As the pandemic recedes, will we see more instances of internal malfeasance?

Covid-19 has wrought havoc in the global economy in ways which we are only now beginning to understand. Shuttered businesses, furloughed employees, disrupted supply-chains and enduring uncertainty about the future all testify to the direct effect the pandemic has had on organisations  around the world, large and small. It remains to be seen whether the recent good news on global vaccine roll-outs and fiscal stimulus packages will be enough to save huge swathes of business in 2021.

But what seems certain is that 2021 will see an increase in the exposure of both employee and corporate malfeasance in areas such as fraud, embezzlement, and bribery. While some media sources report an increase in corporate whistle-blower activity over the last quarter of 2020, the  trend for the year seems to indicate a reduction in the overall number of concerns reported through corporate hotlines, suggesting increased home working may have an impact on willingness or ability to use reporting tools. Why should this be, and how is this related to the Covid-19 pandemic?

Put simply, it may be a case of “out of sight out of mind”. The shared space of the office does act as a barrier to employee malfeasance. The office gives us a sense of the collective, of being engaged in a team effort on behalf of the wider enterprise. For sure, malfeasance occurs in offices – historically, and frequently in some cases – but office working also restrains employee misconduct not only by reducing the physical opportunities for fraud but also because of the constant, if subconscious, awareness that we are visible. No doubt too it also  speaks to our innate desire to have the trust and respect of our colleagues as well as the constant, if subconscious, awareness that we are visible.

Home working on a large scale over the last year may have had an impact on this restraint. Detachment from the office – and from physical contact and exposure to colleagues, managers, and compliance officers – may influence an employee’s idea of identity and shared goals and values. The ties that bind in an office may have weakened, and a willingness to ignore or selectively interpret compliance policies may have increased. For example, employees concerned about job security may be tempted into opportunistic fraud as a hedge against future unemployment. Abuse of furlough schemes, diversion of money from governmental support packages and even low-level expense fraud appears to be on the increase.

Perhaps more worrying are indicators about the pandemic’s deleterious effects on higher-level corporate governance standards. Ensuring business continuity during the pandemic – especially for companies with complex international supply-chains – may have encouraged the dangerous notion of so-called compliance holidays, whereby the normal operation of compliance policies and procedures is informally suspended as a form of crisis management.

Moreover, Covid-19 has restricted the ability of compliance officers, auditors, and internal and external investigators to deal with allegations of fraud and corruption. Since early 2020 it has been almost impossible for them to jump on a plane and investigate whistle-blower reports in distant offices and business units as they would under normal circumstances. Remote working technology has certainly helped, but only to a certain extent. Investigative professionals would probably agree unanimously that interviewing a suspect or witness remotely is a necessary compromise, but no real substitute for the rich experience of the face-to-face interview which offers important atmospherics and body-language cues

As the high watermark of Covid-19 recedes in 2021, companies will not only get a clearer picture of financial distress, they are also likely to see unethical or criminal activity come to light that had previously been masked by the exigencies of getting through the pandemic. Preparations should begin now to deal with any unpleasant surprises in 2021. These should include:

1. Refreshing employee awareness of compliance policies and procedures, and the methods available to report ethical and integrity concerns such as hotlines and other reporting tools.
2. Conducting appropriately-focused fraud risk audits on areas of the business likely to have been most impacted by the pandemic. This may be especially pertinent for recently onboarded suppliers and other third-parties where the pandemic-driven exigencies may have curtailed normal onboarding procedures.
3. If compliance holidays have been in operation – even informally – ensure that these come to an end immediately; as a corollary to this, ensure that all due diligence programmes are refreshed and expedited where necessary, and that the corporate fraud policy is reviewed and updated.
4. Review staffing and resourcing for second- and third-line of defence activities across the enterprise, identity where gaps exist and develop a plan to ensure that the company can respond effectively if major compliance breaches related to the pandemic come to light.
5. Ensuring that employee safety related to travel is maintained, while allowing for a return to on-site investigation of reports of major instances of employee and corporate malfeasance.

By Paul Doran, Director of Investigations at Aperio Intelligence

paul.doran@aperio-intelligence.com