Financial Crime World

Vietnamese Businesses Brace for Fraud Risks Amid COVID-19 Challenges

With COVID-19 presenting operational, financial, and strategic hurdles, businesses worldwide, including in Vietnam, face an increased risk of fraud. In this article, we shed light on this issue and offer recommendations to help mitigate exposure [( source: Vietnam Briefing)].

Operational, Financial, and Strategic Pressures Amid COVID-19

In the midst of Vietnam’s most severe COVID-19 outbreak and subsequent economic repercussions, businesses struggle to manage their liquidity and mitigate operational disruptions. The global landscape’s instability heightens vulnerability to fraud. The pressure on multinational corporations (MNCs) operating in Vietnam is particularly high due to:

  • Economic downturn
  • Job losses
  • Reduced salaries
  • Family financial struggles

The Fraud Triangle: Pressure, Opportunity, and Rationalization

Intensified Pressure

The fraud triangle - a basic concept delineating the factors that perpetuate fraud - remains pertinent during the pandemic. Pressure, derived from the economic downturn and related consequences, intensifies. This increase in pressure can trigger employees to commit fraudulent acts, posing a threat to businesses.

Increased Opportunities

Opportunities for fraud proliferate during this period. Widespread Working-From-Home (WFH) arrangements and travel restrictions necessitate weakened controls. Essential business functions are undersupervised due to remote work, potentially leaving gaps for fraudsters to exploit. The onboarding and screening of third parties (suppliers and customers), which may lack proper due diligence, offers further opportunities for fraud.

Enabling Rationalizations

Rationalization plays a pivotal role in enabling fraud to occur. When faced with increased pressure and decreased oversight, individuals may utilize various justifications for their unethical actions, making fraud more likely to go undetected.

Common Fraud Schemes in the Context of COVID-19

Two common fraudulent activities in the context of COVID-19 are procurement and cash theft.

  1. Procurement Fraud: Trading and manufacturing companies, especially those heavily reliant on Chinese suppliers, must maintain heightened vigilance. Collusion between their sourcing teams and local management can lead to inflated procurement costs. To combat these risks, companies should:
    • Segregate purchasing responsibilities among different staff members
    • Investigate any pricing inconsistencies
  2. Cash Theft: Cash theft is a significant concern for businesses with a lean presence in Vietnam. Lean teams may struggle to properly segregate duties, particularly for functions related to issuing cash receipts and disbursing funds. Co-location of approval and execution powers for e-banking payments significantly increases the risk of cash theft. Vietnam-based businesses should prioritize:
    • Segregation of duties
    • Proper authorization procedures
    • Employee training

Preventive Measures Against Fraud

Implementing the following preventive measures considerably reduces businesses’ exposure to fraud:

  1. Segregation of Duties: Dividing tasks among various employees helps prevent fraud by limiting opportunities for collusion.
  2. Supervision: Ensuring proper supervision and maintaining a clear reporting line are essential for transparency and control.
  3. Internal Pricing Policies: Implementing clear internal pricing policies and allowing only authorized personnel to negotiate pricing can help prevent fraudulent sales practices.
  4. Periodic Inventory Checks: Regular stock counts and IT systems that monitor and automate inventory management help maintain accurate records and reduce the risk of inventory misappropriation.
  5. Reviewing Corporate Governance Structure: Properly configured corporate governance structures can ensure that segregation of duties and reporting lines remain effective control mechanisms.

Conclusion

As the increased risk of fraud during COVID-19 underscores the importance of evaluating risk exposure and taking proactive steps to mitigate threats. By following best practices and implementing effective internal controls, businesses can create robust infrastructures that support long-term success.