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Video transcript: Fraud, bribery, and corruption: Detection and prevention – are you at risk?

Transcript for a video about detecting and preventing fraud.

Title: Fraud, bribery and corruption: Detection and prevention – are you at risk?, Paul O’Neil, General Counsel, Serious Fraud Office

Paul O’Neil, General Counsel, Serious Fraud Office

What I am here to talk about today is I suppose to pass on a little bit about what we as an organisation have learned about detection and prevention of economic crime, broadly speaking, in the course of our prosecutions and investigations because I think the important point is it’s all very well to go through the criminal process to get a prosecution, to get a prison sentence, or to get a ‘not guilty’ verdict, but unless you’re learning something from that, as an organisation we need to do that, and we also feel an obligation to pass that on, otherwise a large part of what we’re trying to achieve isn’t being achieved.

So, are you at risk? That’s the first depressing question. We can flick through that pretty quickly. Almost certainly. I can say that through anecdotal evidence, I can say that from the fact that I have a job, and we are busy. But in terms I suppose of more direct evidence of what’s being seen out there, PWC do a biennial survey – the Global Economic Crime Survey, which came out in 2016 – a slightly blunt tool when it comes to New Zealand. It surveys globally; in relation to New Zealand, a relatively small sample of respondents, but still some interesting things that come out of it. For me, as a headline figure, I suppose, 40% experienced economic crime. That’s interesting in itself, but I think that misses out a large percentage of people who don’t realise they’re the victim of economic crime. Probably, as an organisation, we look at the statistics though, what stands out for us is more the way in which that economic crime is being detected because we’ve seen a real change in that. So, 42% of detections came from a tip-off, 33% were accidental.

So, you’ve got three-quarters of I suppose crime detection occurring through a means other than management controls. So, to go through those management controls as PWC did in great detail – we’re talking internal audit, suspicious transaction reporting, fraud risk management, corporate security, rotation of personnel, all down– such as, to the extent that, as I say, three-quarters of crime detection’s happening through almost ad hoc means if you like, or be it around the tip-off process you could put some structure around it. I suppose the important question is not whether those mechanisms that I’ve just listed out actually work, because they do, but why are they failing? And I’ll touch on that later, because I think that’s a really important question.

In terms of the bottom line though of why we’re at risk – at the risk of being blunt – it’s because money is attractive. Many of the agencies represented here will deal with large sums of money, either through a procurement process or just dealing with customers who place a significant value on the services they’re looking to see provided, and those significant sums of money are both a temptation and a target.

I also talk about gifts. The recent Auckland Transport case, and I’ll talk about the facts rather than going into my personal views on it, not least because it’s under appeal, but that case illustrated to us that we’re not just dealing with cash and we’re dealing with a broad spectrum of gifts – all the way from the free coffee, through to the dinner, through to the iPhone, through to the trip to Brazil, through to the brown paper bag filled with thousands of dollars. So, most people can point to that end of the spectrum and go, ‘that’s not OK’, but where do you draw that line? And in New Zealand we’re not particularly good at knowing where to draw that line, and even if we have a sneaking suspicion that’s not OK, we’re not great at reporting it. That said, overall, the experience in New Zealand, you may have seen publicly on the Anti-Corruption Index we’re number one along with Denmark, and in our three major trading partners – China, Australia, and U.S.A. – 46%, 28%, and 14% are the figures in terms of their experience of bribery and corruption. That compares to our percentage, which is 3%.

I would say, though, when we sit down as an organisation with the Ministry of Justice, with the Police, and we meet with our international counterparts, the first question they ask is typically, ‘you’re there on the Anti-Corruption Index – is it because you’re not good at spotting it or are you corruption-free?’ And it’s a really good question. I think we’d be naïve to be complacent about our place on that index; I also think that I suppose the face of how business is done in New Zealand is changing. New Zealand – Auckland, in particular, with the huge population growth – we’re seeing some fantastic new innovations, new ways of doing business, but we’re also seeing cultural changes with how business is done and it’s incumbent upon is as organisations and agencies to make sure that education around how business should be done is relatively complete, and I think it’s naïve of us just to ignore I suppose the changing face of New Zealand in that respect. And interesting, as well, the second-highest experience of economic crime is government and state-owned enterprises. Again, there is a bit of a perception that state-owned enterprises because ‘we’re in the public service, we’re fine, we’re free, we’re clear, it’s just those evil people at banks who are out there committing crime’ – that couldn’t be more false. So, that complacency is something we do need to stamp out, both in terms of what we see as the face of business in New Zealand and looking at our own organisations.

Probably leads me to a really important point – it’s very difficult to change the culture broadly, you need to start with your own organisation, and if you’re starting at your own organisation – I’ve got a room full of very senior people here – the tone starts at the top, and people typically – certainly I can speak on behalf of the SFO and before that the FMA, we have people who are passionate about what they do – they’re typically working for these organisations because – well, they’re doing it for the right reasons. They want to bring the best service they can to their customers and serve New Zealanders, and certainly members of the SFO are passionate about what we do. That said, we can’t be complacent and think that that general passion or that general ‘people are working here for the right reasons’ translates to some sort of immunity from economic crime – it really doesn’t.

We as an organisation – all organisations – should still think long and hard about how services are procured, how grants and public funds are made to organisations, and I suppose also, in terms of the tone from the top, what we do see is complacency at a senior level – from time to time – in relation to acceptance of gifts, how procurement is carried out, how conflicts of interest are observed both in terms of recording them and acting on them. It’s all very well to have good processes and have a beautiful conflict of interest register that’s impeccably filled out – does anyone actually observe what it says in the far end column? It says ‘keep this person away from this information’ or ‘these are the steps we’re going to take to ensure that this conflict is actually dealt with properly’. So, I suppose chief executives, general managers – they need to be express about their expectations of staff. It is setting example, but also communicating that very clearly to your staff because what we have seen within organisations is that unless it’s demonstrated that those expectations apply to people at the top, they won’t be followed. Staff won’t feel constrained by rules that people at the top aren’t following themselves.

So, in addition to tone at the top, know your risks. I think you do need to consider where your risks lie, and I talked about procurement, but the largest type of economic crime by a mile in the private sector is asset misappropriation. So, do you have valuable equipment which is portable? You may, you may not, but you need to sit down as an organisation and assess what your risks are, and if you know your business well – and you will – you’ll be pretty good at identifying what those risks are, but the number of people who don’t go through that process is alarming. I suppose, to go back to my earlier point about why the corporate control mechanisms fail, it’s because people get complacent and blasé about processes which they have in place. They share passwords, people sign without actually checking the document they’re signing, they bypass system controls, and also they trust people. And trust is very important – an organisation can’t work without trust – but that’s why a process needs to be followed rigorously and without favour. If it’s applied across the board, people won’t question it and say, ‘don’t you trust me?’ No, it’s the process that gets followed. Otherwise, there’s a real risk that, I suppose, breaching the system becomes the system. We had that in the Mighty River Power case relatively recently, where an informal system of procurement had come into place. Everyone knew it was outside the strict process because the individuals who were there were long-serving and were trusted – that was just accepted – and it had become established, and the breach of the system had become the system, and that’s where it fell over. Trust in itself isn’t a control – it’s an absolute essential for any organisations that’s going to run well – but just trusting someone isn’t an adequate control when it comes to economic crime.

The other interesting point – and this is interesting, particularly, given New Zealand’s culture – whistleblowers. I’ve said there in my bullet point, ‘be good to whistleblowers’. It’s an interesting point. We had the SFO conference where it was put to the head of the SFO in the U.K. as to whether or not we should be paying whistleblowers, because whistleblowers themselves really put themselves on the line and can ruin their lives, their careers to do the right thing, and he observed that it was – he could see the point, but it felt in some ways ‘un-British’ to pay a whistleblower. We actually had a person from the FBI who stood up and said it would be ‘un-American’ not to, and their experience was very much that it was money worth spending, and they did that in a very calculated way, they had a system worked out for ‘it’s this type of offence, it’s this type of whistleblowing, that translates to this type of payment’ and that still didn’t compensate people adequately in their experience for what whistleblowers might put themselves through. Now we don’t pay whistleblowers in New Zealand, but yeah, is it ‘un-Kiwi’ to do it? I don’t know. I could see us heading in that direction.

In terms of other things to look out for in what we see – other than people in stripy jumpers – is circumvention of controls, so people trying to go outside the systems and controls that I observed before. Also, unexplained wealth. It sounds silly, but in recent cases that we’ve looked at we have had people driving cars, going on holidays, acquiring consumable goods that just wouldn’t be sustainable typically on an ordinary salary. And – you know – it’s just a case of pausing. One of these sort of red flags, I suppose, in and of itself, doesn’t constitute cause to say, ‘this person is engaged in fraud’, but it should make people stop and think. Unexplained wealth is often one of those things where, you know, the neighbour’s door gets knocked on and they shake their head and go, ‘I always knew – he kept to himself but I always knew something was wrong’. But what we need to do is have people, I suppose, pause and think and act on these red flags if they’re seeing them. Basically, a lifestyle at odds with what that person’s doing for a job is something to have a think about and pause at a senior level and say, ‘what’s happening here?’

I’ll flick through that. Keeping it to themselves. This is something that you’ll probably all be familiar with within your organisations. Sometimes it can just be a way of working. You have people who just typically will work within themselves, but in a procurement context, where people try to own the relationship, I suppose, with that service provider, that can be a real red flag where people don’t want to let other people in on that particular arrangement. Unexplained payment or authorisation of invoices, as I say the number of invoice cases where we have people who sign off on them and say, ‘it’s case I trusted this person, they’ve worked here for X years’, they sign it but if you’re not reading it that’s absolutely meaningless. People avoiding decision processes or delegations, waiting to make decisions for when the person with the delegation is not in the office and just saying, ‘can you just sign this?’ or ‘I’ve signed it off myself because the person isn’t here just to save time’. Raising barriers around roles or departments key to procurement. Again, it’s just creating siloes where there aren’t siloes. Avoiding independent checks on processes. Isolated responsibility. Bypassing normal procedures. Circumventing processes or arguing special cases. All a way of saying the same thing really, which is if this person is looking to avoid the established process for achieving procurement or whatever the process might be, ask yourself, ‘why?’ And if they’re saying it’s a special case, ask yourself, ‘is it really?’ because that sort of challenge is what throws up the cases we eventually get to see – albeit too late.

In terms of other signs, what we do see is internal fraud is typically committed by people you trust. It’s very rare for the new person to commit fraud. It’s very hard. It’s often people who have been there a long time and either will bring their personality to bare, or rely on their experience, or just their weight of knowledge, I suppose, to influence other people. It can be really overt – to be frank, you see some bullies in what we do who have achieved their aims that way. Other people have charmed their way into it, other people have just relied on a body of experience, which compels people to trust them. But I suppose those types of features aren’t reasons not to question them. An unusual interest in a particular contract or contractor – that sounds really obvious, but, again, if people are really beating a particular drum for a particular person, that’s suspicious. Unexplained preference – that’s just going beyond the interest. People who don’t take time off. You may have internal rotation policies, certainly banks do. We see that as being incredibly effective. People who can’t bear to have someone else looking at what they’re working at for longer than two or three days at a time – an enormous red flag.

A couple of other things that I wouldn’t mind touching on – we often hear that someone’s delaying a referral to the SFO – and this is very much specifically about what we do – the employers want to complete employee investigations first. Look, professional service firms get employed and their thought that they’re going to provide the definitive report on what’s happened, they’ll complete that, they’ll get it nicely tidied up and then the referral can come to us. If you leave with nothing else today, it would be do not do that. Come to us at the first instance where you suspect fraud has taken place. You can often – it will be absolutely fine for you to engage in a parallel employment process, but for us to have, I suppose, notice of the investigation that’s already been completed effectively from an employment perspective is just – it’s incredibly unhelpful. Witnesses will have been talked to, stories will have be concocted, evidence will have been destroyed, and we’ll have just lost valuable time. People want to do the right thing; the right thing from an employment perspective – absolutely fine, get your professional advice, follow that process, but contact us.

And we will work with those professional firms as well; we will have the large accounting firms or private investigation firms – we’ll often be sitting alongside them, we’ll benefit from them, we’re not so arrogant as to say, you know, ‘we’ll do our thing, you do yours’ – absolutely not. We will work with them. But we don’t want to get to a process where they’ve finished and then we’re coming on board. A heck of a lot can actually be achieved if we’re working together.

I suppose we can also be flexible about how we proceed. We know that when we’re involved it’s not exactly a shining endorsement of a person or an entity; the three letters S, F, O tend not to bring good news – we’re well aware of that and we are good at investigating people in a confidential way, so I suppose start the conversation – if people have concerns around how we operate, then start the conversation, we’re willing to talk. Some employers – and this is in the public and private sector – never even get to that point. They complete the employment process, they go, ‘that wasn’t great’, but then they just dismiss the person, leaving them free to go on and be employed somewhere else. Look, certainly from a service to New Zealand perspective, don’t do that. If you get to the conclusion of a process – hopefully you haven’t got to a conclusion without talking to us – but if there is something there that you think constitutes fraud or economic crime, talk to us. The number of instances where the person who was engaged in fraud has been dismissed by one, two, three employers for doing the same thing – and they just wanted them off their books because they couldn’t be bothered with the employment hassle of it – it’s far too common. And that’s not to say that all the matters that get referred to us get prosecuted, that if you refer something to us it’s going to get tied up for years either with us or the Police or the FMA or [the Commerce Commission] – that’s not the case. We have an absolute discretion as to whether or not we prosecute matters. There is a public interest that says whether or not we do that, and that’s what guides us, but if the referral’s not made, none of those factors can be taken into account. We can’t even have the conversation with you. So, yeah, let’s arm ourselves with information and then we’ll have some conversations.

Also, the other thing, and this – if I might observe – is typically a Kiwi thing, people will look at it and say, ‘oh this isn’t much, I don’t want to bother them, I don’t want to trouble them’. Please trouble us; all complaints are welcome. It won’t surprise you to know we get some ridiculous complaints, but they’re good – if I wasn’t getting the ridiculous ones I’d be worried cos they’re a wide cross-section of people out there, we want the complaints to come in. We’re good at processing them. If we think it’s absurd or you shouldn’t have worried us, we’ll politely tell you that, but we’ll be grateful for you contacting us. So please don’t think that way.

The other thing, I suppose, I’ve talked a lot about what you guys can do and what can be done out there – what on earth are we up to? I suppose, on the back of the Auckland Transport case we worked very closely with Auckland Transport and with our panel counsel in that matter to sit down with their compliance officer, and to sit down with people in their organisation and other organisations like Auckland Transport and talk about our learnings, talk about the things they saw, talk about how they might have acted differently, warning signs, processes they might put in place, and that’s something I suppose we’re really keen to do on the back of prosecutions that we bring – to sit down and engage with an organisation and not just say, ‘prosecution done, hands off, onto the next one’. We want the learning to be captured, both by us as an organisation and the entity or the individual that we prosecuted. There must be lessons to learn out of that.

Also, we work with the OECD and the United Nations around corruption because they’re interested in what we do here, how we achieve such low levels of corruption, and we’re constantly reviewing our legislation to see whether it’s fit for purpose. We had the Organised Crime and Anti-Corruption Bill from a couple of years back which sought to fill some gaps in New Zealand’s legislation, which was important. That said, we still get overseas people coming in saying, in the case of foreign bribery, New Zealand still allows facilitation payments, which we do, basically payments made to make thing move quicker, albeit not in your direction – just for greasing the wheels, if you like – and in certain narrow contexts that can still be allowed. We’re told pretty firmly by overseas organisations that’s a legislative gap we should be filling, so that’s something that’s on our list of things to do. We also –  our approach through our Crimes Act is really broad-based, other jurisdictions will have an embezzlement crime, they’ll have misfeasance in a public office, they will have – speaking with some justice systems in Europe – they’ll have a system where if someone goes into public office they declare their assets, when they leave public office if they have an asset level that’s inexplicable – they have a percentage for working it out – the onus is on them to explain basically how they got that rich, which is an interesting method, and civilly they can pursue them unless they discharge the onus of saying where they got that wealth from. So, we’re open to, I suppose, legislative ideas.

We’re also open to working with other agencies. The SFO is not an island, we work with the FMA, we work with the Police, we work with the Commerce Commission, and in the area of bribery and corruption we don’t have a great body of case law because New Zealand’s corruption-free – no, probably not, it’s because we’re not good at reporting, detecting, and prosecuting it, and we need to focus on that. And in that sense, bribery cases, corruption cases, are really hard to prove, but that doesn’t mean we won’t take them. We will take hard cases because that’s the only way we’re going to make progress. But, I suppose to round it out, we can only take those hard cases with the assistance of you guys out there. Ideally, we’d like to prevent it, and we’d like to be at the top of the cliff stopping it. The controls I talked about can go a long way towards that, and the engagement that we’re asking for at a complaint level, at an investigation level. Pick up the phone, talk to us, we’d be very happy to hear from you.

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