Expanding operations into foreign countries can be a great way for U.S. businesses to reduce labor and operating costs and gain access to new markets. However, it is important to be aware of the potential fraud risks that come with doing business in foreign countries. Some of the common fraud risks include:
- Corruption: In some countries, corruption is omnipresent. For example, officials may expect gifts or bribes in exchange for their cooperation.
- Hiring employees: You may face pressure to hire friends, family members and associates of government decision-makers. These job candidates may be unqualified for open positions and you might be pressured to pay them above-market rates so that they can provide a kickback to the official who “recommended” them.
- Cybersecurity: Hacking is particularly common when businesses employ individuals who don’t understand or simply don’t follow cybersecurity best practices.
- Intellectual property (IP): Some countries provide only limited legal protection of IP — or may not enforce laws that are on the books. This means rival companies could use your logo, patents, trade secrets and other IP without approval.
- Banking: Smaller banks in foreign countries may struggle to prevent sophisticated fraud schemes. According to McKinsey, risks for banks arise from diverse factors, including vulnerabilities to fraud and financial crime inherent in automation and digitization, massive growth in transaction volumes, and the greater integration of financial systems within countries and internationally.
It is important to familiarize yourself with the country’s culture and laws before making the decision to expand your business into foreign countries. You may also want to consider working with an attorney and a CPA experienced in fraud prevention who can help you navigate these risks and protect your interests.
If you decide to establish foreign operations, it is important to take steps to minimize fraud exposure. Here are five steps that you can take:
- Engage legal and accounting professionals who have clients and contacts in your destination country to inform you about the culture, business practices, politics, labor situation and regulatory environment.
- Identify and assess fraud risks. Conduct a fraud risk assessment to identify the specific fraud risks that your organization is likely to face. Evaluate the effectiveness of your internal controls in mitigating these risks. Once you are up and operating, add or revise controls as necessary to ensure that your organization is adequately protected.
- Conduct thorough due diligence on all potential suppliers, business partners, and major customers in the country before giving them your money, products, or trust. This due diligence should include a review of their financial records, reputation, and history of compliance with laws and regulations.
- Develop anti-fraud hiring policies and programs. Develop hiring policies and programs for foreign-based employees that include anti-fraud training. Ensure that your employee handbook specifies activities (such as accepting bribes) that will result in termination.
- Scrutinize IT and data security defenses to ensure that they are adequate to protect your organization from fraud. Work with experts to remediate any shortcomings.
Fraud Risks Vary by Country
Every country has a unique set of fraud risks. These risks can vary depending on the country’s economic development, political stability, legal system, and cultural norms.
In developed countries, such as the United States, Canada, Australia, Japan, the United Kingdom, and the European Union, common fraud risks include:
- Financial statement fraud:This type of fraud involves intentionally misstating a company’s financial statements in order to deceive investors or creditors.
- Corruption:This type of fraud involves the abuse of power for personal gain. It can take many forms, such as bribery, extortion, and nepotism.
- Cybercrime:This type of fraud involves the use of technology to commit fraud, such as hacking, phishing, and social engineering.
In developing countries, the fraud risks may be different. These countries may have weaker legal systems and less oversight of businesses, which can create opportunities for fraud. Some of the most common fraud risks in developing countries include:
- Embezzlement:This type of fraud involves the theft of assets by employees or other insiders.
- Trade-based money laundering:This type of fraud involves using international trade to launder money.
- Fraud against individuals:This type of fraud involves targeting individuals, such as through investment scams or identity theft.
It is important to be aware of the fraud risks in any country where you are doing business. You can take steps to mitigate these risks by conducting due diligence on your partners and employees, implementing strong internal controls, and being vigilant for signs of fraud. The professionals at Sol Schwartz & Associates can help you with the controls you will need to protect your business. They are also deeply experienced in financial statement audits.
Here are some additional resources that you may find helpful:
- The Association of Certified Fraud Examiners
- The Fraud Resource Center
- The Financial Crimes Enforcement Network