. One important area is fraud, which we will address in the next section.

What is Fraud and How Does It Occur in Businesses?

Generally, the term "fraud" is used as an umbrella term for economic and corporate crime. But what does it include specifically? On the one hand, there are obvious cases such as bribery or forgery of documents. The same applies to fraud, for example the invoicing or payment of services that were never actually provided. Embezzlement is also clearly a criminal offence when someone illegally keeps something for themselves.

However, fraud also includes actions like an unauthorised disclosure of confidential information or customer data. Even a deliberate omission of required processes, such as non-adherence to a required four-eyes principle in an approval process, can be considered fraud. Generally speaking, fraud includes all unlawful acts that are intentionally carried out to either the detriment or the benefit of the company. No matter whether by employees, managers or external parties.

A Fraudulent Act generally comprises Three Elements:

A person first needs to have the inner basic attitude for such actions. They should not collide with the personal value system.
Then, the person must have a corresponding pressure or motive. In case of external pressure, such as financial problems, a company has only limited leverage.
The third factor is opportunity. It is not without reason that "opportunity makes thieves". If proper processes are put in place and compliance is monitored, there is significantly less opportunity for fraudulent activity.

Corruption and Frau need to be reported.

So how can companies take concrete action against fraud attempts? On the one hand, by consistently adhering to their process guidelines and controls. On the other hand, they should pay attention to possible warning signals, e.g. if people continuously disregard guidelines or separate their area of responsibility from their own team. This does not necessarily indicate fraud, but it may be a warning sign. We listed some examples below.

Suspicious cases should be reported to compliance officers as soon as possible so that companies can still take corrective action. If reported, compliance officers assess violations or damages and report them to the management, all while maintaining strict confidentiality of the whistleblower. This is often also in the interest of the fraudulent person concerned: Once a fraudulent act has been carried out and is uncovered, the full force of civil and criminal law strikes, but if it detected early, the consequences might be damage-limited.

Detect Fraud Early: An Overview of Potential Indicators

Of course, these situations do not automatically suggest a fraudulent act, but they may be an indication of it:

Organization	Personal
Lack of separation of functions: When an individual performs multiple critical functions, such as purchase request, approval, and payment, there are multiple opportunities for fraud.	Consistent non-compliance with guidelines: When employees repeatedly disobey internal policies, it can be for a variety of reasons, but it can also indicate fraud.
No dual control principle: Similar to the lack of separation of functions, the control and approval of critical processes by a second person is mi	Discrepancy between income and lifestyle: possibly the lifestyle is financed by fraud, or the person may become an easier victim for fraud opportunities. Attention: Never jump to conclusions, after all, the person may have inherited...
No effective system of internal controls, tolerance of non-compliance: Without an internal control system in place, there may be a lack of overall visibility and therefore more opportunity for fraud.	Closely guarding own activities from colleagues: Here, too, there may be many reasons, but it may also be fraud intended to be hidden from colleagues.

The Consequences of Corruption and Fraud: This is What Companies and Individuals Must Expect

The impact of corruption and fraud attempts can threaten the survival of a company. That is why it is crucial to implement effective compliance measures to mitigate these risks and promote a culture of integrity and lawfulness.

Here is an overview of potential consequences resulting from compliance violations:

Loss of Sales & Damage to Reputation

Corruption and fraud lead to financial losses and affect the economic stability of a company. Hefty fines, claims for damages and exclusion from future business can lead to significant financial losses. In addition, the company's reputation is damaged, which shakes the confidence of customers and investors.

Decreasing Customer & Partner Loyalty

Customers and partners can be affected by inflated prices, inferior products or services that result from bribery or fraudulent practices. Their trust in the company is lost, business relationships are terminated, which has a direct impact on revenue.

Brand Integrity

When companies obtain advantages through unfair means, fair conditions of competition are prevented. This can lead to a distortion effect where honest companies are disadvantaged and market transparency and efficiency suffer.

Legal Consequences

Criminal activities will have legal consequences. Companies and individuals (i.e. also employees as individuals) can face heavy fines, claims for damages and even imprisonment due to their involvement in illegal activities. The legal consequences can further damage a company's image and lead to long-term legal burdens.

Reducing Fraud and Corruption with Compliance Training

Companies with effective compliance measures protect themselves and their employees from legal, financial and reputational risks. A good image and a culture of integrity can provide competitive advantages for long-term success in the marketplace.

Given the serious consequences of corruption and fraud, it is essential for companies of all kinds to always act in compliance and in accordance with the rules. With our compliance training developed with in-house specialists, you can educate your employees about the important topic of compliance interactively.

The e-learning courses are suitable for small, medium-sized and large companies and can be integrated into a company's own learning management system (LMS) or operated via our IS-FOX Cloud, customized to the company guidelines and corporate design, of course.

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