Released on: April 28, 2008, 2:53 pm

Press Release Author: Kroll

Industry: Financial

Press Release Summary: The latest Kroll Global Fraud Report highlights the growing
danger of supply chain fraud to businesses worldwide.

Press Release Body: London, Monday 28 April 2008: As companies expand globally,
outsource business operations and add new IT systems, they become more vulnerable to
fraud, according to a report from Kroll, the world's leading risk consulting
company.
The latest Kroll Global Fraud Report highlights the growing danger of supply chain
fraud to businesses worldwide. Large companies have increasingly become "extended
enterprises" as they have globalised, outsourced, re-engineered their business
processes, brought business partners and vendors closer and specialised their
functions. The result makes them more complex and leaves them vulnerable to an array
of frauds ranging from simple theft, to the misrepresentation of inventory to fool
investors, through to counterfeiting, grey market diversion and piracy.
"Fraud thrives on complexity and companies are facing fraud from the very beginning,
on every single factor: raw materials, production, and delivery," said Richard
Abbey, a London-based Managing Director at Kroll. "Today's supply chains are a
multi-faceted, complex web of relationships and processes that often spans a number
of continents as companies become larger and more global in scope."
One sector that has suffered significant problems, with potentially dire
consequences is the pharmaceutical industry, as recent scandals in the US indicate.
Its increasingly complex patterns of production, distribution and sales make it
vulnerable. According to America's Food and Drug Administration (FDA) the volume of
fraudulent drugs in the supply chain has increased fivefold between 2001 and 2007
with fraudulent e-pharmacies raking in up to $6 billion per year. The World Health
Organization (WHO) estimates that roughly 10 per cent of drugs on the market
worldwide are counterfeit; as many as 25 per cent may be so in developing countries.
While companies work to secure their supply chains, thieves are working just as hard
to exploit the vulnerabilities. Cargo theft, for instance, is estimated to be a $12
billion problem in the U.S. alone according to the International Cargo Security
Council. Unfortunately, the thieves preying on companies aren't always on the
outside. Internal theft throughout the supply chain is a major risk as well.

Through its experiences helping companies investigate internal fraud issues in their
supply chain, particularly in logistics and transportation, Kroll has identified the
following red flags:
o Abnormal selection of vendors: When a single individual selects service
providers, related, controllable or illicit players can be chosen;
o Payments outside the normal accounts system: Be warned if payments are hand
delivered, approved manually or not accompanied by a proof of delivery;
o Unusual payment patterns: Falsified invoices rarely follow the same patterns that
come from honest suppliers. Watch for an increase in payments to one vendor, a high
number of transactions under audit thresholds or multiple invoices on the same day;
o Rates paid are out of line with the company's standing in the market: It is
difficult for a carrier that earns a fair profit to distribute part of their
revenues in kickbacks or illicit payments, so their charges may be higher;
o Unexplained lifestyle improvement: Luxury cars, trips or vacations with
suppliers, and purchases of real estate may all point to a problem; and
o Complaints or tips: Corrupt staff members try to get rid of non-conformers,
exclude them from the "in crowd" and marginalize complaints from co-workers.
"When red flags have surfaced, we've found fraud in some cases and incompetence in
others," said Mark Sullivan, a Chicago-based Managing Director at Kroll. "In every
case however, clients were paying millions - five to 25 per cent - more than they
should have for services rendered."
And as the paperless office becomes a reality, more and more businesses use
electronic media to store records and business data. Stefano Demichelis, a Senior
Director in Kroll's London office added: "Since it is relatively cheap and easy to
store information electronically, companies are holding on to data/information
longer, which increases risks for fraud due to the increased volume."


Web Site: http://www.kroll.com

Contact Details: To obtain a copy of the Global Fraud Report (April 2008) and learn
more about Kroll's services in this area, please send a request to
aboniche@kroll.com or go to www.kroll.com/fraud.