Technology in the fight against corruption

July 2021 | FEATURE | FRAUD & CORRUPTION

Financier Worldwide Magazine

July 2021 Issue

Bribery and corruption interfere with the proper functioning of competitive markets and erode trust in businesses. Worldwide, bribery is estimated to cost as much as $2 trillion a year, according to the International Monetary Fund (IMF), while the United Nations (UN) reports that the cost of corruption exceeds $3.6 trillion per year. In response, companies and governments are dedicating significant resources to fight these crimes.

There are tangible financial benefits to curbing corruption. According to the IMF, revenues are higher in countries perceived to be less corrupt. The least corrupt governments collect 4 percent of GDP more in taxes than those at the same level of economic development with the highest levels of corruption. It is estimated that if all countries were to reduce corruption in a similar way, $1 trillion would be gained in lost tax revenue, or 1.25 percent of global GDP.

Despite considerable regulatory progress in recent years, 2020 was a mixed bag for anti-corruption efforts. Authorities in the US brought 32 Foreign Corrupt Practices Act (FCPA) actions last year and imposed sanctions totalling $5.69bn in resolved matters. In the UK, the Serious Fraud Office (SFO) secured three separate deferred prosecution agreements (DPAs).

As the world begins to emerge from the worst of the COVID-19 pandemic, and government support begins to dry up, it is likely that instances of fraud, corruption and white-collar crime that may have slipped under the radar will begin to surface.

The fast pace of technology innovation enables new ways for bad actors to commit corruption – whether by exploiting opportunities on the ‘dark web’, leveraging the anonymity of cryptocurrencies, or by misusing well-intended technologies. Meanwhile, authorities struggle to keep up.

But the flip side is that technology also has as vital role to play in the fight against corruption. Tax authorities and customs agencies are using artificial intelligence (AI) and predictive analytics to detect and deter tax evasion. These potent tools can detect anomalies or patterns – for example in financial transaction data – better than any human compliance professional.

“To keep pace with ambitious, sophisticated bad actors, and to meet the rising expectations of regulators, companies are investing more into technology to augment their internal compliance programmes.”

In the UK, through its Connect system, tax regulators can use social network analysis and data mining that cross-references tax records to uncover fraudulent or undisclosed activity. A predictive algorithm identifies people considered to be at high risk of committing tax fraud and helps devise pre-emptive actions.

Distributed ledger technology (DLT), such as blockchain, could also have a big impact on reducing corruption in the future. The ability of blockchain technology to efficiently store data in a decentralised system provides enhanced security and transparency in transactions, as no one can illegitimately alter the data stored in the blocks.

According to the World Economic Forum: “Blockchain has emerged as the most promising disruptive technology in the fight against corruption. It possesses important features that can help anchor integrity in bureaucracies, by securing identity, tracking funds, registering assets, and procuring contracts.” To realise these benefits, however, central authorities need to embrace DLT technology, and global standardisation will be required to accommodate and incorporate blockchain technology into legal systems.

Companies, too, are reacting to the rising threat of corruption. To keep pace with ambitious, sophisticated bad actors, and to meet the rising expectations of regulators, companies are investing more into technology to augment their internal compliance programmes.

New technologies and techniques are being integrated to take advantage of the vast data companies collect. For example, advanced analytics can drive predictive modelling that helps companies interpret organisational data in complex business environments. According to Deloitte, behavioural analytics can be used to identify which types of employees or actions have the latent potential for risky behaviour.

Amid the uncertainty caused by COVID-19, it is inevitable that corruption will have thrived, affecting numerous pockets of the global economy. Healthcare, for example, has been particularly susceptible. Even before the pandemic, an estimated $455bn of the $7.35 trillion spent annually on healthcare worldwide was lost to fraud and corruption, according to the World Economic Forum. According to a NEMEXIS survey, most countries experienced corruption related to purchasing or gaining access to personal protective equipment during the crisis.

Although it may be some time before the full extent of pandemic-related corruption becomes clear, businesses have a lot of work to do in the months ahead.

Tech-powered, data-based anti-corruption solutions are critical to strengthening the safeguards necessary to mitigate corruption risks. By embracing data analytics and AI to assess patterns and behaviours, as well as blockchain to secure records and transactions, companies and authorities will give themselves a fighting chance of reducing crime and financial loss.

Richard Summerfield