Brazil: white-collar crime rising

Brazil may be losing a whopping 6% of its GDP thanks to white-collar crime, making it one of the most exposed countries in the world to fraud, according to a recent report by KPMG. Of the countries that have reported suffering fraud, Brazil is second only to the US in terms of financial crime detected. The US only ranks higher because its rules are stricter and more stringently enforced, the report finds. The silver lining is that Brazil is set to impose tighter accounting rules, bringing an increase in transparency that should help banks analyse corporate risk more closely.

The reporting of illegal activity is also increasing sharply, says the KPMG report. The Brazilian body to whom banks report irregularities, the Conselho de Controle de Atividades, part of the Ministry of Finance, expects to announce a jump of 112% in the number of anti-fraud operations carried out this year, bringing the total to 300,000.

Two large operations have been launched so far, garnering much media attention. One had a dramatic effect on Opportunity Group, a large investment bank and private wealth management firm, which lost R$1 billion ($616 million) in client withdrawals when the news that its owner was being investigated broke.

The main driver of financial crime in the country is that Brazilians remain confident they will not be successfully prosecuted if caught. But the increase in crimes detected is also partly due to increased scrutiny as Brazil opens up to the world and companies become more transparent, according to Werner Scharrer, a partner at KPMG.

A separate report into economic crime by PricewaterhouseCoopers (PwC) is less severe in its conclusions. White-collar crime in Brazil is probably greater than the US and continental Europe, but it is in line with other emerging markets, according to Luis Madasi, a partner and head of forensics for Latin America at PwC in Sao Paulo. The explanation for the large increase in figures is that “the more you investigate crime, the more you find,” he says.

The PwC report found that Brazil is reporting slightly more crime than its Latin neighbours. Forty-five per cent of firms polled said they had suffered fraud in the past two years, against 41% in the rest of Latin America. But levels are higher still in the US, which reports 52%, due to a regulatory push in the US for companies to investigate fraud more rigorously, he says. Also, the report found that just 30% of crime reported in Brazil is coming from internal auditing and only a tiny 3% from electronic detection of suspect transactions. Compilers interviewed 76 Brazilian executives.

Madasi is optimistic about the overall trend. Brazilian companies are increasingly carrying out internal investigations, he says. And if Brazil does punish malefactors, this will also have a strong deterrent effect. The implementation of a new law will oblige many more companies to carry out an audit of statements, which will bring further transparency to Brazilian corporates, Madasi says. Law 11.638, was published last December and takes effect this year. More rigorous auditing will give the banking system more clarity on the true financial position of companies, help bring down white-collar crime and help the government claw back lost tax revenues, he reasons.

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