October 20, 2010 – Fraud is a constant concern for insurers and a new report shows that insurers have good reason to be concerned.

Theft of information and electronic data at global companies, insurers included, has overtaken physical theft for the first time, according to the latest edition of the Kroll Annual Global Fraud Report. This year’s study shows that the amount lost by businesses to fraud rose from $1.4 million to $1.7 million per billion dollars of sales in the past 12 months — an increase of more than 20 percent.

Kroll commissioned The Economist Intelligence Unit to conduct a worldwide survey on fraud and its effect on business during 2010. A total of 801 senior executives took part in this survey. Nearly one-third (29 percent) of the respondents were based in North America, 25 percent in Europe, just under a quarter from Asia-Pacific region and 11 percent each from Latin America and the Middle East and Africa. Ten industries were covered, with no fewer than 50 respondents drawn from each industry. The highest number of respondents came from the financial services industry (13 percent), some of that representing insurance.

According to the survey, 88 percent of companies said they had been the victim of at least one type of fraud during the past year. Of the specific countries analyzed, China is the top market in which companies suffered fraud, with 98 percent of businesses operating there affected. Colombia ranked second with a 94 percent incidence of fraud in 2010, followed by Brazil with 90 percent.

“Theft of confidential information is on the rise because data is increasingly portable and perpetrators — often departing or disgruntled employees — can remove it with ease absent sufficient controls,” says Robert Brenner, VP of Kroll’s Americas region.

“At the same time, there is a growing awareness among thieves of the increasing intrinsic value of an organization’s intellectual property. The results of the survey do not suggest other types of fraud are decreasing but merely that the rise in theft of intellectual capital has outstripped other fraudulent activity that has remained constant. Companies need to regularly evaluate how they are controlling access to information within their organization to ensure they are keeping pace with technological advancement and the imperative for collaboration in the workplace.”

The speed of technological developments poses new challenges in the fight against fraud. Nearly one-third (28 percent) of respondents cited information infrastructure complexity as the single most important factor in raising their exposure to fraud. However, despite the increased risks, only 48 percent of companies are planning to spend more on information security in the next 12 months, down from 51 percent last year.

Naturally, information-based industries reported the highest incidence of theft of information and electronic data over the past 12 months. These include financial services (42 percent in 2010 versus 24 percent in 2009), professional services (40 percent in 2010 versus 27 percent in 2009) and technology, media and telecoms (37 percent in 2010 versus 29 percent in 2009).

Another area where the survey showed difference among industries is fraud from within. In financial services, for example, a notably high proportion of customers are key perpetrators of fraud (28 percent compared to a survey average of 10 percent). Consumer goods companies, meanwhile, suffer 40 percent of their frauds at the hands of vendors and suppliers, more than twice the survey average of 18 percent. The broader message of the survey here, however, is an unpleasant one. Whatever the sector, if a fraud occurs the culprit is more often than not likely to be one of the people working with you.

Other key findings include:

Fear of fraud dissuades. Nearly half of companies surveyed from becoming more global. 48 percent of respondents indicated that fraud had dissuaded them from pursuing business opportunities in at least one foreign country. The biggest impact has been on emerging economies, with fraud deterring 11 percent of businesses operating in China and similar percentages of businesses operating in Africa (11 percent) and Latin America (10 percent). Respondents claimed they managed risk in these countries simply by avoiding the regions, even though they may offer attractive investment opportunities.

Companies are unprepared for regulation. Increased regulation through the Foreign Corrupt Practices Act (FCPA) and the introduction of the UK’s new Bribery Act has created new challenges for companies. According to the survey, nearly two-thirds (63 percent) of businesses with operations in the United States or UK believe the laws do not apply to them or are unsure. As a result, many are unprepared to deal with the regulatory risks: less than one-half (47 percent) are confident that they have the controls in place to prevent bribery at all levels of the operation, compared with 42 percent who say they have assessed the risks and put in place the necessary monitoring and reporting procedures.

Fraud is usually an “inside job.” For those companies who have been affected by fraud over the past year, junior employees and senior management were the most likely perpetrators at 22 percent each, followed by agents or other intermediaries at 11 percent. The proportion of fraud carried out by these employees ranged from 50-to-60 percent in North America, Europe and Asia-Pacific to 71 percent in the Middle East and Africa. The number dropped to 42 percent in Latin America where customers are the primary fraudsters.

“Some of the most concerning findings from the report this year were that challenges faced by corporates investing in unfamiliar territories in search of growth are dissuading them from expansion,” says Tom Hartley, VP of Kroll’s Eurasia region. “This is a combination of opportunity lying where fraud risk is highest and at the same time, the penalties for regulatory failure and likelihood of prosecution increasing. Companies can manage these risks but need to think broadly about the appropriate steps taken to minimize exposure and investigate suspicious actions.”

This originally appeared on Insurance Networking News.

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