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Current trends
Companies and directors are being pursued by governments and other organ-
isations internationally. Moreover advisors are generally being more rigorous.
For example:
The World Bank (WB) is reinvigorating its anti-graft role but has been urged
to integrate more ˜corruption risk analysis™ into WB project developments;
The UN™s internal investigation arm has produced a report regarding procure-
ment operations that cover 31% of the value of all commercial UN contracts
over $5m. The report states that the UN may have lost $298m in contract
irregularities in respect of the value of $1bn of contracts investigated;
Corporate governance legislation and more active public prosecutors are hav-
ing an effect on bringing these matters to the public attention;
PwC™s Japanese business unit Chuo Aoyama PwC had to suspend its oper-
ations for two months as a result of investigations into allegations of failing
to detect and prevent accountancy fraud at the Kanebo cosmetics group;
Compass, a large UK-based caterer, has been hit by a second US lawsuit from
an international competitor (Es-Ko) claiming $369m in damages for lost busi-
ness through Compass™ alleged corruption at the UN;
In Bolivia, Repsol™s top two executives in Bolivia went into hiding when the
government there ordered their arrest on charges of oil smuggling and tax
evasion (Financial Times, 11 March 2006);
Columbia has sued Diageo, the UK drinks company, alleging that the company
threatened national security by dealing with known terrorists, money laun-
derers and drug traffickers (Financial Mail on Sunday, 7 November 2004);
After four big scandals in Germany involving blue chip companies Com-
merzbank, DaimlerChrysler, Infineon and Volkswagen the German regulators
have become much stricter; and
In Thailand the Thai prime minister threatened to scrap a contract for the
provision of baggage scanning equipment unless US-based GE InVision pub-
licly denied that government officials may have been offered inducements to
accept the deal (Financial Times, 5 May 2005).
Indirect risk may affect you:
Financing projects which have come under suspicion may have a negative
affect upon your reputation. For example, a report on India™s power sector
revealed that a UK bank had a loan guaranteed to the Nathpa Jharki power
project, which was said to be a ˜first-rate scandal™ after being investigated for
corruption and suspensions of building works by the Ministry of the
Environment and Forestry (MOEF) for violations of the Forest (Conservation)
Act 1980 (with Amendments made in 1988), and the Environment Act 2002.

Company codes
Bearing in mind the above it must be recognised that “ regardless of the legal
and moral drivers “ corruption represents a significant business risk. Companies
Chapter 7 “ Economic crime, bribery and corruption 137



that pay bribes typically win some short-term advantage, but pay a severe long-
term price:
They cannot complain if they do not receive what they had paid for;
Paying any bribe leads to further demands, from petty ˜grease payments™ to
major bribes to secure contracts;
By breaking the law they become vulnerable to blackmail, particularly if
there is a change of regime; and
Ending a corrupt relationship may lead to various threats, including violence.
Nevertheless bribery and corruption still continue often because:
Companies believe that bribes are part of ˜local custom™;
They think “ usually wrongly “ that there is no choice when faced with what
often appears to be official extortion; and
Executives often claim that “ though they dislike the practice “ they need to
arrange kickbacks to secure business to avoid unscrupulous competitors
from winning the contracts.
It is advisable not only to be aware of the legal and regulatory framework but also
to develop and have in place a corporate code (see further below) in the interests
of sustainable risk management whatever area, size or operational location.


International case study
The impact of international economic crime on doing business in today™s mar-
ketplace can be well illustrated by the trade link between the UK and India. This
is a topical example especially bearing in mind the importance of India as an
emerging market. The impacts affect a variety of different sized organisations.


UK and Indian economies
The UK™s economy is one of the world™s most regulated economies. London is a
hub of world trade and finance, and has world-class status in financial manage-
ment and probity. The UK is not historically a corrupt marketplace. The South
Asian population in the UK accounts for 2% of the GDP, and 10% of the UK™s
financial turnover. There are over 300 South Asian millionaires with personal
assets of over £4m, and the spread of such wealth in the southeast of the
UK amounts to some £8bn alone (Ethnic Media Group Rich List 2005). The UK
provides many opportunities for new economies such as India and China and
it is recognised that there is significant potential for investment from India in
particular.
India has the second fastest growing economy in the world, and may soon
have the world™s largest population. Furthermore, it is estimated that within the
next two decades, India will have the third largest economy in the world. In
terms of growth sectors, it is a world leader in telecommunications and the
pharmaceutical industry. India™s drawback is that it is a historically corrupt
Part B “ Overview of the Economic Aspects of Business Risks
138



marketplace, both in public and private sectors of the economy. By way of put-
ting this into perspective, in 2003, for instance, the National Crime Records
Bureau of India reported 2058 cases of corruption under investigation by the
Central Bureau of Investigation (CBI).


Off-shoring: UK and India
There is tangible evidence, not just a perception, that problems are emanating
from India that impact on confidence in India/UK trade. The Forrester Asia Pacific
Research Report 2005, for instance, raised fears regarding the security of customer
data at offshore centres. John McCarthy, vice president at Forrester Research Asia
Pacific, told reporters in Australia that thefts could result in a 30% reduction in
the amount of call centre work Western companies offshore to firms in India.
Case study (April 2005): three former employees of Indian BPO firm
MphasiS have been arrested for allegedly siphoning off $300 000 from Citibank
customers after stealing account details while working at an offshore call
centre in India.
Case study: in 2004 BPO firm Wipro lost a telemarketing contract with US
card issuer Capital One after an internal audit found that staff at its call centre
deliberately misled customers during sales calls.
Over half of UK consumers have been reported to be unhappy about banks
outsourcing customer contact centres to cheap offshore locations, according to
research conducted by Fujitsu Services (2005). The survey of 1000 consumers
from regions across the UK found that 62% were ˜concerned™ about the off-
shoring of call centres: issues around data security were a main issue. The popu-
lar media have been keen to exploit such stories, which culminated in the Sun
newspaper report of June 2005 concerning the HSBC call centre in Delhi.


The effects of globalisation
There is now a global economy, which transcends national and regional bor-
ders, with major global companies operating in every corner of the globe. The
consequences of huge advances in technology, the growth of e-commerce, and
the availability of cheaper modes of transportation have meant that we now live
in a shrinking world. It has facilitated the growth of trade, the movement of
goods, and the migration of the world™s population, generally from poorer
economies to richer ones. In the era of globalisation, borders are porous, infor-
mation technology speeds financial flows around the globe and trade barriers
have broken. With today™s situation, the movements of funds through illegal
means have become easier.


Organised criminal networks: the UK case study
The unprecedented movement of people for economic reasons has led in the
UK to a tremendous rise in the growth of unregulated cash rich businesses,
Chapter 7 “ Economic crime, bribery and corruption 139



which can be a front for organised criminal operations. Money laundering has
seen an immense growth in the last decade or so, in the UK in particular. By
way of example, mention should be made of the hawala banking system. It is
legal in the UK, and although hawala is illegal in India, it is still a very big area
of operation there, because of tight fiscal controls surrounding the movement of
money. Historically, an alternative banking system such as hawala offers cheap
solutions to the movement of money, and therefore competes with normal trade
and business. For example, in the UK there are about 1000 registered hawal-
adars, who are given only scant supervision by HM Revenue & Excise, thereby
giving immense opportunities for organised criminals to dispose of money
(NCIS South Asian Organised Crime Threat Assessment 2004). In India, accord-
ing to Mumbai police records, hawala (money laundering) transactions aver-
aged more than Rs30 000 crores (US$6.25bn) a year in the 1990s (Institute of
Peace & Conflict Studies: Article 974 of 7.3.03).




Growth of organised crime
Organised crime, which is defined by NCIS UK (2003) as ˜those involved,
normally working with others, in continuous criminal activities for sub-
stantial profit, whether based in the UK or elsewhere™, has seen unpreced-
ented growth in the last decade or so. It is estimated that in the UK it is
now worth upwards of £150bn (NCIS UK Threat Assessment 2005) while
in India it is a commercially accepted statistic that the amount of illegal
money (i.e. that which is based upon tax evaded income) is thought to
exceed 40% of India™s total GDP (Institute of Peace & Conflict Studies:
Article 398 of 5.8.2000).




Given that the UK is not historically corrupt, it is significant that the cost of
fraud in the UK is currently running at £40bn pa (£28bn in London alone) and
the cost of cyber crime here is £2.8bn (NCIS UK Threat Assessment & RSM
Robson Rhodes LLP Report 18.10.04) and rising. There is a gap in our intelli-
gence with regard to the actual cost of fraud within India, but with large global
companies, including banks, establishing large-scale business there, it is likely
to be significant.
It should be noted that organised crime groups within the UK and India
have become increasingly sophisticated in terms of logistics, technical skill,
and the scale and diversity of operation. It is often a multi-dimensional busi-
ness, with a spread of investment across all sectors of criminality. It is also
global business, imitating legitimate business in having stakeholdings across
international borders, often with a head office in one country and many branch
offices across a region or continents.
Part B “ Overview of the Economic Aspects of Business Risks
140




Criminal networks in India
In India the depth of penetration of organised criminal networks is likely
to be significant. For example, there are reportedly 700 legislators, includ-
ing 40 Members of Parliament, with criminal antecedents. More than 47%
of the representatives in local self-governments in Maharashtra have crim-
inal backgrounds; in states like Uttar Pradesh and Bihar, this is as high as
70“80%. This reveals that organised criminal activities are no longer lim-
ited to urban centres but have percolated down to the grassroots (Institute
of Peace & Conflict Studies: Article 974 of 7.3.03).



Such crime groups often have an SMT, middle management structure and
ground floor sales team just like their legitimate counterparts. The South Asian
crime groups in the UK account for about 15% of operations against the UK™s
900 criminal organisations (NCIS South Asian Threat Assessment 2004) and
about 20% of London™s 142 such groups (MPS SCD Criminal Networks
Prioritisation Matrix).
As regards India and the UK, most communities in India have representa-
tion in the UK not only because of the historical connections but also because
of globalisation. Many members of the newer communities from the subcontin-
ent in the UK do not have their status confirmed within this country, and are
therefore vulnerable from organised criminals living within their own commu-
nities, often coercing them into committing serious crime ranging from fraud,
money laundering, drugs trafficking and human smuggling.


Impact on fraud in London
In terms of serious economic crime committed by South Asian crime
groups within London alone, it is clear that they play a very significant
part of the total fraud committed there. By way of evidence, in 2004/5 they
accounted for some 25% of the detections for serious fraud and public sec-
tor corruption, investigated by the MPS™s SCD6 (Specialist and Economic
Crime Unit), and in 2003/4 some 38% (MPS PIB 2005).



When considering specific crimes, kidnapping within India also has an impact
on trade between the two countries. In 2003 the Histox Insurance Group indi-
cated the top 10 countries with regard to the frequency of kidnappings “ India
was ranked sixth. In 2003, for instance, there were over 20 000 people kid-
napped across India (National Crime Records Bureau, India). The effect of this
on risk to companies is significant when one considers the deployment of staff
to countries such as India, as well as the potential for coercion of employees to
commit economic crime. The fear of kidnap on British Asian business people
visiting India is also significant, as well as bad treatment by the Indian Police
Chapter 7 “ Economic crime, bribery and corruption 141



Service when they become victims of crime. Clearly this too has an impact on
the issue of confidence for UK/India trade, as the South Asian business com-
munity in the UK is so significant. Clearly any business considering inter-
national business opportunities should be aware of such issues when
developing its risk management strategy.


Key economic crime offences
* Identity theft/fraud (accounts for 40% of fraud offences in the UK alone);
* Infiltration of companies and finance houses;
* Corruption;
* Company fraud/theft;
* Investment fraud;
* Cyber crime; and
* Money laundering.



The effects on trade and business between UK and India
The risk assessment: UK and India
Overall, risks to trade from threat are generally low (but see reference above to
Forrester Asia Pacific Report 2005). However, it should be understood that the:

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