- The Global Threat of Green Fraud
The Global Threat of Green Fraud
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3月 29, 2022
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Not all of the hands reaching out for a share of government-funded net zero initiatives are clean. Here is how fraudsters threaten the system, the impact on public and private sectors, and actions we must take now to mitigate risk.
For all the dire news about the effects of global warming on the planet’s future, glimmers of hope occasionally penetrate the darkness. Consider the growing attention on reducing carbon emissions by businesses and governments alike. Driven by the threat to the world economy and by the shift toward environmental, social and governance (ESG) policies, momentum is building toward accountability. Today, more than 130 countries are on the path to targeting net-zero emissions by mid-century1.
It is a long and complex journey. Meeting net-zero targets means reorienting and decarbonizing entire economies. Every aspect that touches the way people work and live — from power and transportation to housing and agriculture — must be completely reimagined and financed. Such an undertaking will be as expensive as it sounds, requiring major investments from both the public and private sectors.
One estimate puts the cost to reach net zero by 2050 between USD$1 trillion and USD$2 trillion per year2. With that kind of money circulating, you can be sure that bad actors — fraudsters — will be looking to siphon off funds illegally. The threat is massive and quite possibly catastrophic. Not only is “green fraud” likely to develop on an industrial scale and waste billions in taxpayers’ money, but the risk threatens to undermine the very credibility of net-zero initiatives.
We can mitigate that risk if we act now. But like global warming itself, we must move swiftly and decisively in partnership with private enterprise and government to stem green fraud before it takes full root. That may sound hyperbolic, but our planet’s very future depends on it.
The Temptation of Trillions
We can get a sense of the potential rise of green fraud by considering recent examples of fraud targeting government during the pandemic. According to the United Kingdom’s National Audit Office, the Bounce Back Loan Scheme to aid businesses affected by COVID-19 cost U.K. taxpayers £4.9 billion in fraud loss, representing approximately 11% of total investment in the scheme3. In the United States, the Secret Service estimated that by December 2021, fraudsters had stolen close to USD$100 billion of USD$3.5 trillion distributed from three federal COVID-19 relief programs4.
Now consider the vast amounts of money at stake in the U.K.’s Net Zero Strategy, issued last October. Costs are estimated at roughly £50-60 billion per year5. (Though the real figure could be as high as £70 billion annually.) That totals more than £1 trillion in invested capital by mid-century.
Using pandemic stimulus fraud trends and other data, FTI Consulting estimates that at least 5% of the £1 trillion could be drained off by fraudsters6. That would cost taxpayers about £3.5 billion per year, or enough to pay for the salaries of 31,000 nurses and 14,000 police officers in the U.K. in a single year, and plant 200 million trees7, 8, 9.
At that rate, the total amount lost to fraud by mid-century would be an astonishing £50 billion.
Green Schemes Grow Like Weeds
As green initiatives and investment programs develop, we can expect to see a standard variety of green fraud schemes develop alongside. Here are a few examples:
- Grant fraud: Funds are provided to a legitimate applicant but for illegitimate purposes. Alternatively, the application is entirely fraudulent, and funds are misappropriated.
- Procurement fraud: This entails providing green/sustainable goods and services to the government by bogus service providers, or companies colluding to subvert procurement processes.
- Duplicate fund and grant applications: Here, multiple low-value applications are submitted by the same fraudster to different awarding bodies.
- Fraudulent ESG credentials: Companies use these to attract investors and customers, or to obtain funding under a government-related scheme or grant.
Third-party and cyber-enabled fraud: Individuals’ identities and personal details are stolen and used without their consent to commit fraud on government schemes. These are set up to sham companies to perpetrate fraud and open bank accounts through which misappropriated funds are dissipated.
Three Steps To Protect Green Investments
If there is one great lesson to be learned about fraud during the pandemic, it is that haste makes waste. Case in point is the rushed distribution of funds through the U.S. CARES Act (Coronavirus Aid, Relief, and Economic Security Act). The U.S. Government Accountability Office (GAO) and The Brookings Institution assert that speed took precedence over internal control checks, such as verifying recipient identity and eligibility, as money was rapidly dispersed from the CARES Act’s reserve of over USD$2 trillion10, 11.
The scenario attracted a stunning array of bad actors, according to the GAO, including one individual who tried to exploit the Act’s Economic Injury Disaster Loan program with 20 different fraudulent applications. Another claimed the stolen identities of multiple people in an attempt to pilfer more than USD$500,000. Fortunately, both individuals were arrested12.
We can do better. We can act strategically and thoughtfully to protect green investments from the risk and cost of fraud. But we will need unprecedented levels of collaboration. Public and private sectors must come together to leverage resources, skills and expertise. Everyone from law enforcement to social media companies to financial institutions will need to cooperate.
The below outlines three collaborative actions along these lines.
Establish a fraud-prevention framework
Identify potential risks now by carrying out fraud risk assessments on every fund, grant, scheme and investment. Interview stakeholders across government, law enforcement and the private sector, particularly those involved in awarding funds or grants or making payments.
Design appropriate policies, procedures and controls, including procurement policies. Align these to the fraud and operational risks identified, and to best practices from government and the private sector. Require independent counterparty due diligence on higher risk/value investments or spending.
Create reporting and analysis mechanisms
Centralize data to enable quicker analysis and reporting. Identify improper use, duplicate funding and related-party funding, and provide feedback on any issues to awarding departments or authorities.
Maintain a database of funds recipients with robust management reporting to support accountability and oversight. Establish a single oversight board with authority to commission independent investigations; include representatives from outside the government to draw on best practices in the private sector and law enforcement. Deploy AI-based threat monitoring by leveraging external data sources (social media, blogs, chat) to enrich other sources of information.
Deploy a safety net in case safeguards fail
Launch an independent whistleblower hotline alongside a communications campaign to promote it. Data can be fed from the hotline to the oversight board where appropriate authorities or departments can respond. Create a dedicated public website to ensure transparency of how funds are being used. Government should set up recovery mechanisms for when fraud is identified to take steps to recover funds using civil and criminal asset recovery powers.
Protecting green investment from green fraud will not be easy. But while we are focusing on the future of the planet’s health, let’s get started now.
This article is based on FTI Consulting’s report “Emerging Danger: A New Net Zero Industry,” available for downloading.
Footnotes:
1: “What is Net Zero and How are the UK and Other Countries Doing?” BBC.com, Nov. 4, 2021. https://www.bbc.com/news/science-environment-58874518.
2: “Getting to Net Zero Emissions Could Cost $2 trillion a Year, Report Says.” CNN Business, Sep. 16, 2020. https://edition.cnn.com/2020/09/16/business/net-zero-climate-energy-transitions-commission/index.html
3: “The Bounce Back Loan Scheme: An Update.” National Audit Office, Dec. 3, 2021. https://www.nao.org.uk/wp-content/uploads/2021/12/The-Bounce-Back-Loan-Scheme-an-update.pdf
4: “Criminals Have Stolen Nearly $100 Billion in COVID Relief Funds, Secret Service Says.” CNBC.com, Dec. 21, 2021. https://www.cnbc.com/2021/12/21/criminals-have-stolen-nearly-100-billion-in-covid-relief-funds-secret-service.html
5: “Net Zero Strategy: Build Back Better.” HM government. Oct. 2021. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1033990/net-zero-strategy-beis.pdf
6: “Report to The Nations – 2020 Global Study on Occupational Fraud and Abuse: Association of Certified Fraud Examiners.” https://acfepublic.s3-us-west-2.amazonaws.com/2020-Report-to-the-Nations.pdf
7: “Key Facts and Figures About the NHS. The King’s Fund, Jan. 13, 2022.” https://www.kingsfund.org.uk/audio-video/key-facts-figures-nhs
8: “Mayor of London: Police Officer Costs, Jan. 17, 2019.” https://www.london.gov.uk/questions/2019/0491
9: “Plant a tree.” National Trust. https://www.nationaltrust.org.uk/features/plant-a-tree
10: "Preventing Fraud in CARES programs.” U.S. General Accountability Office, Nov. 16, 2021. https://www.gao.gov/blog/preventing-fraud-cares-act-programs
10: “Fighting Fraud, Waste, and Abuse—COVID-19 pandemic relief expenditures.” Brookings Institution. Feb. 11, 2022. https://www.brookings.edu/blog/fixgov/2022/02/11/fighting-fraud-waste-and-abuse-covid-19-pandemic-relief-expenditures/
12: "Preventing Fraud in CARES programs.”
©Copyright 2022. The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.
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3月 29, 2022
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