Fraud, Pillage And Risk – The Need For Vigilance

We live and work in changing and challenging times.  The pressures at the top of organisations have never been greater. Given the sheer breadth of current economic, commercial and regulatory challenges and with more inevitable changes looming on the horizon, the CEO and the Chief Financial Officer (CFO) will need to play an increasingly vigilant […]

By Brenda Lee Tang

July 15, 2015

We live and work in changing and challenging times.  The pressures at the top of organisations have never been greater. Given the sheer breadth of current economic, commercial and regulatory challenges and with more inevitable changes looming on the horizon, the CEO and the Chief Financial Officer (CFO) will need to play an increasingly vigilant role in business operations.

It is becoming critical for them to develop a risk challenge culture, to look ahead, to anticipate risks and manage them. It is an all-encompassing role that is made all the more urgent by digital technologies, social media and the internet.

Boundary-spanning leadership is needed to build resilient businesses for these uncertain times. Good corporate governance and risk management are cornerstones to this. However, concern about the way that companies arrange their corporate governance and manage their risks is now more widespread than ever. There is a view among many in politics, along with regulators and in the media, that the corporate sector has failed to address these risky issues well.

Many observers also feel that failures in corporate governance and risk management contributed substantially to the crisis which is still dominating many economies, especially in the western world.

Despite the many inquiries and post-mortems which have taken place over these last few years, and the remedial action which has been taken, along with pledges that we must never allow another global financial crisis to derail so many economies, we are still, unfortunately, seeing evidence of serious failures.

Living as we do in a very unpredictable and fast-changing world, this does not provide the necessary confidence that our companies have what is needed to steer a steady path through these difficult issues.

This is the turbulent climate in which accountants, both those working within companies and those providing professional services to them, now have to operate, whether in the public or the private sector.

However unsettled the global economic climate is, the challenges it represents also offer opportunities for the finance profession to demonstrate the crucial importance of the role it plays.

As a profession, accountants have obligations to always act in the best interests of constituents and employers. But, as seen throughout recent times, accountants are also subject to ethical responsibilities to act within the law and to resist internal pressures for them to do otherwise. This is one of the key disciplines which differentiate professional accountants from individuals who are not qualified, and are therefore not subject to regulation or disciplinary codes.

To address these issues in turn, ACCA has looked at a number of challenges and opportunities facing the business community and the finance profession, in terms of pillage, fraud and risk.

The first of these issues pillage used to solely be a term of war which meant ‘to take everything of value from a place that has been conquered’. These days, pillage can be used to talk about any organisations who take other peoples’ or organisations’ assets.

As a prosecuted offence, pillage seemed to disappear after the Second World War, but globalisation and the related supply chains have seen it re-emerge in the 21st century.

ACCA’s report Pillage: a new threat to global supply chains, explored the business risk associated with economic war crimes as supply chains lengthen and activist interest grows.

Shifting regulatory, jurisprudential and public opinion landscapes have revitalised the war crime of pillage as an offence, and business must respond.

This is because pillage poses a multilayered threat to multinational business. Its interaction with money laundering offences extends the risk from direct involvement to guilt by association.

Businesses can be open to prosecution for money laundering if pillaged goods are found in their supply chain.

The growth in regulation reflects the enhanced recognition of the role business should play in society. It is not enough simply to provide benefits; businesses must also refrain from doing or promoting harm.

From a long-term financial perspective, the only real defence against the possible impacts of pillage on a business will be the ability to refute absolutely any allegation of involvement in or connection with pillaged goods in the supply chain. Proper internal controls are essential for this along with the proper design, implementation and operation of due diligence procedures. The skills and experience of qualified accountants around the world will be vital in these areas.

Business supply chains have become so complex that companies could be at risk of prosecution by paying for goods and materials that have been pillaged by criminals and terrorists, even ISIS fighters in Iraq – without even realising it.

This was a key warning from ACCA in this Pillage paper, a report which points to the major risks companies around the world face by the vast complexities of supply chains which expose them to paying for goods and materials that may have been pillaged from war zones, exposing those businesses to prosecution.

Recent reports from foreign intelligence agencies identify pillage of raw materials from Syria by ISIS fighters in Iraq as being a source of funding for the group. However, ACCA says the pillage – the crime of theft in armed conflict – is widespread beyond the conflict in the Middle East.

The rise of cross-border supply chains, and the fact they have become longer and more complex makes it easier for raw materials that have been pillaged to enter the supply chain. Simply handling pillaged goods can count as money laundering, vastly expanding the scope for prosecutions.

The fact ISIS fighters have sold raw materials that were pillaged from Syria means those materials have entered the machinery of global trade. It could mean consumers in the UK, US and around the world will be buying products that have pillaged components in them and that multinational businesses are indirectly financing those fighters. Prosecution is an option not just in respect of the original theft, but also for handling the pillaged goods or the proceeds from them.

It is more widespread than the current flash point in Iraq. The consumer electronics industry is just one sector that could be at risk with its reliance on tantalum, tungsten and tin, which have links with the various conflicts afflicting the DRC. The risks for businesses go far beyond mineral extraction.

A key element of the initial case against Charles Taylor, former president of Liberia, related to illegal logging activities. Garment manufacturers must deal with the complexities of the cotton supply chain. Coal, palm oil, even works of art could potentially be tainted by pillage and give rise to money-laundering implications.

It is a fact of modern-day digital business that goods can be ordered on line at the lick of button – from birthday cards to clothes, from mobile phones to holidays. Behind these incredible array of choices lies a global web of trade and manufacture which almost defies comprehension.

As well as the potential legal threat a business faces by using pillaged goods, there is a crippling reputational impact. While it will depend on a company’s customer base, the main risk is that today’s customer is more socially aware and concerned about the impact businesses have on the social and physical environment.

Companies exposed to pillaged goods and materials through their supply chains will take a hit to their reputations. Who wants to buy a company’s products made with the fruits of war, when a competitor’s business is squeaky clean?

Finance professionals have an important role to play in designing and implementing assurance systems to guard against pillaged goods and materials in a company’s supply chain. The report points to various government-led initiatives around the world, such as the European Union proposed regulations for self-certification of responsible importers (2014/0059 COD) and Section 1502 of the US Dodd-Frank Act.

But the administrative burden of maintaining, for example, a consistent paper trail of accountability at every stage in the production process in respect of every individual shipment of materials is unlikely to be an attractive prospect for businesses. The levels of due diligence required at each stage of the production cycle will vary according to the perceived risk, and the resources available to the business.  However, this comes with a warning – a lack of resource to confirm the status of goods will not in itself constitute a defence in criminal proceedings.

Businesses may need to look at other ways of ensuring as best they can a pillage free supply chain. Many end manufacturers, such as those in the car industry, may have millions of variants on one product line sourced from an array of multi-layered supply chains.

Notwithstanding the abhorrent nature of the underlying crimes, a business must, in managing its risk, maintain a focus on the economic realities of staying in business. If the costs of effective supply chain assurance become too great then competition from less scrupulous competitors may well render the best efforts of a responsible business counterproductive as its goods are priced out of the market.

Business may need to give consideration to finding proxies for direct assurance. For example, suppliers’ membership of recognised trade bodies or submission to certain levels of audit will demonstrate a commitment to good practice. Whether this can be judged adequate will involve a considered appraisal of the circumstances, a process ideally suited to the skills of the modern accountant.

In the next article, we will look at how businesses manage risk, the biggest threats to business and how they can build trust.

Brenda Lee Tang

Brenda Lee Tang is a Fellow of the Association of Chartered Certified Accountants. As head ACCA Caribbean, Ms. Lee Tang leads ACCA’s business and key relationships in the Caribbean and is responsible for advancing ACCA’s strategy in the region.