How can the GCC construction sector combat fraud?

Jumana Abdel-Razzaq investigates the prevalence of fraud and risk within GCC construction, in what many see as a growing challenge for our industry

Money worries: experts say financial pressures within the Gulf’s construction sector could contribute to increased rates of fraud.
Money worries: experts say financial pressures within the Gulf’s construction sector could contribute to increased rates of fraud.

The Middle East, and more specifically Gulf countries, have the highest instances of fraud within the construction industry of any region in the world. And with liquidity in the sector tightening, as a result of lower oil prices stalling the growth of major GCC economies, fraud cases have seemingly increased in countries like the UAE, Saudi Arabia, and Qatar, according to experts.

The rise in fraud cases in the region can be attributed to several factors, including aggressive expansion plans, massive infrastructure projects, and the wide prevalence of cash dealings.

Rebecca Kelly, partner at law firm Morgan Lewis, explains: “In the construction sector around the world, there is always a high prevalence of fraud; this is not unique to the Middle East. For the region, however, the difference is that a lot of the construction underway is government related, with high levels of government contracts being issued.”

Kelly says that though there is currently a high incidence of fraud across the GCC, it is important to note that there has been an increase in a particular type of fraud. Around five years ago, the majority of the fraud committed in the construction sector was seen in the procurements segment. Now, however, the industry is seeing more cyber-related incidents, both in the Middle East and at the global level.

Kelly did not believe there to be a link between oil prices and the increase in fraud cases in the region, however, and says that a shift to big data and technology has changed the types of cases we see in the industry.

Daniel Turner, associate managing director at Kroll, a global risk consultant, holds a differing opinion. He says that the biggest risk facing our industry is still posed by the procurement segment.

“There are poor controls around procurement,” he explains. “There will be more cases, I would imagine, and they will come out a few years down the line, as they usually would here in the region.”

Turner notes that key risks tend to be found at the individual level within a company, with the biggest challenges being the lack of proper audits, training, and awareness – especially when it comes to smaller firms.

Both experts agree that the UAE has the highest number of fraud and risk cases in the region, with above-average figures. Again, the majority of fraudulent activities take place within organisations at the employee level.

According to the Kroll Annual Global Fraud and Risk Report, approximately 70% of executives in the sector, internationally, reported that their company fell victim to fraud in 2016. The report also highlighted an increase in vendor, supplier, or procurement fraud as one of the most prevalent types witnessed in the sector, accounting for 28% of respondents’ accounts. But the more substantial figure was reported in cyber incidents, with 77% of global construction, engineering, and infrastructure companies having experienced this type of fraud in the last year.

Currently, the UAE has the highest number of fraud cases reported as of last year, with Saudi Arabia and Qatar coming in second and third, respectively, according to Turner. This is partly due to massive infrastructure developments happening in preparation for global events, such as the Expo 2020 Dubai and the 2022 FIFA World Cup in Qatar. And with a slower market and tighter budgets, such cases are statistically more likely to increase as controls lessen.

Poor reporting, a challenge faced by several countries due to their reluctance to be associated with fraud, also represents a challenge for the region’s construction sector.

Saudi Arabia, for example, in the last year, has faced severe austerity measures following the continued slump in oil prices. But again, it is difficult to analyse the level of fraud cases reported in the kingdom as data remains difficult to access. In fact, one of the biggest problems when it comes to reporting such incidents is a dearth of specialised agencies, or official central reporting bureaus in many regional countries.

Encouragingly, the UAE has, in the past few years, taken strides to take control of the increasing number of fraud and risk cases in its construction sector.

“In the Middle East, there is no central reporting bureau, but we do have government agencies that are responsible for investigating fraud,” explains Morgan Lewis’s Kelly. “By way of example, the Abu Dhabi Accountability Authority, and the Financial Audit Department in Dubai, are two separate entities in the UAE that investigate fraud cases by way of audits.”

These agencies, says Kelly, do not release statistics of the evidence of fraud, but instead provide data on how many organisations they investigate and audit, including government entities. Consequently, we can see that there has been an increase in the number of audits which, she believes, will bring down the level of fraud cases reported this year, in both the public and private sectors. The system used is said to be “quite rigorous” and has matured over the last several years.

Though these two organisations have been up and running since 2008-2009, they are now fully utilised, and the amount of audits performed have increased in the last 18 months.

Both experts say that it is difficult to predict whether or not the number of fraud cases will increase in 2017, but note that the issuance of new laws in countries like the UAE – in tandem with better reporting – could help to boost transparency. For example, a new law designed to counter the increase in fraud cases was passed at the end of 2016. Kelly continues: “This actually repeals a 1979 law that, from that time to 2016, had not gone through any substantial amendments.

“Because of technology and easier access to data and information, they have now increased the penalties – both through prison time and financial penalties – to discourage those from committing these crimes from the start.”

Kelly sees this as a substantial deterrent to those individuals or companies from committing acts of fraud, especially as standards in reporting have started to improve in the last year. Further deterrents for companies in the Middle East include the high price of reputational damage, and possible blacklisting, which could result in disentitlement to tender and massive financial losses.

“Fraud can be a taboo subject, and people don’t want the marketplace to know that they are suffering from such an activity,” says Turner, who adds that, when it comes to reporting, the majority of Kroll’s work tends to involve cases that happened several years prior to being reported.

“The types of cases that we are approached to work on are generally historic events, so people are more reactive than proactive, which is something that I haven’t seen change over the last few years,” he continues. “We’re usually called in for something that has happened one or two years ago.”

Both experts agree that reporting on the exact number of cases continues to be very difficult due to a lack of available data and the unwillingness of companies to report such incidents. As a result, the best way to prevent these cases in the first place is for firms to actively tackle corruption from the inside.

Turner comments: “What companies should be doing is investing in their internal controls, but [it can be difficult] to do that with tighter budgets. Any kind of financial pressure [can contribute to the creation of] a risky environment.”

Even so, both experts agree that to counter fraud in the industry, firms must invest in strong internal controls, audit teams, and training at the procurement level.

“These messages are still being communicated, but it doesn’t appear that a great number of people have taken them on board,” Turner laments. “Over the next few years, more fraud cases will definitely come to market because of the economic uncertainty.”

Both Kelly and Turner believe that there is plenty of work that still needs to be done. Turner concludes: “It just comes back to raising more awareness within firms, and enforcing an attitude to fight the internal corruption that is so prevalent in the construction industry.”

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