Fewer businesses falling victim?
In 2008, fewer businesses in Norway reported being the victim of one or more forms of economic crime compared with 2003. Furthermore, the businesses that have fallen victim have also been subjected to fewer crimes. This reduction can be due to an actual fall in economic crime, or because companies were more likely to class such actions as crimes five years ago. The reduction applies to most types of economic crimes, and particularly to serious fraud.
In 2008, slightly more than 17 per cent of businesses reported having been the victim of an economic crime. Five years earlier, the corresponding figure was around 22 per cent. The results are taken from the “Businesses as victims of economic crime” surveys. With a net sample of more than 1 800 businesses in both surveys, the reduction is statistically significant. However, a degree of uncertainty surrounds what the businesses consider to be an economic crime (see text box).
About the survey
The “Businesses as victims of economic crime” survey was first conducted in 2004 for the year 2003, and repeated in 2009 for the year 2008. The samples in both surveys consist of 2 000 businesses with five or more employees, extracted from the company level of Statistics Norway’s Central Register of Establishments and Enterprises (CRE). The participation rate in both surveys was extremely high; 92 and 94 per cent respectively. For more information, see Ellingsen and Sky 2005, and the forthcoming report (Ellingsen 2010).
The term “economic crime” as applied in the surveys, means, in principle, the forms of crime covered by the survey, which are the same crimes on which The National Authority for Investigation and Prosecution of Economic and Environmental Crime in Norway’s work and crime statistics category of the same name are based (see separate text box).
Company size is a factor that is considered to be of major significance to a business’ vulnerability to economic crime. In order to align the skewedness in the sample in connection with the analysis of the results, the sample was weighted with regard to number of employees.
All of the companies were asked if they had been the victim of seven defined forms of economic crime, from serious fraud to price fixing. They were also asked if they had been subjected to any other form of economic crime (see text box for the crime categories).
In the 2003 survey, slightly more than 6 per cent of businesses reported being the victim of “other forms” of economic crime. By 2008, the share had fallen to just 4 per cent. This response category is slightly problematic in relation to what is deemed an economic crime. A further analysis of what type of crime the respondent is referring to shows that in many cases the crime in question would not normally be defined as an economic crime. For instance, a number of businesses reported events such as robberies or pilfering in 2003.
A clear fall
The problem is greatest among the businesses that have only been subjected to these “other forms” of economic crime. These make up between 3.5 and 4 per cent of the businesses in both 2003 and 2008. If we exclude these cases, the number of businesses that fell victim to economic crime in 2008 falls to 13.5 per cent, from 18.5 per cent in 2003. This reduction is also statistically significant. However, not all crimes reported under the category “other forms of economic crime” can be excluded by applying the criteria “not normally defined as an economic crime”. In order to highlight the uncertainty, we estimate that approximately 20 per cent of the businesses were the victim of an economic crime in 2003, compared with roughly 15 per cent in 2008.
PricewaterhouseCoopers’ findings open to debate
This does not concur with the picture created by certain other surveys on this subject. The most commonly quoted survey is that conducted every two years by auditors PricewaterhouseCoopers (PWC 2007, PWC 2009). The heading in the most recently published report is “Higher incidence of economic crime during economic slumps”. Their 2009 survey reports 25 per cent of the businesses as being the victim of an economic crime in the preceding 12 months. In 2005 and 2007, the share was more than 40 per cent, however the relevant question in these two surveys covered the preceding two years.
There are a number of problems with this survey. In previous years, the methodology has only been explained to a limited extent. However, the 2009 report states that the 500 largest companies in Norway were approached. Of these, 75 responded; a response rate of 15 per cent. First of all, this is a completely different gross sample than for our survey, and a sample which by virtue of its size will be particularly exposed to crimes and be unrepresentative of Norwegian businesses in general. It is also reasonable to assume that non-response is selective and skewed. One of the main problems can be that the businesses’ experience of economic crime determines whether they will respond or not. The low response rate will render any further comparison of forms of crime and industries impossible. Other sources have also indicated that auditors have self-interests in their presentation of the crime situation, and that their analyses should therefore be viewed with caution (Levi et al 2007).
Serious fraud, such as abuse of welfare benefits, subsidy or invoice fraud (the example to be used for public sector activities)/serious fraud, such as invoice, credit or investment fraud (the example to be used for private sector businesses)
Disloyalty, corruption or bribery
Embezzlement, such as unauthorised gains or breaches of trust, not pilfering
Crimes related to debt and bankruptcy. This covers the illegal withdrawal of profits or non-notification.
False accounting, such as non-submission of accounts and manipulation
Evasion of tax, VAT and import duty
Price fixing and bid rigging
Other economic crimes
Can timing affect the activities?
It is interesting to note when our surveys were conducted. It can generally be assumed that the response rates in surveys such as these are affected by how much coverage the subject gets in the media, and that both the response rate and the share subjected to crime can increase when the respondent perceives the problem to be real and wants to highlight it. During a period when economic crime is high on the media agenda, respondents may be quicker to interpret actions as crime. For instance, if it comes to light that businesses have committed a large number of crimes in connection with bankruptcy, this may lead to the perception that bankruptcies which a business has been affected by may have entailed a crime being committed. This can also apply to media coverage about price fixing in certain industries, businesses that commit tax evasion and gain competitive advantages and corruption cases etc.
Prior to 2003-2004, one factor in particular is thought to have played a role in the rise in the number of businesses subjected to economic crimes; the Finance Credit case. We will not go into this complicated case in any detail in this article, except to say that the case turned a number of small and large businesses into victims of economic crime, and that it received a great deal of attention. The case was unravelled in late autumn 2002, and has subsequently had extensive media coverage. The biggest losses were incurred by the banks, as well as many smaller customers of Finance Credit. In addition to the Finance Credit case, the media spotlight remained on economic crime both during and prior to the survey period.
In spring 2009, when the last survey was conducted, one of the most dramatic periods in the Norwegian and international economy had just taken place. The financial system had experienced a substantial crisis of confidence. Many companies had financial problems and stock market prices fell dramatically etc. This may also have intensified the focus on problems such as the risk of falling victim to economic crime. In addition, a number of cases relating to corruption within public sector activities and publicly-owned activities were given media coverage.
Or have they stepped up security?
One possible reason for the fall is the obvious one - that fewer crimes were actually committed. However, there may be a number of reasons; a long period of prosperity in industry may have created less intense competition and fewer bankruptcies and associated crimes. Businesses in Norway achieved good results in the years preceding 2008, and this continued into 2008 for many businesses.
It can also be envisaged that the focus on economic crime over several decades, both in Norway and abroad, has sharpened the businesses’ control routines and control efforts, thus acting as a deterrent to potential perpetrators of economic crimes. Or the routines may have made it difficult or impossible to commit a crime.
A survey has been conducted every year since 2006 on economic crime and other forms of security problems in industry and public sector activities (Krisino 2006-2009). However, it is difficult to compare this survey with ours with regard to changes in exposure to economic crime. The survey has a somewhat different sample to ours, the questions are formulated differently, and the questions that are most comparable to ours were not included in the last two years. Nevertheless, the survey has some interesting findings in some fields, including measures to combat crime. For example, the Krisino survey for 2008 shows that 68 per cent of businesses in the hotel and restaurant industry have routines in place for uncovering economic crime (Blymke 2009). This is the industry that all surveys indicate is frequently targeted, and also where we find a fall in exposure to economic crime in our 2008 survey.
There has been a fall in almost all the types of crime we enquire about. The only exception is false accounting, with a roughly stable and low share. The fall has been greatest for serious fraud and “other forms of economic crime” (see figure 1).
This also concurs with what the businesses report with regard to exposure to crime and law-abidingness in their own industry. The share of businesses that believe it is “very uncommon” to be subjected to serious fraud has increased from around 38 per cent to around 43 per cent. For crimes related to debt, there was a similar increase, from 51 per cent to 56 per cent, and for tax evasion etc. from 48 to 53 per cent. This forms a picture of less exposure in 2008 than in 2003.
Slightly fewer than a quarter of all respondents in 2008 believed, however, that their competitors commit, or have committed, economic crimes in order to achieve competitive advantages. This is a slight increase since 2003. However, the retention horizon here is far more extensive than in the questions concerning what they themselves have been subjected to, or what risk is usual or unusual in the industry. They do not just report what happened in 2003 or 2008, or what is usual or unusual, but can in principle have a horizon of several years or decades. The responses can also be in reference to a few “rotten apples” in every industry that “everyone” knows about, and which have had a great deal of press coverage, but which do not directly affect the business in question.
Fewer crimes per victim
The trend of businesses experiencing just one or a few crimes is stronger in 2008 than in 2003 (see figure 2). The share of companies reporting just one crime has increased by almost 10 percentage points, from 36 to 46 per cent of those subjected to crime. The share of businesses that have been the victim of 2-5 crimes, shows a slight increase. In total, 315 (weighted) of the companies were the victims of crime in 2008. Overall, these 315 businesses fell victim to 3 164 crimes, i.e. an average of 10 crimes per business. In 2003, the corresponding average was 14 crimes. This reinforces the picture of a reduction in economic crimes aimed at businesses.
It is also important to note that relatively many of the businesses fell victim to more than one crime both in 2003 and 2008, and that some have been subjected to a large number of crimes. The share that have experienced 100 or more crimes shows a slight increase, and the few businesses that have experienced this number of crimes have been the victim of a substantial share of all the crimes we have become aware of through this survey. In 2008, none of the businesses had an unspecified number of crimes, which will affect the breakdown somewhat.
Finance and insurance most exposed
The finance and insurance industry was particularly vulnerable to serious fraud, crimes related to debt, embezzlement and disloyalty etc., both in 2003 and 2008. This is also the case in the Krisino surveys of 2006 to 2008. This is only to be expected however, since many of the businesses in the industry are large enterprises with a large customer base, where some of the customers will defraud the bank or insurance company.
Commodity trade and accommodation and food service activities are also particularly vulnerable, which is evident in both surveys. However, it should be noted that accommodation and food service activities experienced a fall in crimes from 2003 to 2008, particularly in terms of the number of crimes that have been aimed at individual victims, and that the fall applies to several categories of crime. As referred to above, this industry has implemented a large number of control measures.
Losses are higher
How great was the loss incurred by the business in connection with the last crime they fell victim to? This is a difficult question to answer. First of all, it is almost impossible to estimate the loss for some crimes, e.g. corruption, price fixing and bid rigging. Second, the losses may be of a non-financial nature. This can particularly be the case where the crime has been committed in a way that entails a major breach of trust. We have therefore chosen only to ask about the extent of the loss in connection with businesses that have been the victim of serious fraud and embezzlement. We assumed it would be easier to quantify the economic loss from such crimes.
In the 2003 survey, 108 businesses lost a total of NOK 25.5 million from serious fraud. The average loss was slightly in excess of NOK 235 000. In 2008, 77 businesses lost around NOK 14 million, i.e. an average of NOK 185 000. The fall becomes even clearer when taking into account the price growth during the same period.
With regard to embezzlement, the picture is reversed. Eighty-nine businesses in 2003 lost a total of NOK 8.5 million in this category, i.e. an average loss of NOK 100 000. In 2008, the corresponding figure is somewhat lower (82 businesses), but the total loss was NOK 34 million, i.e. around NOK 325 000 per company. The total loss from serious fraud and embezzlement was thus NOK 34 million in 2003 and NOK 48 million in 2008. This increase is substantially higher than the price growth in the relevant period. However, the figures are generally affected by relatively high individual losses in a few businesses in certain industries, and should not be given too much focus in the discussion on changes in exposure to economic crime.
More crimes reported to police
The share of businesses that report a crime to the police has increased from around 20 per cent in 2003 to approximately 30 per cent in 2008 (as a percentage of the crimes that businesses have fallen victim to). The number of reports of tax evasion is particularly high, due to the inclusion in our sample of a public sector activity that has been the victim of several such crimes. Otherwise, the trend of reporting disloyalty etc. and “other forms of economic crime” has risen since 2003, while the number of reports of embezzlement and crimes related to debt has fallen. In 2003, we concluded that not all cases could be actual crimes, otherwise the statistics on reporting would contain far more economic crimes (Ellingsen and Sky 2005). This problem still applies today.
Nevertheless, it is important to be aware that the unreported figures are still high; seven out of ten cases are never reported to the police. The unreported figures in 2008 are the highest for price fixing, bid rigging and false accounting, and lowest for tax evasion and “other forms of economic crime”.
A few respondents state that they do not report a crime because they don’t believe the police have the resources or expertise to do anything about it. Not reporting a crime is usually a sign of being outcome-oriented. It does not lead to a result, it is difficult to prove, the perpetrator has been dealt with etc.
ICT is an important tool
The only new question in the 2008 survey was whether ICT (information and communication technology) is an important tool in the execution of economic crimes. The respondents were of the opinion that this tool had been important in more than half of the false accounting cases, four out of ten cases of embezzlement, one out of three crimes related to debt, and three out of ten serious fraud crimes. The tool was not considered to be very important for tax evasion crimes, price fixing and “other forms of economic crime”.
But how do the respondents interpret this question? In the modern industrial world, very many work tasks are indeed dependent on the use of ICT. However, given that so few consider tax evasion being carried out with such a tool to be an important factor, this may be an indication that the question has been understood correctly. After all, most companies use ICT to report accounting data.
No room for complacency
In this article we have presented and analysed some arguments and findings that could indicate a reduction in economic crimes aimed at businesses. However, this should be regarded with caution since we only have two observation years, and both years have a number of special characteristics.
Although there appears to have been an actual fall in economic crime, the reality is that the risk of businesses falling victim to such crime remains high. Our estimate that 15 per cent of businesses in 2008 were subjected to economic crime is still a slightly higher share than among private individuals, as reported in surveys. According to the Survey of living conditions 2007, less than 15 per cent of the adult population fell victim to one or more cases of violence, threats, theft or criminal damage during the course of one year. If we added the incidence of traditional crimes for profit incurred on businesses, the victim rate would no doubt be much higher.
Crimes aimed at business also affect private individuals, both directly and indirectly. Fraud and embezzlement in the workplace create bad feeling and trust issues. Both the surveys on Norwegian businesses as victims of economic crime and Krisino (2008) show that several thousand people have their employment terminated every year as a result of committing such crimes.
Society as a whole is more indirectly affected by economic crime. The trust between the members of society and social institutions is impaired, with the financial crisis being a case in point. Stolen funds are funds that need to be replaced, which in turn can lead to higher costs, e.g. in insurance premiums. As a result, greater controls may be necessary, which in turn have their own financial and social costs.
This article was first published in Samfunnsspeilet nr. 3 in June 2010. You find the article in Norwegian under More on ssb.no.
Blymke, Øystein (2009): "Finanskrisen og økonomisk kriminalitet" (The financial crisis and economic crime), in Sikkerhet no. 1, 2009, The Norwegian Business and Industry Security Council.
Ellingsen, Dag and Vibeke Sky (2005): Virksomheter som ofre for økonomisk kriminalitet (Businesses as victims of economic crime), Reports 2005/14, Statistics Norway.
Ellingsen, Dag (2010): Virksomheter som ofre for økonomisk kriminalitet 2003 og 2008 (Businesses as victims of economic crime 2003 and 2008). To be published in the Reports series, Statistics Norway.
Krisino (2006, 2007, 2008, 2009): Kriminalitets- og sikkerhetsundersøkelsen i Norge (Survey on crime and security). Conducted by Perduco in collaboration with the Norwegian Business and Industry Security Council.
Survey of living conditions, victimisation and fear of crime, http://www.ssb.no/english/subjects/03/05/vold_en/ , Statistics Norway.
Levi, Michael, John Burrows, Matthew H. Flemming and Matthew Hopkins (2007): “The Nature, Extent and Economic Impact of Fraud
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PricewaterhouseCoopers: “Economic Crime in a Downturn” The Global Economic Crime Survey. November 2009. Norway.