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As the world fights fraud and corruption, will you need to protect yourself? 14th Global Fraud Survey – UK Viewpoint 91 % believe that understanding the ultimate beneficial ownership of the entities with whom they do business is important 39 % of respondents considered bribery and corrupt practices to happen widely in their country, with no improvements since our last survey 32 % of our respondents reported that they had concerns when asked about misconduct in their workplace Corporate misconduct — individual consequences EY’s latest Global Fraud Survey of senior executives comes at a time of overwhelming calls for enhanced transparency and heightened volatility in financial markets. The escalating threats of cybercrime, terrorist financing and, more recently, the revelations regarding widespread possible misuse of offshore jurisdictions, have increased pressure on governments to act and companies to identify and mitigate fraud, bribery and corruption issues. The extent of global cooperation between regulators when pursuing the corrupt has never been higher. The call for increased transparency will resonate with many of the respondents to our survey. Over 90% consider that understanding the ultimate beneficial ownership of the entities with whom they do business is important. The demand for beneficial ownership transparency is unsurprising as the threat posed by bribery and corruption shows no sign of abating. Just over half of respondents in rapid-growth markets believe that corruption is endemic in their country and one fifth believes it to be widespread in developed markets too – up from seventeen percent since our last survey. Globally, one in ten respondents consider cash payments or personal gifts as acceptable to win business. This provides food for thought for those UK companies seeking to invest overseas, particularly given developments in enforcement by UK authorities over the last 12 months. This should also be of concern to boards and executives as global enforcement trends are increasingly focusing on individual misconduct. The G20 major economies recognise bribery and corruption as a blocker to economic growth and continue to focus on methods to prevent and reduce such activity. They have highlighted the abuse of legal and corporate structures to hide or disguise inappropriate business relationships and movements of funds and have committed to increasing transparency in this area. Fraud continues to present a serious challenge to businesses: 12% of respondents told us they had experienced a fraud they considered to be significant in the last two years. It’s arguable whether that is a result of increased fraudulent behaviour or the result of improving compliance and identification: almost 40% of respondents told us that they have made it easier for employees to report concerns. However, challenges certainly remain and the willingness of individuals to engage in inappropriate behaviour to maintain perceptions of performance is very real. For example, in Africa, almost half of our respondents could justify unethical conduct to meet financial targets.

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Page 1: EY Global Fraud Survey 2016: UK ViewpointFile/EY-Global-Fraud-Survey-2016-UK-viewpoint.pdf · Act 2010 have not attracted widespread public ... based in a jurisdiction that permits

As the world fi ghts fraud and corruption, will you need to protect yourself?14th Global Fraud Survey – UK Viewpoint

91%believe that understanding the ultimate benefi cial ownership of the entities with whom they do business is important

39%of respondents considered bribery and corrupt practices to happen widely in their country, with no improvements since our last survey

32%of our respondents reported that they had concerns when asked about misconduct in their workplace

Corporate misconduct — individual consequences

EY’s latest Global Fraud Survey of senior executives comes at a time of overwhelming calls for enhanced transparency and heightened volatility in fi nancial markets.

The escalating threats of cybercrime, terrorist fi nancing and, more recently, the revelations regarding widespread possible misuse of offshore jurisdictions, have increased pressure on governments to act and companies to identify and mitigate fraud, bribery and corruption issues. The extent of global cooperation between regulators when pursuing the corrupt has never been higher.

The call for increased transparency will resonate with many of the respondents to our survey. Over 90% consider that understanding the ultimate benefi cial ownership of the entities with whom they do business is important.

The demand for benefi cial ownership transparency is unsurprising as the threat posed by bribery and corruption shows no sign of abating. Just over half of respondents in rapid-growth markets believe that corruption is endemic in their country and one fi fth believes it to be widespread in developed markets too – up from seventeen percent since our last survey. Globally, one in ten respondents consider cash payments or personal gifts as acceptable to win business.

This provides food for thought for those UK companies seeking to invest overseas, particularly given developments in enforcement by UK authorities over the last 12 months. This should also be of concern to boards and executives as global enforcement trends are increasingly focusing on individual misconduct.

The G20 major economies recognise bribery and corruption as a blocker to economic growth and continue to focus on methods to prevent and reduce such

activity. They have highlighted the abuse of legal and corporate structures to hide or disguise inappropriate business relationships and movements of funds and have committed to increasing transparency in this area.

Fraud continues to present a serious challenge to businesses: 12% of respondents told us they had experienced a fraud they considered to be signifi cant in the last two years. It’s arguable whether that is a result of increased fraudulent behaviour or the result of improving compliance and identifi cation: almost 40% of respondents told us that they have made it easier for employees to report concerns.

However, challenges certainly remain and the willingness of individuals to engage in inappropriate behaviour to maintain perceptions of performance is very real. For example, in Africa, almost half of our respondents could justify unethical conduct to meet fi nancial targets.

Page 2: EY Global Fraud Survey 2016: UK ViewpointFile/EY-Global-Fraud-Survey-2016-UK-viewpoint.pdf · Act 2010 have not attracted widespread public ... based in a jurisdiction that permits

The UK perspective

Regulatory regimeThere is a continued focus from law enforcement agencies on tackling bribery and corruption. The G20 countries issued an Anti-Corruption Action Plan in 2015, identifying areas where governments and multinational corporates must strengthen cooperation and efforts to eradicate corrupt behaviour. In May 2016, a Global Anti-Corruption summit of world leaders takes place in London.

However, there remains a perception in the UK that regulatory bodies are not performing adequately in combatting bribery and corruption, with half of all UK respondents believing that enforcement bodies are either unwilling to prosecute or ineffective in securing convictions.

This perception is perhaps because the prosecutions to date under the UK Bribery Act 2010 have not attracted widespread public attention.

In fact, UK authorities have successfully concluded a number of milestone cases through the courts in the last 12 months. Section 7 of the UK Bribery Act (the controversial ‘failure of commercial organisations to prevent bribery’ offence) was cited in three completed cases in the second half of 2015. In addition, the first Deferred Prosecution Agreement was completed by the Serious Fraud Office and a landmark fine imposed by the Financial Conduct

Authority for financial crime failings. While none of the Section 7 cases provide extensive precedents, the question of whether the Bribery Act has teeth has been answered.

It will be interesting to see how further publicity around these cases and the enforcement bodies’ pipeline of cases impacts on UK executives’ perception of the strength and effectiveness.

to know who ultimately own and controls the entities they do business with. The vast majority of UK respondents also believe that publishing the ultimate beneficial ownerships of companies that participate in public tenders will mitigate the risks of fraud, bribery and corruption.

They will be heartened, therefore, by global moves towards increased transparency and the UK government’s response to this challenge. New regulations have been implemented requiring all UK-incorporated companies and LLPs, subject to certain exceptions, to maintain a register of all “natural persons” with significant control. These registers will be made publically available from mid-2016, making it possible for the first time to see not just who owns shares in a company but also who influences or controls a company through other means.

Fraud remains a challenge, with 20% of UK respondents experiencing a fraud they considered to be significant in the last two years. Efforts to combat this appear to have improved, with almost half of UK respondents indicating that they have made it easier for employees to report any concerns that arise.

With the UK the home of the headquarters of many multinational businesses, the fact that the majority of respondents in 20 of the 62 countries and territories our survey covered believed that bribery and corruption happened widely in their countries represents a clear challenge for such companies.

This perception is not restricted to emerging markets – UK executives don’t consider their own region to be corruption-free.

Whilst nearly a third believe corruption to be widespread in the UK, only two percent believe that to be the case in their own industry, suggesting they view it as someone else’s problem. This perception is at odds with our respondents’ personal experience of misconduct at work, with 22% of respondents recognising that they have had concerns about fraud, bribery and corruption at work.

UK executives recognise the need for transparency when dealing with third parties, with 98% believing it is important

32%32% could justify corporate entertainment to win or retain business

? 98%believe it is important to know who ultimately own and controls the entities they do business with

20%of UK respondents have experienced a significant fraud in the last two years

22%of respondents have had concerns about fraud, bribery and corruption at work

UK authorities have successfully concluded a number of milestone cases through the courts in the last 12 months.

Page 3: EY Global Fraud Survey 2016: UK ViewpointFile/EY-Global-Fraud-Survey-2016-UK-viewpoint.pdf · Act 2010 have not attracted widespread public ... based in a jurisdiction that permits

Transparency and third-party risk

One of the biggest challenges to businesses in mitigating bribery and corruption risk is controlling the activities of third parties acting on their behalf. An OECD report issued in 2015 indicated that of 427 foreign bribery cases they had studied globally, in the vast majority of cases the bribery was perpetrated by third parties, such as agents and intermediaries.

In the UK, the SFO has, in external communications this year, made it very clear that the activities of such third parties are of great interest to them, particularly “where those agents or intermediaries take the form of companies based in a jurisdiction that permits beneficial ownership to be concealed”.

This view is supported by UK enforcement activity in 2015:

• The first case to cite Section 7 of the UK Bribery Act 2010 (“failure of a commercial organisation to prevent bribery”) followed a company’s self-report to the Scottish Crown Office & Procurator Fiscal Service and was concluded via a civil settlement. This case related to payments made through third parties

• The Serious Fraud Office’s (“SFO”) first successful prosecution under Section 7 of the UK Bribery Act 2010 was concluded. This case related to payments made through third parties

• The SFO’s first application for a Deferred Prosecution Agreement, following a self-report by the company concerned, was approved by the courts. This case related to payments through third parties.

One of the biggest challenges to businesses in mitigating bribery and corruption risk is controlling the activities of third parties acting on their behalf.

Are your business partners helping you grow? Or growing your risk?

Good practice in mitigating risk and understanding those third parties is some form of forensic due diligence when entering into relationships - whether this is on entering a new market or as part of ongoing monitoring in existing businesses. This should take the form, as a minimum, of background checks on ownership and reputation and ongoing checks of compliance with policies and procedures.

Despite the understanding of the importance of knowing who they are doing business with, the use by UK companies

of internal audit, external audit, external consultants or law firms to monitor compliance is below the global average and lags behind Africa, Eastern Europe and the emerging markets more generally.

Given the spate of recent leaks of information relating to the activities of entities in jurisdictions where information on ownership is opaque, this is an area where enforcement focus can only increase. Our survey illustrates that the UK appears to have work to do in this area.

Page 4: EY Global Fraud Survey 2016: UK ViewpointFile/EY-Global-Fraud-Survey-2016-UK-viewpoint.pdf · Act 2010 have not attracted widespread public ... based in a jurisdiction that permits

98%

Opportunity and risk in emerging markets

94%

94%97%

91%

84%

86%

87%

85%

94%

N. America

S. AmericaAfrica

Middle East

India

Japan

Eastern Europe94%

W. Europe Far East

Oceania

Companies across the globe continue to seek routes to growth and the lure of expansion into emerging markets remains. For many companies, those markets offer both opportunity and risk. Our survey found that just over half of all companies that exited investments in Africa, Brazil, China, Eastern Europe or India cited fraud, bribery and corruption risks as a contributory factor.

Globally, almost 40% of respondents believe that corrupt practices happen widely in business in their local market, with the figures rising to 81% across Africa, 46% in Eastern Europe and 51% across emerging markets as a whole. These figures fluctuate significantly across jurisdictions — for example the figure for Brazil, subject to significant inbound investment, is as high as 90%, whilst in China it is 24%, lower even than the UK.

Despite these fluctuations, a third of UK respondents do not consider country specific risks when undertaking forensic or anti-corruption due diligence on potential investments. This suggests that, despite our survey illustrating that UK respondents believe their anti-bribery and corruption programmes to be robust, there is work to do in closing this particular gap.

Global support for transparency over beneficial ownership

UK

India

51%of respondents in emerging markets believe that bribery and corruption are still perceived to occur widely in their countries.

Page 5: EY Global Fraud Survey 2016: UK ViewpointFile/EY-Global-Fraud-Survey-2016-UK-viewpoint.pdf · Act 2010 have not attracted widespread public ... based in a jurisdiction that permits

WhistleblowingThe issue of whistleblowing is one that UK organisations continue to wrestle with.

76%

of UK respondents have a whistleblowing hotline in place

Financial services regulators in the UK have announced new regulations, which will come into force in September 2016, that require all firms falling within their scope to have effective whistleblowing arrangements. Whilst these regulations are geared to financial services firms, they are being seen by many other industries as best practice.

The survey shows that 76% of UK respondents have a whistleblowing hotline

in place, compared to 86% globally. However, questions remain about the adequacy of a whistleblowing hotline on its own as a solution to mitigate fraud, bribery and corruption risk.

When someone becomes aware of wrongdoing, their natural instinct is to want to let others know. However, the reality is that fear can sometimes get in the way and prevent people from speaking up — fear that the issue will not be taken seriously, fear that the matter will not be investigated properly or, in the worst case, fear that recriminations may follow.

This is borne out by the results of the survey: 18% of respondents told us they would not blow the whistle due to fear for their personal safety. A further 10 % of respondents advised that they would not blow the whistle out of loyalty to their colleagues and 14 % of respondents

told us they are less likely to do so than they were three years ago, an interesting contrast given that 48% of UK respondents considered that they had made it easier for employees to report concerns in the same time period.

Our experience shows that, rather than operating a whistleblowing line in isolation, the development of a culture that encourages employees to speak up and provides assurance that they will be supported when they do, is the key to an effective whistleblowing framework.

An effective framework should assist in identifying issues early, giving the company the chance to undertake an initial assessment of the validity or otherwise of the allegations. There is a very real risk that, if a whistleblower does not feel able

“ Whistleblowing is an essential element of an effective compliance and audit regime”Andrew Tyrie MP, Chairman of the Parliamentary Commission on Banking Standards.

to raise issues internally, they will look to regulators or the press to express their concerns. Once these are in the public domain, the company loses control over the outcome. Whether the concerns are valid or can be evidenced becomes irrelevant, as damage to the company’s reputation is inevitable.

The Financial Conduct Authority has made it clear as part of its own whistleblowing regulations that senior management will now be held personally accountable for the businesses for which they are responsible. These regulations are acting as a trigger for businesses in other sectors to re-examine their own whistleblowing procedures and frameworks simply because it’s the right thing to do for their company and employees.

It remains to be seen whether regulators in other sectors will follow the same path of personal accountability and the impact on boardroom behaviour if they do. These are certainly interesting times for senior figures in major corporations.

18% 10% 14%of respondents told us they would not blow the whistle due to fear for their personal safety

of respondents advised that they would not blow the whistle out of loyalty to their colleagues

of respondents told us they are less likely to blow the whistle than they were three years ago

Best practice in whistleblowing

Robust and holistic whistleblowing arrangements should include:

A whistleblowing framework

Multi-channel reporting platform

A well-structured and practical response and escalation plan

Awareness among management and employees that includes training in the requisite processes

Page 6: EY Global Fraud Survey 2016: UK ViewpointFile/EY-Global-Fraud-Survey-2016-UK-viewpoint.pdf · Act 2010 have not attracted widespread public ... based in a jurisdiction that permits

Corporate misconduct – individual consequencesThe senior executives we interviewed in the UK were categorical in telling us that they would not ignore unethical conduct by third-parties or by their own staff. Equally, they told us clearly that they would not mislead management or external parties such as auditors or regulators to advance their own career or for financial reward.

This is juxtaposed with an apparent ability to rationalise potentially unethical conduct when under pressure; almost forty percent of UK respondents interviewed stated that they would be prepared to make some form of adjustment to the presentation of financial performance to meet targets or safeguard a company’s economic survival. The figures are even more acute when considering solely those in finance functions.

Given the subjective nature of certain accounting adjustments, some can be considered to fall within a “grey” area. However, a considerable proportion of frauds we encounter do not start out as deliberate attempts at personal gain, rather as poor decisions that push the boundaries. These decisions are intended to be short term, are made under pressure, but escalate and take on a life of their own. Adjustments of this type can therefore be the start of a slippery slope.

And what does this mean for the individuals involved? Recent developments in enforcement activity illustrate an increased focus on individual liability for fraud, bribery and corruption offences, which should sound warning bells in the boardroom. The US Securities & Exchange Commission has charged 175 individuals with financial reporting violations in the past two years and, amongst its successful prosecutions of individuals for corruption in 2015, the SFO announced its first completed prosecution of an individual under the UK Bribery Act.

The SFO continues to investigate individual executives among its active cases and actions for alleged corruption against a number of executives of major multi-national organisations are already progressing through the Courts.

Our survey found that the majority of our respondents support this type of action, with 88% of UK respondents viewing enforcement against management as an effective deterrent.

A considerable proportion of frauds we encounter do not start out as deliberate attempts at personal gain, rather as poor decisions that push the boundaries.

175individuals charged by the SEC with financial reporting violations in the past two years

88%of UK respondents viewing enforcement against management as an effective deterrent

Page 7: EY Global Fraud Survey 2016: UK ViewpointFile/EY-Global-Fraud-Survey-2016-UK-viewpoint.pdf · Act 2010 have not attracted widespread public ... based in a jurisdiction that permits

Immediate actions for management

2 Implement an effective whistleblowing regime

Recent large-scale information leaks have catapulted the whistleblower on to the front pages and, in those circumstances, corporate reputations may be damaged regardless of the accuracy of allegations.

Half-heartedly operating a whistleblowing regime, or operating one where people’s concerns and warnings are never followed up, will lead employees to assume that management is not serious about promoting ethical behaviour or tackling wrongdoing.

It is vital to ensure that a channel for voicing concerns is not just there because the policy requires it, but that when someone contacts it, real and visible action is taken. The alternative is that issues do not get identified until it is too late or employees choose to voice their concerns in the public domain, with the company’s reputation tarnished before it has even had a chance to understand whether there is a basis to allegations.

3 Perform rigorous due diligence on third parties

It is vital that you know who you are doing business with and who undertakes activities in your name. Acquired businesses, overseas subsidiaries, suppliers, customers, contractors, consultants, agents and other intermediaries all present risks around fraud, bribery and corruption.

Enforcement agencies have been clear in setting out their expectation that you know whether these are really the kind of entities you should be working with or acquiring. Failure to undertake adequate due diligence in this regard will undoubtedly result in action if a bribery issue emerges.

Due diligence of this type should not be lip-service. Proper background checks on individual, entities and beneficial owners should be routine and the results documented. Contracts should be put in place setting out your expectations from these third-parties and signed confirmation that they will adhere to your policies and procedures obtained.

Due diligence should not be a one off. Compliance with policies and procedures

should be tested as part of a rolling process, via internal audit or external consultants. Ownership of entities can change and it is important that you remain vigilant.

4 Set the tone

Senior management should set the tone and take every opportunity to communicate its commitment to ethical conduct: to owners, staff, customers, and the supply chain.

This communication needs to be two-way and senior management should be demanding information from across the business to understand the effectiveness of its messages. This communication also needs to be reinforced by action, especially in relation to non-compliance. Too often, employees see policies without teeth.

5 Be proactive in tackling issues

It will almost always be a more painful experience if others identify wrongdoing before you do. Proactivity gives you more control of the outcomes.

You should have a clear and pre-defined approach to investigating misconduct, with clearly allocated responsibilities. Investigation and compliance functions should be properly resourced to enable them to act quickly and proportionately to identify and investigate incidents when they occur.

1 Analyse your data

Accessing the right data to monitor activity and identify risks can be a challenge. However, proper analysis of transactional data across the business will enable you to target more manual reviews to the areas of greatest risk, alongside verifying compliance with policies and procedures.

Sophisticated data analytics tools are available that can automate much of this process, identifying anomalies, red flags and potential indicators of fraud. Monitoring software can be implemented which identifies threats, including potential cyber-attacks, in real time.

With a global focus on combating fraud, bribery and corruption, and regulators increasingly focusing on individual misconduct, Boards must respond proactively.

Current levels of regulatory activity will not reduce in the near term. Challenging economic conditions across markets where UK companies operate look set to remain for some time; and the risks of fraud, bribery and corruption are not going away.

With the increased global focus on executive behaviour, companies need to do more. They need to take sensible, proportionate steps to reduce the risk of fraud and corruption in their organisations and to quickly identify and mitigate it in the event that it occurs. Building an effective compliance framework takes time, but there are some key steps that can deliver quick progress:

Page 8: EY Global Fraud Survey 2016: UK ViewpointFile/EY-Global-Fraud-Survey-2016-UK-viewpoint.pdf · Act 2010 have not attracted widespread public ... based in a jurisdiction that permits

Corporate misconduct — individual consequencesGlobal enforcement focuses the spotlight on executive integrity

14th Global Fraud Survey

About the Global Fraud SurveyBetween October 2015 and January 2016, our researchers — the global market research agency Ipsos Mori — conducted 2,825 interviews in the local language with senior decision-makers in a sample of large companies in 62 countries and territories. The polling sample was designed to elicit the views of executives with responsibility for tackling fraud, mainly CFOs, CCOs, general counsel and heads of internal audit.

The full results are available in the EY report Corporate misconduct – individual consequences, which can be downloaded at www.ey.com/uk/fraudsurvey.

To request copies of the Global Fraud Survey or the UK Viewpoint please email [email protected]

EY’s Fraud Investigation & Dispute Services practice has a global reach. For more information about the survey – and how EY can help your organisation navigate the risks of fraud, bribery and corruption go to ey.com/uk/FIDS

Contacts

Jim McCurryEMEIA and UK Head of Fraud Investigation & Dispute Services +44 (0) 20 7951 [email protected]

Paul WalkerEMEIA and UK Head of Forensic Technology & Discovery Services +44 (0) 20 7951 [email protected]

Sanjay BhandariUK Head of Financial Services Forensic Team+44 (0) 20 7951 [email protected]

Jonathan MiddupUK Head of Anti-Bribery & Corruption+44 (0) 121 535 [email protected]

John SmartUK Head of Investigations+44 (0) 20 7951 [email protected]

EY | Assurance | Tax | Transactions | Advisory

About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

About EY’s Fraud Investigation & Dispute Services Dealing with complex issues of fraud, regulatory compliance and business disputes can detract from efforts to succeed. Better management of fraud risk and compliance exposure is a critical business priority — no matter the industry sector. With over 4,500 fraud investigation and dispute professionals around the world, we can assemble the right multidisciplinary and culturally aligned team to work with you and your legal advisors. We work to give you the benefit of our broad sector experience, our deep subject-matter knowledge and the latest insights from our work worldwide.

Ernst & Young LLPThe UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC300001 and is a member firm of Ernst & Young Global Limited.

Ernst & Young LLP, 1 More London Place, London, SE1 2AF.

© 2016 Ernst & Young LLP. Published in the UK. All Rights Reserved.

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In line with EY’s commitment to minimize its impact on the environment, this document has been printed on paper with a high recycled content.

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

ey.com/uk/FIDS