Despite increasing awareness of the problems fraud and corruption can cause, a surprising number of companies in China still leave themselves vulnerable.
Regulations on the overseas activities of Western firms combined with the outward expansion of Chinese companies are generating a better understanding of what constitutes unethical practices such as bribes and kickbacks – which can translate into fraud of one kind or another against otherwise legitimate companies.
But this awareness has not always been matched by similarly widespread strategies to combat fraud. This is due in part to the complexity of global businesses and in part to the ever increasing sophistication of the crimes.
One obvious area of vulnerability is exposed when global companies work with local distributors and lose control of a portion of their business.
"Say you make product X and, under Chinese law, you have to use a Chinese distributor to get it to the client," said Sam Porteous, head of China for Navigant, a global consultancy that offers investigative, due diligence and forensics services among other things. "What that distributor does with his potential client in a meeting is something you're not aware of or can control."
A KPMG study released earlier this year, which follows a similar survey done in 2003, found supply-chain fraud and theft of assets to be most common in China. Businesses operating in Hong Kong tend to have more efficient controls but they, in turn, are being forced to deal with new forms of computer fraud.
The study's most startling find was the lack of strategies for monitoring the behavior of local partners and take action if improprieties are identified.
A little more than half of companies investigate all reports but 67% have no internal audit resources, 66% do not do fraud risk assessments and 68% do not carry out any fraud awareness training.
This lack of awareness and concern cuts across organizations.
"If you do not have the tone right at the top, you are not going to get it right throughout the rest of the organization," said Grant Jamieson, a principal at KPMG in Hong Kong and co-author of the report.
Beyond that, the problem may simply boil down to ignorance, or a general comfort level with fraudulent practices that had developed over time.
Employees may not even be aware that bribes are unethical and see them as normal business practice, said Mark Bowra, the partner in KPMG China who wrote the report with Jamieson.
However, he did note that people are less tolerant of these issues than they were 10 years ago.
One way of dealing with fraud is to be aware of telltale signs, said Porteous. An obvious indicator is a high turnover of low-level accountants. Another is invisible production or distribution facilities "operated" by local partners.
While fraud perpetrated by local partners and distributors is common, it is perhaps less of a concern than fraudulent activity by inside staff. This kind of crime may be challenging to set up, but it can be hard to trace and incredibly damaging in the long run.
One investigation taken on by Navigant involved the head of the Chinese subsidiary of a multinational company. A rising star, he was left in almost complete control of the China operations. After a couple of years, however, allegations surfaced that led to the discovery that suppliers he had engaged were held by one family member or another. Unusually, all the accomplices had changed their names to hide obvious links.
Beyond the obvious costs associated with both internal and external frauds, the impact of a scam can multiply the damage to a business if it becomes public, said Bowra.
"The companies that we are acting for often have more concern with reputation than actual losses."