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In international trade, ‘nobody’s hands are clean’

Canadian companies’ biggest foreign exposure to fraud is in emerging markets, says Mike Savage, a partner at Ernst & Young in Toronto.

Fernando Morales/The Globe and Mail

During his 25-year career, mining engineer Joe Ringwald has done business everywhere from Mexico to Eastern Europe to Africa. When it comes to corruption, what he's seen has left him shocked.

"People say right in your face, 'I want this and then I'll help you out,'" says Mr. Ringwald, who is president and chief executive officer of Selwyn Resources Ltd., a Vancouver-based mining exploration and development company.

As a director of the Canadian chapter of Transparency International, the Berlin-based, non-profit anti-corruption organization, Mr. Ringwald isn't pointing fingers. "I have personally encountered corruption by local government, national government, civil society and business," he says. "Nobody's hands are clean in my mind."

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But he has also heard Canadian companies working abroad make excuses about their lack of an effective program to guard against corruption and other fraud. "It really isn't that difficult to do," he says. "It just requires a conscious effort to initiate it, develop it in their company and monitor it."

Although fraud ranges from bribery to theft by employees, combating it in foreign business operations isn't prohibitively complex or expensive. Acknowledging potential hazards, enforcing clear policies and ensuring proper local oversight can greatly reduce the risk, experts say.

Canadian companies can't afford not to act. Every year the typical organization loses 5 per cent of its revenue to fraud, according to a 2012 survey by the Austin, Tex.-based Association of Certified Fraud Examiners. The same poll put the median loss in an occupational fraud case at $140,000 (U.S.), with one-fifth of all cases costing $1-million (U.S.) or more.

Bigger Canadian corporations that are used to doing business overseas have sophisticated antifraud programs, says Peter Dent, a Toronto-based partner with Deloitte & Touche LLP and national leader of the firm's forensic services practice. Many of them are mining and oil-and-gas companies, but their junior counterparts can be far more vulnerable, Mr. Dent warns.

Maybe they are embarking on their first big project, or "they're starting operations in a jurisdiction where they have no familiarity, and they don't have a lot of money to spend on robust compliance or control programs," he said.

Canadian companies' biggest foreign exposure to fraud is in emerging markets, says Ernst & Young partner Mike Savage, the firm's Toronto-based Canadian leader for fraud investigation and dispute services. Those countries present three big fraud risks, Mr. Savage explains: asset misappropriation, corrupt business practices and financial statement fraud.

With financial statements, local accounting practices simply might not match Canadian ones, he notes, but there could also be a fraud risk. "It's fairly easy to take advantage of a finance organization in a foreign country that applies local standards as opposed to Canadian standards and to exploit that to perhaps report better results than might be warranted under Canadian standards."

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The first step in developing a strong foreign anti-fraud program is to acknowledge that doing business abroad might be different and adjust internal controls accordingly, Mr. Savage says.

Policies are the second key step. As soon as possible, a Canadian company that has bought an overseas operation should integrate accounting standards and business policies and procedures, Mr. Savage says.

Requiring people to absorb the latter is crucial: "Translating the policies and procedures into the local language, having awareness workshops or training sessions can be very helpful in making sure that people have a good understanding of what's allowed and what's not allowed."

Deloitte's Mr. Dent recommends appointing an employee locally to provide fraud oversight. That person may come from Canada, but they need to speak the language, he stresses. "If you place somebody into those jurisdictions who doesn't speak the local language and you put them in an oversight role, they're already behind the eight ball."

Oversight includes electronically monitoring everything from purchase orders to travel expenses for signs of fraud, says John Verver, vice-president for product strategy and alliances at ACL Services Ltd., a Vancouver-based provider of compliance, governance, audit and risk software. "Increasingly what we see with our customers is that it involves monitoring of transactions."

For Mr. Savage, focus is the third main element of an antifraud program. "Rather than trying to boil the ocean and cover everything, focus in on the key areas where things are going to be different and where there is a big exposure," he says.

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But when venturing abroad, companies often try to learn the lay of the land on the cheap, Mr. Dent says. "And many times, they rely too much on individuals within the local environment to advise them." If a company goes that route, it should verify that candidates aren't connected to the government officials that recommend them or acting as conduits for bribe payments.

Canadian businesses must also remember that one size doesn't fit all. "What's going to cost you a very little bit of money providing antifraud programs in a country like France or Germany or Japan is going to cost you a lot more money in a country like Guinea-Bissau or Russia or Indonesia," Mr. Dent says.

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