Government response to crisis will up fraud, says study

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NEW YORK - Regulatory crisis responses and government stimuli such as the Obama administration's new American Recovery and Reinvestment Act (ARRA) have inadvertently provided fraudsters with increased opportunities, according to New York-based risk consultancy Kroll.

Kroll's latest 'Global fraud report' says a spike in fraudulent activity is leading to increased public scrutiny of how government funds are being spent and the affect of new regulatory rules rushed through amid crisis conditions.

"Those affected by the economic instability who are inclined to engage in fraudulent business practices will work to secure stimulus funds by any means possible," says Blake Coppotelli, senior managing director at Kroll's business intelligence and investigations practice.

"One prime area is infrastructure projects," says Coppotelli. "With the near collapse of the real estate and construction markets, traditional fraud and rackets, such as bribery, kickbacks and bid-rigging, will find a wealth of opportunity in the stimulus funds. In our experience, without extensive anti-fraud policies, oversight and enforcement, 10% of these funds will be lost to fraud and criminal activity."

Increased financial crime risks combined with recent regulatory gaffes - such as the US Securities and Exchange Commission's (SEC) double failure to detect the Madoff and Stanford fraud scandals - mean authorities will invest more in fraud detection.

"Following the recent spate of high-profile investment scandals, we expect to see heightened activity among the SEC and other regulatory bodies aimed at improving processes for spotting and addressing potential red flags," says Richard Abbey, managing director in Kroll's business intelligence practice. "In the meantime, due diligence and compliance best practices remain an investor's best defence against the increasing risks."

Kroll's report can be read here.