COVID-19: be alert to fraud, compliance and integrity risk during the crisis

While worldwide crises like the COVID-19 pandemic can bring out generosity and support in some, it can unfortunately bring out the worst in others – including those who take advantage of confusing situations in order to perpetrate frauds.

Some of the most brazen fraudsters during the coronavirus crisis have already generated headlines. Con artists who peddle bogus online cures and identity thieves who lure victims into clicking on phony links to access government benefits have drawn public scrutiny – and well-deserved public scorn.

But less flagrant, low-profile fraudsters are equally active during uncertain times, and the damage they can inflict is no less malicious. White collar criminals – including dishonest employees, managers and executives – are notoriously adept at exploiting crises. They recognize vulnerabilities and opportunities, and adapt their schemes to take advantage.

Today’s unprecedented business volatility and the distractions associated with massive public health and economic disruptions make it imperative that companies develop and adapt their anti-fraud strategies and deploy appropriate tactics to manage the rapidly increasing – and always evolving – fraud risks.

Fraud in a “normal” crisis environment

People behave differently during a crisis; their individual behaviors do not always correspond to way they would behave during everyday life. They are motivated by different emotions and follow lines of reasoning that are unlike those they normally apply.

During the 2008 financial crisis, for example, anxiety, fear, confusion and disbelief pushed some in the financial industry to make poor decisions about how they managed loan portfolios. Some crossed ethical boundaries. Others – including many investors – made unwise decisions, driven in part by panic and uncertainty.

Crises also tend to inhibit fraud detection activities. It is generally recognized that the most common scenario for uncovering an internal fraud scheme begins with a tip from a suspicious employee. During a crisis, however, those employees are more likely to either overlook ethical violations, or simply not bother reporting questionable behaviors because they are distracted by other concerns that they perceive to be more urgent.

It is no surprise that bad actors will use a crisis to delay, shortcut or skip control procedures. But under pressure of a crisis, even generally trustworthy employees can be tempted to override or circumvent controls "just this one time," knowing the likelihood of getting caught is decreased. This is particularly true when can justify their actions in their own minds as being a necessary, one-time response to an unforeseen emergency.