A monthly newsletter focused on real-world issues and practical strategies for the professional involved in investigations, computer forensics, and incident readiness and response.

In This Issue:

	From the Investigator's Notebook: Fraud Increases in 2009 as Reported in Kroll's Global Fraud Report
	News & Events

From the Investigator's Notebook: Fraud Increases in 2009 as Reported in Kroll's Global Fraud Report

There is no doubt the economic downturn has presented businesses across all industries with difficult and unforeseen challenges. As the global financial crisis continued to produce volatile business environments throughout 2009, an increasing number of incidences of business-related fraud began to surface. According to the Kroll Global Fraud Report Annual Edition 2009/2010, 85 percent of companies across industry sectors, including financial services, manufacturing, natural resources, consumer goods, and travel, have experienced at least one occurrence of fraud in the past three years, with the average total cost of fraud for each company totaling $8.8 million. These instances of fraud are broadly categorized and include activities such as money laundering, bribery, theft and vendor fraud.

The Economy's Effect
The logical conclusion is that an economic recession results in increased levels of fraud. However, that is not necessarily true as noted in the new Fraud Report, which polled 729 senior executives across 10 industries around the world. The Report highlighted that in times of downturn, it is the discovery of fraud that increases. While fraud levels remained mostly unchanged from levels reported in 2008, 30 percent of respondents reported that the current economic climate had directly increased their exposure to fraud over the past 12 months. The survey also found that fraud levels varied dramatically across sectors, with construction, engineering and infrastructure, manufacturing, and natural resources citing decreases in the levels of fraud, as industries closer to the heart of the financial crisis experienced significant increases.

It is no surprise that the global financial services industry has encountered the largest increase in fraud levels. The combined average loss for financial services companies surveyed over the last three years was $15.2 million, representing an 18 percent rise from the 2008 figure. In addition, over one-half of the financial services companies claimed the down economy has resulted in higher fraud occurrences. Somewhat less predictable is the rise in levels of fraud in the professional services sector. While this sector's total average loss as a result of fraud is well below the survey average, a surprising 86 percent reported increases in the number of frauds.

The financial services industry has, in general, taken a proactive approach to increased fraud levels with widespread investment in anti-fraud defenses. However, like many of the companies surveyed, budget constraints have hindered the investment in such programs. As a result, one in five companies in this sector—21 percent—experienced weakened internal controls. When recession leads to decreased profits, anti-fraud initiatives often seem to come at too high a cost. In the interest of economy, internal controls are decreased or eliminated. While short-term cost savings provide temporary relief from budget constraints, any incident of fraud is likely to create costs far beyond those of prevention.

Using Computer Forensics to Fight Fraud
Some computer forensic professionals are experts in fraud prevention. They uniquely understand intricate IT infrastructures and the complexities associated with determining digital fraud. As a first step, computer forensic professionals can identify an organization's vulnerabilities and risks. For example, computer forensic analysis allows the identification of specific areas of information systems that are susceptible to breach or create ample opportunity for fraud. Once risks are determined, forensic experts are able to develop and recommend a comprehensive plan of action in order to best manage the system effectively. This process includes not only expert detection of vulnerabilities, but also the advancement of methods and procedures that mitigate risks, and expert advice on how to best protect sensitive information.

The complexity of IT systems not only can result in areas of susceptibility, but can often make the detection of fraud extremely difficult. Evidence of fraud is often buried under insurmountable amounts of electronic information, and, unless one has the knowledge of indicators of fraud, fraudulent activity may go undetected. Computer forensic experts have the ability and knowledge to expediently sort through large amounts of information and detect possible incidences of fraud through the analysis of irregular transaction patterns, intentionally deleted or hidden information, or other questionable conduct.

When fraud has been detected, the mitigation of cost and information loss requires an immediate and efficient response. Computer forensic experts possess the knowledge and tools to efficiently analyze database transactions and other pieces of electronically stored information to uncover evidence of misconduct. In conducting investigations, computer forensic experts also possess the knowledge of how to best preserve electronic evidence for use in litigation, and to determine how to prevent such fraud in the future. Ultimately, computer forensics can uncover the type of fraudulent conduct, the length of time over which the behavior has occurred, what enabled the fraud to perpetrate, and the value of the impact.

Recession or no recession, fraud will continue to affect individual businesses and the global economy. Changing market conditions do not eliminate the risk of fraud. Instead, they produce different risks that may have significant impact on a diverse set of industries. While we hope that the worst of the financial crisis is behind us, as the market recovers the pendulum could swing to the other side and create new concerns. As businesses, the systems used to operate them, and the amounts of electronic information amassed by them become larger and more complex, the expert knowledge of professionals in the field of computer forensics will prove vital to the on-going fight against fraud.

To obtain a complimentary copy of the Kroll Global Fraud Report, please visit www.krollontrack.com/redir/fraudreport-II.asp.

Special thanks to Daniel E. Karson, Executive Managing Director and Counsel of Business Intelligence & Investigations for Kroll Inc., for his contribution in writing this article.

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News & Events

Webinar Tomorrow: Third Annual ESI Trends Report – ESI Management Is Top of Mind, But Effective Implementation Is Falling Short
According to Kroll Ontrack's Third Annual ESI Trends Survey, 6 in 10 organizations have a document retention policy, but they lack or are unaware of an electronically stored information (ESI) readiness strategy – leaving them vulnerable when faced with a flood of litigation or investigations. See how your organization stacks up against its peers. Join us at 1 p.m. EST on Wednesday, December 16, for an online seminar discussing the survey and what the results mean to you as an industry professional. For more information or to register, visit www.krollontrack.com/webinar-121609.

Download Kroll Ontrack's Recent Podcast, "The Economy's Impact on In-House Counsel & Metadata as a Public Record"
What effect has the economy had on in-house counsel's role, specifically with regard to managing electronically stored information? In this edition of the ESI Report, Kelly Kubacki, Kroll Ontrack Legal Correspondent fills in for Gina Jytyla and welcomes Everett Upshaw, Senior Litigation Counsel with Nokia and Lisa Spinelli, Legal Consultant for Kroll Ontrack, to discuss the expansion of corporate counsel's roles and responsibilities as a result of economic pressure and the need to streamline existing processes. In the Bits & Bytes Legal Analysis segment, Gina and Kelly will take a look at the discovery order issued in Lake v. City of Phoenix. To listen to the podcast, visit www.krollontrack.com/redir/1109IHC-MetadataPodcast-II.asp.

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We Request Your Input

This newsletter was written by Kelly Kubacki and Kelly Runkle, Kroll Ontrack Law Clerks, with assistance from Regina Jytyla, Kroll Ontrack Managing Staff Attorney. Ms. Kubacki can be contacted by writing to kkubacki@krollontrack.com.

For more information about e-discovery and computer forensics services, contact Kroll Ontrack at 800 347 6105 or www.krollontrack.com.