EXCERPT – The Types of Business Fraud (and Why Product Fraud is a Challenge)

Addressing food fraud requires commitment. The strategies and responses are hard to put into broad categories. The typical crime-fighting responses usually don’t directly apply. The regular food safety practices are ill-fitting tools. And it is an odd type of business fraud.

Trying to manage food fraud – and more broadly, all product fraud – is just so interdisciplinary, complex, and novel that, historically, little was done except complaining and catching the bad product. There is often a frustration point where the countermeasures just turn to rapid detection after the next incident and then trying to punish the bad actors.

A quick review will show why product fraud often gets left off corporate business fraud assessments and strategies.

Excerpt from Food Fraud Prevention  (Spink, 2019):

Overview of Business Economic Crimes Including Fraud

It is logical that food fraud, product fraud, and product counterfeiting have NOT been a primary focus of business economic crime or fraud investigations. The nature of the food fraud risk and root cause are so different from that of the other types of business fraud problems that the current investigation or auditing fundamentals do NOT apply. A review of the types of business fraud often includes the likes of (PWC 2007, 2016):

  1. “Asset misappropriation including embezzlement and deception by employees
  2. Accounting fraud either to benefit the enterprise or a specific business function
  3. Corruption and bribery including racketeering and extortion
  4. Money laundering of a wide range of revenues
  5. IP infringement (a general category for Intellectual Property related issues) including trademarks, patents, counterfeit products and services, industrial espionage, etc.”

The first four would be investigated using forensic accounting and forensic audits. The investigation processes for these four are traditional accounting audits, whereas the fifth requires completely different activities, expertise, and skills. The fifth is a catch-all category for all intellectual property infringement beyond trademark and patent where the investigation would include market monitoring, field investigations, or other analysis.

The first four types of business fraud generally occur within the company or at least at their facilities. The audits would occur inside those proprietary known locations or on those known computer systems. The fifth category of incidents probably occurs outside the company facilities and proprietary computer systems.

Also, the first four occur on a relatively frequent basis, and the methods of responses are very similar. Known assessment methods or standard operating procedures could be used to investigate the incidents. For the fifth, there sometimes appears to be as many types of fraud incidents as there are fraudsters.

Finally, for the first four, there is a lot of research, data, and analysis of the quantitative, analytical assessment of how much occurs. There are specific methods to analyze the extent of the economic impact. For the fifth, the losses are often unknown and possibly unknowable. There is even debate on the confidence in estimates of the economic impact of counterfeiting and piracy, see OECD (2007). Also, there is uncertainty as to how much an IP infringement actually costs the company. There is reduced legal liability if someone is injured – as long as the offending product can be confirmed a counterfeit. Also, even lost sales are hard to quantify since abnormally low prices attract some buyers (e.g., a bulk product “near expiration” and “selling at a deep discount”) or some consumers actually seek counterfeit products (e.g., fake luxury goods).

Takeaway Points:

  1. Food fraud is a problem that has occurred before, so regardless of the complexity of the response, a Board of Directors expects ALL these types of business problems to be assessed and managed.
  2. Food fraud prevention requires a fundamentally different approach than used for addressing other business problems.
  3. Fortunately, there is a growing body of resources that can help to develop, implement, and manage food fraud prevention efficiently and effectively.
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