Bringing fraud into focus

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Fraud and corruption is about far more than just numbers, says EY’s Maryam Hussain. While costing infinite damage, some practical solutions nonetheless exist.

There are networks of civil society, press, regulators and industry associations forming across the world and exchanging information to combat fraud and corruption.

Yanukovych, Ben-Ali, Gaddaffi, Ceaușescu…These are simple stories of grand corruption: one man and his cronies looting a nation. The complex story is one of fraud and corruption present from senior levels to grass roots in both the public and private sphere — and those who are working every day to fight it and bring about lasting change.

One such group of women parliamentarians from Europe, Middle East and Africa met in November 2013 at the European Parliament, as part of the first summit of over 200 women ministers from 90 countries, to discuss practical challenges and successes in the fight against fraud and corruption. 

For example, one parliamentarian faced the prospect of being asked to pay a bribe to join her parliament’s public accounts transparency committee. She posed the question “where do you start when corruption is so endemic that government officials have to bribe each other to get government business done?”  

Follow the money

The common thread in discussions at the European Parliament was the necessity of treating the disease and not the symptoms. This means understanding the types of corruption and the sectors and institutions involved at country level.

A practical approach can be to start by following the major sources of funds — “following the money” by introducing oversight mechanisms over major areas of government revenue and expenditure.

These mechanisms need to be transparent, independent and capable of identifying indicators of fraud and corruption at an early stage.

For example, in many emerging economies, the largest spender in the country is the government on major projects such as building vital infrastructure. There is an expectation of a correlation between government expenditure with major suppliers on these projects and the level of tax that they pay. Oversight mechanisms that identify a disparity between the two indicate a possible shortfall in tax collections. 

Another example is the expected income from licensing fees and tax revenues from natural resources, such as oil and gas reserves. In this case, we have what economists call “an agency problem” — companies negotiating a set of rights for extraction against the government acting as agent on behalf of the country’s citizens.

With extensive reporting requirements for public companies, the problem of ensuring that the directors are negotiating in the best interest of their shareholders can be far less acute than ensuring than individual government officials are operating in the best interests of their citizens.

The Extractive Industries Transparency Initiative (EITI) — a global coalition of governments, companies and civil society — exists to address this challenge. It operates by a simple principle — the government publishes what they have received in revenues, and the company publishes what they have paid. An independent auditor verifies the accuracy of these figures. There are currently 26 EITI-compliant countries. 

EITI is one of many organizations with a mission to improve accountable management of public finances. There are networks of civil society, press, regulators and industry associations forming across the world and exchanging information to combat fraud and corruption.  

And there lay the answer for the Parliamentarian who faced the challenge of a parliamentary mechanism closed to her — the alternative of an overseas regulator who was very interested in evidence of a company in its jurisdiction paying bribes overseas. 

Read our article: Bringing fraud into focus