Supply Chain Fraud & Integrity

Transcription

1 Supply Chain Fraud & Integrity Hosted by United States Fashion Industry Association (USFIA) and May 17, :30 A.M. Eastern/5:30 A.M. Pacific

2 Do you have a question? During the webinar, all attendees will be assigned to listenonly mode. Please use the Questions box on your dashboard to ask a question during the webinar.

3 Supply chain fraud and integrity 17 May 2017

4 What do we mean by Supply Chain Integrity? 4

5 Supply chain fraud Nearly one-third of about 2,600 supply chain professionals said their companies experienced supply chain fraud, waste, or abuse the previous year, but only 40% had a program in place to detect or prevent these issues (Journal of Accountancy 13 April 2015)

6 What is it? Procurement Sales Suppliers Principal company Actors Manufacturing Airline/ocean lines International Procurement Office Warehousing Trucking/LSP Port/airport Airline/ocean lines Customs / OGA Principal company Warehousing Trucking/LSP Port/airport Customs / OGA Distributors

7 Examples 1. Suppliers colluding with company personnel to inflate prices in kickback schemes 2. Substandard goods ranging from vendors cutting corners and misrepresenting specs to product liability exposure: hazardous materials introduced in the production process 3. Embezzlement / conflicts of interest - company personnel setting up fictitious vendors as a vehicle to misappropriate funds 4. Soliciting entertainment, travel and charitable contributions from agents working on behalf of the company 5. Bid rigging: vendors engaged in influencing the outcome of tendering processes 6. Subcontractors submitting fictitious invoices in order to evade customs duties 7. Inventory thefts shrinkage (sometimes the security guard!)

8 Why does fraud occur? It is generally accepted that the following three conditions must be present for fraud to occur: Incentive or pressure Incentive fraud is often committed because perpetrators are in some form of financial difficulty or need (e.g. gambling, drugs, living beyond means, etc.) Pressure to meet loan covenants or forecast numbers Pressure to meet market expectations or targets Opportunity Incentive or pressure! Fraud Self rationalisation Rationalisation I m doing the company a favour. This will definitely enhance shareholder value Everyone is doing it I ll just borrow the money and return it later I deserve it since I ve sacrificed so much for the company Opportunity Nobody is really checking! Fraudsters are in the right position at the right time, and recognise and seize the opportunity They understand operations, policies and procedures, and have access to records/funds

9 Case Studies 9

10 Case study 1: Procurement Local group acquired by an MNC, which was later acquired by a fund. High pressure on speed and costs savings. Employees used any methods to achieve KPIs. Employees work with customs broker to generate customs pro forma invoices for customs declaration. Goods with licensing requirements (such as CCC or Licence A) are grouped and declared as other products. Goods with antidumping duties also grouped with other goods. Take away: Difficult to detect. Broker selection and performance review. Compliance should be part of KPIs.

11 Case study 2(a): Modification of import invoices Original invoice 1. Product A $12, Product B $32, Product C $28,000 Total: $72,000 Duty rates 1. Product A 3% 2. Product B 12% 3. Product C 6% Invoice submitted to Customs 1. Product A $55, Product B $ 5, Product C $12,000 Total: $72,000 Original Modified Product A $360 $1,650 Product B $3,840 $600 Product C $1,680 $720 Duty paid $5,880 $2,970

12 Case study 2(b): Modification of import invoices Purchases through Hong Kong related company. Hong Kong has no staff and place of business. All operations performed by the China related entity. Goods re-invoiced through Hong Kong using the Hong Kong company s letterhead at a much lower price. All the re-invoicing activities done in China. Warning signs: - Local invoices used for customs clearance rather than commercial invoice - Unwillingness to conduct broker / import compliance review - Claiming Customs dictated/required prices What could be done? - Periodic, random audit of import declarations - Reconciliation against accounts payable

13 Case study 3: Origin & transhipment Anti-dumping & counter-vailing - Goods are transhipped to claim false country of origin to avoid anti-dumping / counter-vailing duties Free trade agreement claims - Goods are merely transhipped and repackaged with no change in origin to claim FTA preferential tariff - Some logistics providers claiming abilities to evade anti-dumping duties Warning signs - Extra diligence on AD/CVD/high duty rate goods - Low Cost Country (LCC) price for non-lcc goods - Strange logistics routing - CoO provided for light assembly / mixing / packaging work What could be done? - Contractual protections - Add to vendor selection / quality audit process

14 Case study 4: Recommended hire Senior person pushed local staff to hire customs broker he recommended. Bidding process circumvented. No contracts. No KPIs. No periodic review. Goods are properly declared, and duty and VAT payments are properly supported by documents. However, turned out that the other charges such as inspection fees, etc. are significantly higher than market rate (x 10). Found that customs broker was related to the senior person.

15 Case study 5: Fictitious sales Company newly acquired by MNC. High sales target and revenue pressure. Goods are later sold back to the company. Fake transactions but official VAT invoices issued. Goods are sold to Director s related companies near end of each quarter to meet sales budget. 15

16 Case study 6: Payments to officials Background - Payments to avoid fines and penalties Warning signs - Customs/OGA problems that disappear - Former customs officials as independent consultants - Consulting fees on logistics/broker invoice - Travel or entertainment fees on logistics/broker invoice

17 Wrap up 17

18 Supply chain integrity Not Just Customs Regulatory Compliance Other Rules, e.g. FCPA, Anti-bribery, Export Controls, Sanctions... Cross- Functional Involvement Management of All Parties in the Supply Chain Required Breakdown in One Area may have Implications on Others 18

19 Steps that can be taken to help identify supply chain fraud Understand risks, business environment and local culture - Who are your customers, vendors and business partners? - What are the government touchpoints? - What controls are in place to prevent, detect and respond to fraud? Put yourself in the position of fraudster - How would I steal money - How would I manipulate the company s reported results Keep the fraud triangle in mind - Look for pressures - Be aware of opportunities Trust is not a fraud control 19

20 Important program elements to prevent supply chain fraud Written standards of conduct and detailed, localised policies Adequate training of employees and suppliers Reporting mechanisms and clear messaging of zero tolerance Spending controls, incl. multiple levels of review, spending limits, and detailed documentary requirements Supplier evaluation process takes into consideration compliance risk and includes appropriate levels of due diligence Have in place a contract management process which includes compliance language in contracts with suppliers / third parties Perform regular, independent internal monitoring 20

21 Finally, be sure to understand local business and cultural conditions Proliferation of state owned/related enterprises and government touchpoints Business heavily dependent on relationships Variable quality and integrity of business partners Gift giving culture Cultural reluctance to question bosses activity Collusion The culture may be different! 21

22 Your speakers today Derek Lee Partner Worldtrade Management Services China Tel : 86 (21) derek.wc.lee@cn.pwc.com Paul Tan Partner Consulting Forensic Services China Tel : 86 (21) paul.tan@cn.pwc.com 22

23 Thank you This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors All rights reserved. refers to the network and/or one or more of its member firms, each of which is a separate legal entity. Please see for further details.

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