Middle East fraud and corruption enigma

Fabulous wealth, staggering poverty, political imbalances and ancient tribal cultures can worsen fraud and corruption. But some organizations and governments in the Middle East are beginning to take tougher stances.

The Middle East is a land of complex extremes: extravagant wealth and gleaming skyscrapers juxtaposed against stunning poverty and ramshackle homes. The region also has a byzantine relationship with corruption and fraud. Middle Eastern nations’ efforts to combat these crimes, which are as complex as the collective history of the area, require the participation of the private and public sectors. Fraud fighters might have difficulty in doing their jobs if their countries’ governments don’t enforce, for example, anti-money laundering (AML) regulations, and so their organizations might not have an impetus to increase their fraud risk management programs, their AML compliance programs and anti-fraud controls.

Sectarian strife and bloody conflict grip Yemen and Syria. But the United Arab Emirates (UAE) showcases engineering marvels built with petroleum profits. And Qatar prepares to serve as an unlikely host of the highest-profile sporting event in the world — the World Cup. Turmoil and success each carry unique fraud risks, whether it’s a lack of central authority incapable of preventing large-scale graft or fraudsters targeting the fabulously rich and exploiting international investment.

Saudi Arabia is demonstrating a show of force in its fight against fraud and corruption. In November 2017, Crown Prince Mohammed bin Salman (MBS) launched a massive anti-corruption crackdown by rounding up scores of the country’s princes, ministers and businessmen. He held some of them for months in Riyadh’s Ritz-Carlton Hotel and later moved some to a prison. MBS said the anti-corruption program was his “shock therapy” as he tries to overhaul the economy.

The campaign, which lasted until January, reportedly netted more than $106 billion. The initiative also led to criminal charges against more than 150 — 87 of whom confessed and reached settlements. Saudi Arabia also established a new financial reporting office to monitor state spending. (See “Saudi Arabia: Corruption crackdown ‘ends with $106bn recovered’ ”  and “Saudi launches a new anti-corruption office.”)

Transparency International’s (TI) 2018 Corruption Perceptions Index (CPI), which groups North Africa with the Middle East, gives the region a grim outlook. The CPI reports incremental progress in a few countries, but most nations in the area are failing in the fight against corruption.

Two of the war-torn Middle Eastern countries — Syria and Yemen — are ranked in the bottom five of the index. UAE, the country ranked highest in the region, just cracks the top 25, tying with Uruguay for 23rd place out of 180. TI’s regional analysis labeled Dubai a “money laundering paradise, where the corrupt and other criminals can go to buy luxurious property with no restrictions.” (See “Middle East & North Africa: Corruption Continues as Institutions and Political Rights Weaken.”)

French newsmagazine L’Obs published an exposé in September 2018 describing a UAE company’s facilitation of tax avoidance through the companies they created for clients that obfuscated the companies’ true beneficial owners. This should sound familiar in the wake of the 2016 Panama Papers and the 2017 Paradise Papers. Helin International FZE, based in Ras-al-Khaimah, UAE, created companies, trusts and bank accounts for more than 200 clients worldwide, including a European prince, professional athletes, Russian oligarchs and others.

According to L’Obs, Helin International transferred client wealth from offshore companies through networks of bank accounts before distributing the funds in the form of loans that were never repaid, prepaid credit cards, cash disbursements and debit cards registered in names other than the recipients. [See “ ‘Dubai Papers’: le prince et la philanthrope, duo au cœur du réseau de fraude fiscale,” (or “ ‘Dubai Papers’: the prince and the philanthropist, duo at the heart of the tax evasion network”) by Caroline Michel-Aguirre and Vincent Monnier, L'Obs, Sept. 5, 2018.]

Although none of the Dubai Papers’ articles published in L’Obs mention any Middle Eastern employees, managers or clients, the fact that the base of operations was located in the Middle East speaks to the global appeal of certain regional countries’ financial sectors, and the fraud risks that come with the international financial activity.

Responses to PwC’s Middle East Global Economic Crime and Fraud Survey 2018 indicate that even though fraud is increasing in the region, fraud awareness and anti-fraud efforts are also growing. Those who reported experiencing fraud in the region in the previous two years increased from 26 percent to 34 percent, but the number of organizations that have formal business ethics and compliance programs, and also performed a risk assessment within the previous two years, both increased — 82 percent and 77 percent, respectively. (See “Pulling fraud out of the shadows: A spotlight on the Middle East.”)

In an interview with Fraud Magazine, Amine Antari, CFE, managing director of business intelligence and investigations at Kroll in Dubai, spoke about fraud in the Middle East and efforts to combat it. “Countries in the Middle East in recent years have been actively revamping their AML/CTF regulations and taking necessary actions against financial institutions that are not following those regulations,” Antari says. “This is also driven by the Financial Action Task Force evaluations that have been conducted in certain countries such as Saudi Arabia and Bahrain and are to come to the UAE. We also noted an increased cooperation with Western jurisdictions to assist with international investigations and tracing of illicit funds.

Apparently, organizations in the region are spending more on anti-fraud programs, which mirrors Middle Eastern governments’ revamped regulations and increased international cooperation with their own increased awareness. According to PwC’s survey, 42 percent of organizations in the region increased the amount of money they allocated to combating fraud and economic crime over the past two years, and 49 percent planned to increase it over the next two years as well — outpacing the global average of 44 percent.

Potential solutions might not meet the same level of enthusiasm across the region. “Regulations [in] certain countries — UAE, Saudi Arabia and Bahrain — are quite similar in terms of financial crime laws and have evolved significantly in the past years. There are other countries in the region that are lagging behind and are far from being aligned with best practices,” Antari says.

Risks not necessarily consistent throughout region

“There are certain fraud risks that are common in the Middle East. It does not mean that they are not present in other regions as well,” Antari says. “For instance, third-party risk is significant for international companies. Many international companies would like to do business in the Middle East and have a tendency to use agents and intermediaries to try to win contracts. These agents and intermediaries sometimes conduct business in an inappropriate manner.”

In PwC’s survey, the most common out of 13 different types of fraud experienced by respondents over the previous two years included (in order) asset misappropriation and business misconduct (tied), consumer fraud, cybercrime, bribery and corruption, and procurement fraud (tied). Several of those categories could easily impact an international organization attempting to award or be awarded a contract in cooperation with a third party in the region.

In EY’s 2018 Global Fraud Survey, 22 percent of respondents from the Middle East would justify making cash payments to win or retain business; 16 percent indicated they were aware of a significant fraud in their company in the previous two years, which was higher than the overall figure of 11 percent. (See “15th Global Fraud Survey 2018.”)

“Companies have been looking for ways to mitigate their third-party risk, for example, by performing enhanced due diligence, adding right-to-audit clauses in agreements as well as putting the third party through a thorough onboarding, monitoring and periodic auditing-related processes,” Antari says.

Takeaways for fraud examiners

With no shortage of motivations for doing business in the Middle East, organizations must be aware of the fraud risks specific to the region and do their best to mitigate them with proactive efforts. In the countries less motivated to actively prevent financial crime through regulation and enforcement, organizations should conduct thorough due diligence to assess the risks of doing business.

In addition to scrutinizing potential business partners, these efforts should also focus on individual jurisdictions and their authorities’ attitudes toward fraud. Specifically, it’s worth analyzing how committed they are to prevention, whether they have the resources or capabilities to do so, or whether they benefit from an environment conducive to fraud elements such as bribery and corruption.

Taking steps to educate third parties about compliance requirements set forth in regulations such as the U.S. Foreign Corrupt Practices Act or the U.K. Bribery Act can help companies avoid liability for the actions of contractors during the onboarding process. Compliance training for contractors or other third parties might be necessary.

Also, rather than taking a contractor at its word regarding the existence of an ethics or compliance policy within the organization, actually examining the policy and its enforcement might help ensure its efficacy.

As with any other occupational fraud, these training and awareness efforts also demonstrate that a company takes fraud seriously and actively promotes a culture of compliance, which could potentially deter any inappropriate third-party behavior.

Mason Wilder, CFE, is a research specialist with the ACFE. Contact him at mwilder@acfe.com.