Canadian Lawyer InHouse

ROUnDUp • A roundup of legal department news and trends Fraud may be down but threat still looms from within I ncidents of white-collar fraud appear to be on the decline both globally and in Canada, but some senior executives may have a false sense of security when it comes to the potential threats to their organizations. Kroll Advisory Solutions' sixth annual Global Fraud Report for 2012-13 shows in Canada the percentage of companies surveyed that were affected by fraud dropped to 47 per cent in 2011-12 compared to 70 per cent of those surveyed in 2010-11. Globally, the proportion of companies that suffered an incident declined to 61 per cent in the current survey from 75 per cent last year. "From our perspective we look at the longer term trends rather than focusing on year-to-year, but it is obviously good news that there was a rather significant decline. It's an indication that a lot of companies have put resources into addressing fraud," says Peter McFarlane, managing director with Kroll in Toronto. More than 800 senior executives were polled worldwide in July and August for the survey, commissioned by Kroll and carried out by the Economist Intelligence Unit, from a range of industries. The biggest threat still remains from inside an organization with 67 per cent of all fraud cases committed internally, up from 60 per cent last year. The average percentage of revenue lost to fraud was 0.6 per cent, down from 0.9 per cent last year. The overall decline can be attributed to increasingly strict regulatory requirements, says Mark Morrison, a partner with Blake Cassels & Graydon LLP in Calgary. "This certainly reflects what we see. Fraud prevention and compliance awareness has become a focus for most companies over the last several years," says Morrison. The areas of frequent loss include theft of physical assets or stock (24 per cent) and management conflicts of interest (14 per cent). Areas where companies consider themselves moderately or highly vulnerable to risk include information theft, loss, or attack (28 per cent), theft of physical assets or stock (28 per cent), and intellectual property theft (23 per cent). The most widespread factor leading to greater fraud exposure was IT complexity with 31 per cent saying they feel it's the biggest driver of increased exposure to their company. However, that is down slightly from last year's number of 33 per cent. Three specific areas of fraud did increase slightly in frequency: • theft of physical assets; • management conflicts of interest; and • regulatory or compliance breach. For each of these, the prevalence in Canada is now at or above the global average. However, for all of those frauds the levels of perceived vulnerability have dropped. Canadian respondents were the most likely to report that growing collaboration between companies is increasing exposure to fraud. They are also less likely than average to be planning to invest in partner due diligence measures (33 per cent compared to 38 per cent for all countries). The report cites an example of a Canadian company that hired a consulting firm to advise on procurement policies and controls, and assist in reorganizing the purchasing department. It hired the firm without conducting background checks. Once hired the consulting company changed vendors on key supply contracts. Senior management realized there was a problem and an investigation revealed false and inflated invoicing through related vendors and false expense reports. A search of public records also revealed allegations of fraud against the firm in another jurisdiction. "That's an example of how important it is to understand who you're doing business with," says McFarlane. "If you form a relationship with a contractor you have to understand who they subcontract with and ensure they are doing business with appropriate people." Morrison says that kind of situation typically happens with medium-sized organizations in high-growth mode. "It's unusual to see that in large companies. Where I think you see more of that kind of risk is in mid-size companies that are growing but haven't put sophisticated measures in place to monitor things like who, exactly, they're doing business with. This is a high-risk group," he says. Feds get tough on white-collar crimes I n its efforts to get tough on whitecollar crime, the federal government may have made it tougher for the Competition Bureau to get individuals and corporations to work with its established leniency programs. As of Nov. 20, anyone convicted of making an anti-competitive agreement with a competitor or misleading repre6 • Fe b r u a ry 2013 sentations to the public can be punished with prison time, instead of community service, when found guilty of violating certain criminal provisions of the Competition Act. On March 13, 2012, amendments to s. 742.1 of the Criminal Code, which were part of Bill C-10, the government's omnibus crime bill, received Royal assent. The INHOUSE changes restrict the availability of conditional sentences for some Competition Act offences. Several criminal sentencing provisions of the Safe Streets and Communities Act impose stricter sentences for convictions under ss. 45 (price-fixing), 47 (bid-rigging), and 52 (misleading advertising) of the Competition Act. Price-fixing

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