Today, the automotive industry has become significantly more global in scope, and a company’s supply and distribution relationships are likely to have a much broader global reach than ever. These inter-relationships that extend across borders, time zones, and continents could also compound the opportunities for fraudulent and corrupt activity due to differences in culture, business practices, regulations and any number of norms or standards. This can increase internal and external fraud, bribery and corruption risks, depending on the geographic distribution and nature of the company’s internal operations and those of related parties and of other third-party business partners.
Furthermore, rapid growth in demand from global emerging markets has shifted significant volumes of activity in the automotive (auto) sector to various parts of the world, which has magnified fraud, bribery and corruption risks that many automotive sector companies face. Additionally, many suppliers are shifting operations to emerging markets for the first time and are faced with the challenges of operating in heightened risk environments with a limited compliance function.
Economic volatility – a braking effect on the sector
The auto industry has experienced significant stress caused by swings in the overall global economic cycle. The economic downturn has caused companies to rethink and rapidly change their business models, infrastructure, manufacturing capacity, supply and distribution relationships, and their board and management structures, just to name a few. All of these changes tends to raise the risks and opportunities for fraud, bribery and corruption, particularly when many of these business variables change rapidly and simultaneously as they have in the past few years. The domino or ripple effects of economic shocks are particularly pronounced here, with its tightly linked supply and distribution chains.
The Indian auto sector – fueling the country’s growth
According to the India Brand Equity Foundation (IBEF), India’s auto industry is one of the largest globally. It had an annual production of 23.37 million vehicles in FY15, following a growth of 8.68% over the last year. It accounts for 7.1% of the country’s gross domestic product (GDP).
But there are road bumps..
The last few years have been quite challenging for the Indian auto sector, with a high number of vehicle recalls and the detection of other safety issues. Some key risks faced by auto companies include:
- Violation of emission norms – These include manipulation of prototype test norms and test results; faking records and documents, including intentional non-updating of failed internal tests and conspiring internally to submit favourable test reports; lack of action on quality defects and non-reporting of such defects to the senior management at the start of production, etc.
- Bribery and corruption – These include monetary and non-monetary benefits extended for managing emission test results, negotiating fleet sale contracts, obtaining bulk sale orders, and managing non-compliance to various licenses and regulatory requirements.
- Dealer frauds – These include frauds in dealer sales commission and warranty claims, use of counterfeit products, discounts offered to ineligible customers by manipulating underlying records, teaming and falsifying bills of lading during collection and cheque deposition.
- Inventory theft and scrap sales – These include theft of inventory and peddling these products in the grey market, manipulation in weighing records, higher grade scrap sold at a price applicable to lower grade, non-invoicing of scrap dispatches, and sale of rejected auto parts without proper defacement.
Considering the heightened implications currently underway due to flouting of emission norms, here is a more detailed take on the areas companies need to be cognizant of:
Going the distance proactively
As the scrutiny toward this sector intensifies, companies need to incorporate more effective proactive measures to ensure they do not face a “break-down” when tasked with proving their efforts to comply with these laws. The following steps can be taken for a proactive review which can help companies identify issues (if any):
- Conducting a vulnerability review of the identified process or activities pertaining to emission standards and vehicle certification process. Also, identifying key process owners responsible for obtaining the type approval and Conformity of Production (CoP) certificates.
- Reviewing and analysing, through the use of forensic data analytics, relevant data maintained for internal or external testing, homologation and quality assurance (including sampling, test results and identified defects in parts).
- Undertaking computer forensic reviews (disk imaging, data processing and analysis) of IT assets used by employees involved in testing, homologation and quality assurance to identify email communication with potential red flags and communication
- Forensically reviewing identified sample transactions based on fraud analytics performed on employee reimbursements of key employees, cash book, ledger dumps etc. (including tests records, certificates, log books, vehicle movement registers and communications with authorities)
- Commissioning, field visits, to uncover interactions on select vendors or third parties involved in the emission approval and certification process