Authors: Alexandru Ene-Dragan (Partner, Head of Compliance & Litigation, Noerr), Oana Piticas (Coordinator White Collar Crime Practice, Noerr), Gabriel Zgunea (CEO, Corporate Intelligence Agency)

As anti-fraud specialists that witness on a daily basis how our clients struggle with corporate fraud, we have always encouraged them to develop and nurture compliant cultures. We have advised them on the great benefits of a compliant work environment and a tailor-made compliance and risk-management system. But first and foremost, we have tried to teach them that fraud is not to be seen as an inevitable cost of doing business.

However, upon taking a deeper look at what has until now been presented as a mere myth, we cannot avoid asking ourselves if, especially in certain cultures like ours, fraud should not indeed be considered a normal cost of doing business. As harsh as this might sound, taking a country’s economic and sociological background into account may cause us to realize a cruel reality: in most sectors, corporate fraud is unavoidable, and managers and shareholders are more often than not forced to direct their budgets towards reactive measures rather than prevention strategies. A major factor in this is the legal system and overall public prosecution environment in which a company exists.   

Without trying to put legislators or prosecutors in a bad light, we have summarized below our main difficulties when it comes to developing and sustaining a compliant organization:

*1 Public funds and assets are still considered more valuable than private funds and assets

Every manager or shareholder who has faced even one case of corporate fraud has found it necessary to examine the issue of whether or not to file a criminal complaint against the internal perpetrator. Once properly advised by its consultants on whether the fraud case is of a criminal nature, the manager or shareholder changes the focus to the practical challenges of filing and sustaining a criminal complaint, and not the legal difficulties. Is anyone going to even bother looking into this complaint? Are prosecutors actually trained to understand the differences between the public and the private sector? Are the costs of sustaining this criminal complaint going to exceed the damage to the company? Do I even have an obligation to file a criminal complaint in order to protect the company? And these are just the most basic questions a manger is forced to address.

Managers and shareholders doing business in Romania are well acquainted with the reluctance of the Public Ministry to invest in prosecuting corporate fraud cases. They fear, and not without good reason, lack of interest, public corruption, gross incompetence (especially if the fraud requires some knowledge of civil or corporate law), extremely long and often fruitless investigations and therefore wasted lawyers’ fees. 

As a result, most companies refrain from filing a criminal complaint, even though the fraud perpetrated against them is clearly of a criminal nature, and even though the damage is extensive. Moreover, if a manager or shareholder compares all this with, for example, the reaction of the Public Ministry when faced with a tax evasion suspicion amounting to a similar amount of damage, the only thing that would come to mind is frustration and a sense of helplessness. As a result, more and more companies are forced to give up the illusion of public help, and end up initiating tedious and extremely expensive internal investigations and disciplinary procedures. Which brings us to number 2 on our list:

*2 Dismissing a fraudster is more expensive than ever

By fraudsters we mean the regular thief, the employee who has a keen eye for embezzling schemes, or, generally speaking, the employee who somehow believes that the work environment is a good place to gain more than a salary. A fraudster under this definition is unfortunately a typology that every company comes across at some point.

With this in mind, let’s paint the following scenario: a manager has done a lot of research on how to build a strong compliance culture; he or she has even gone the extra mile and allocated a generous budget for protection systems, highly trained personnel and sophisticated consultants, all working together to develop the illusion of a bulletproof compliance system. But, as often happens, one day this manager encounters serious reasons to suspect kickback schemes, nepotism, conflicts of interest, abuse of trust and breaches of internal guidelines. Maybe one employee who is more versed and has been given a C-level management position has decided to commission a friend’s company to provide services for the company, and these services suddenly become somehow more necessary or frequent (company cars or machinery suddenly need more repairs, some company resources seem to run out much faster, etc.). Or maybe this C-level manager has worked his way through the well organised compliance system and found an inventive way to use the company assets for his or her personal benefit.

After carefully analysing the damage the company has suffered, the diligent manager in our scenario soon prepares for an upcoming disciplinary investigation. But the following difficulties arise:

• A six-month statute of limitation period for applying any kind of sanctions to an employee, although this six-month period is somehow always much shorter than the statute of limitations for the offence committed by the employee. Every manager working with a large number of employees knows that discovering, understanding and documenting a typical fraud case requires much more than six months;
• If relevant proof consists of witnesses, i.e. other employees, they might soon be paid off by the fraudster or simply be afraid of or uncomfortable with putting what they saw in writing;
• What about filing a criminal complaint? It might seem a logical solution, but in fact, it is illegal to dismiss an employee against whom a criminal complaint has been filed. So even if the manager decides to do so, dismissal is an option only after some years, when the formal investigation is over and the case has been sent to trial (assuming the damage is obvious and the prosecutor is very cooperative and understands the situation).

So it is not at all surprising that managers end up negotiating an amicable severance agreement and sizable severance payments with a fraudster, who, from a legal perspective, turns out to be impossible to fire. Indeed, more and more companies budget severance payments in advance because, after they have exhausted every legal possibility available to them, these payments are still the most cost-efficient solution.

With this in mind, and on a more humorous note, we would like to conclude by saying that compliance seems to be more and more a formal engagement companies are forced to make towards non-compliant employees and public authorities. And as long as this responsibility is not shared by all participants and strongly supported by legislative and judicial systems, we can no longer blame companies who consider fraud to be a… very expensive inevitable cost of doing business. 

But even so, a manager’s diligence and the quality of the advice he or she receives makes a great difference in the amount of such cost. Yes, some corporate fraud is unavoidable, but most of it can be foreseen and prevented. In-depth assessments of company vulnerabilities, especially when performed by specialists trained to identify them, and quick reactions to fraud suspicions are the two most effective ways to fight corporate fraud. Periodic assessments are recommended, and assessments performed upon restructurings or changes in business operations are a must.

Moreover, as per the Association for Certified Fraud Examiners, the average duration of a typical fraud case is 14 months. So even for those fraud cases that cannot be prevented, there is a significant difference between the damage caused by fraud caught in its early stages and fraud discovered too late.