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  • Corporate Fraud & Corruption

Corporate Fraud & Corruption

28 April 2022

In the latest edition of InDepth Feature by Financier Worldwide  - Aakash Bassi  and Rahul Samdani from BDO UAE, discuss their perspectives on corporate fraud & corruption in the United Arab Emirates.

Q. To what extent are boards and senior executives in the UAE taking proactive steps to reduce incidences of fraud and corruption from surfacing within their company?

A. Organisations across the United Arab Emirates (UAE) have generally seen an increasing trend of enhanced efforts by leadership to prevent, detect and respond to fraud and misconduct, including corruption. More specifically, there is a concerted effort to detect and investigate corruption for various reasons, including a focus by law enforcement on corruption being a predicate offence for money laundering. This was further intensified by the recent news of large organisations in the UAE that came under the scrutiny of UAE law enforcement authorities for potential wrongdoing. Boards understandthat a culture of compliance is critical, and there has been an uptick in organisations developing and enhancing whistleblower and internal investigation protocols. Furthermore, the UAE criminalises bribery of government officials under Article 237 of the Penal Code. The public prosecutor is generally provided with extensive powers to investigate suspected violations of laws and regulations, with a specific focus on fraud and corruption. In the UAE, failure to report a crime is a criminal offence, which bolsters legal and regulatory expectations around reporting corporate fraud and misconduct.

Q. Have there been any significant legal and regulatory developments relevant to corporate fraud and corruption in the UAE over the past 12-18 months?

A. The pace of regulatory change and developments in addressing fraud and misconduct in the UAE has been fast, with the introduction of numerous measures to enhance ongoing laws concerning anti-money laundering (AML) and countering the financing of terrorism (CFT) and whistleblower protections, to name a few. In April 2020, the UAE’s Securities and Commodities Authority released the corporate governance rules for public joint stock companies listed on the Abu Dhabi Stock Exchange or Dubai Financial Markets. These rules require the development of an internal audit system, the appointment of a compliance officer and approval of related-party transactions – areas that are critical in managing the risk of fraud and misconduct. In February 2021, the UAE made key amendments to AML legislation with the UAE Cabinet approving the establishment of the ‘UAE Executive Office of Anti- Money Laundering and Countering the Financing of Terrorism’ (the EO). The EO reports directly to the Higher Committee overseeing the UAE’s national AML/CTF strategy, which is responsible for actively increasing information sharing between law enforcement agencies, supervisors and the private sector.

Q. When suspicions of fraud or corruption arise within a firm, what steps should be taken to evaluate and resolve the potential problem?

A. The implementation of a fraud prevention programme and defining roles and responsibilities at the senior management level are good initial  steps toward resolving potential fraud suspicion issues within a company. Effective detection is a key element of a fraud prevention programme. All organisations should deploy resources to carry out an effective investigation into potential misconduct. Further, appointing the right professionals to perform the investigation, including appropriate protocols, is key. Many organisations may not have appropriate in-house investigative capabilities and embark on an investigation to only realise the need for an outside expert halfway through the process, leading to a potential compromise of data and evidence. A poorly conducted investigation can be far more damaging than if the organisation took no action.Seeking assistance from outside subject matter experts, including privilege considerations, is critical in responding to and remediating misconduct. Lastly, augmenting policies, programmes and controls to plug gaps and weaknesses is a key step in preventing similar misconduct from occurring in the future, which is eventually germane to the ongoing effectiveness of a fraud prevention programme.

Q. Do you believe companies are paying enough attention to employee awareness, such as training staff to identify and report potential fraud and misconduct?

A. An effective whistleblowing culture goes beyond the implementation of a whistleblower policy and related protocols. It also includes instilling a sense of moral righteousness by promoting stories of courage along with continued organisational support to drive conversations that allow employees to raise concerns in good faith. The UAE has introduced a few pieces of legislation over the past couple of years around the protection of whistleblowers, including the ‘Witness Protection Program the UAE’, as approved by the Federal National Council in 2020. The new legislation aims to provide protection to individuals giving evidence in court and penalise persons who reveal or leak information about a witness. The legislation applies to financial crimes and crimes involving people holding public posts. Given this legislation, the whistleblower culture within the UAE has been on the rise, and companies are paying more attention to creating awareness in the organisation around identifying and reporting misconduct. That said, companies in the UAE can focus their efforts on creating a transparent policy that provides clarity around laws and regulations related to whistleblowing, and also ensure that the messaging and process is transparent to provide safety and confidence to employees.

Q. How has the renewed focus on encouraging and protecting whistleblowers changed the way companies manage and respond to reports of potential wrongdoing?

A. In the UAE, notable changes to the legislation for whistleblower protection have led companies to increasingly look to enhance their internal reporting protocols to grant employees confidentiality, anonymity and a safe space to identify and report fraud and misconduct, whether through a hotline or by submitting an online report. Additionally, companies are becoming increasingly open about asking for outside assistance in relation to whistleblower complaints. Lawyers and forensic accountants are being increasingly called upon to respond to reports of wrongdoing that involve senior management and the violation of laws and regulations, with a specific focus on allegations of financial crime.

Q. Could you outline the main fraud and corruption risks that can emerge from third-party relationships? In your opinion, do firms pay sufficient attention to due diligence at the outset of a new business relationship?

A. Companies with operations in the UAE should consider all financial and non-financial risks that may manifest due to third-party relationships. These include, but are not limited to, bribery and corruption, cyber risks, environmental, social and governance (ESG)-related issues and concerns, and violations of laws and regulations. Third-party risk management is still an evolving concept in the UAE. Many global organisations that have a presence in the UAE utilise centralised protocols developed in the home country for risk assessment and due diligence of third-party relationships. UAE-based companies largely focus their efforts on due diligence of third parties relative to AML and know your customer (KYC) requirements, including ultimate beneficial owners, and other related information available in the public domain.

Q. What advice can you offer to companies on implementing and maintaining a robust fraud and corruption risk management process, with appropriate internal controls?

A. An effective fraud risk management programme should help identify risks and proactively bridge gaps in the internal control environment. The coronavirus (COVID-19) pandemic has accelerated the need for robust fraud risk management, which includes a recalibrated risk assessment and anticipating changes in fraud risk factors. Senior management and the board therefore need to be on the lookout for changes in incentives and pressures and related opportunities that might give rise to potentially fraudulent behaviour. Having a strong tone at the top, including risk being a standing agenda item at board meetings, is likely to prevent any resultant losses from fraud. Additionally, culture is a good indicator for measuring an organisation’s susceptibility to fraud. Assessing the ethical culture periodically with a focus on how performance management and incentive programmes may create a high-pressure sales culture would help to proactively identify issues or red flags indicative of fraud or misconduct.