Fraud and corruption pose threat to global growth in the construction industry

Technology could save the global construction sector from a $1.5 trillion fraud bill in 2025

"With the Construction market coming out of recession – fraud will be hot on its heels.”
– Erik Lioy, Fraud specialist. Grant Thornton US.

As growth returns to the global economy, the international Construction industry risks being targeted as a weak link by fraudsters as levels of other crime fall, according to an international report released in Australia today.

The report calls for the global construction industry to make better use of information technology to fight fraud – an area where the sector is said to lag well behind others, particularly here in Australia.

Time for a new direction: fighting fraud in Construction, a report released by Grant Thornton following research carried out in Australia, Canada, India, the US and the UK, estimates the cost of fraud to account for between 5% and 10% of revenues in the construction industry.

There are currently no authoritative figures on the scale of fraud in the Construction industry. However, with recent estimates valuing the global construction industry at US$8.6 trillion, expecting to grow to US$15 trillion by 2025, this could mean a cost to business of almost US$1trillion globally, rising to US$1.5 trillion by 2025 if action is not taken.

An ex-Detective for the City of London Police, Chris Watson now works as a Forensic Consulting partner at Grant Thornton Australia and was a contributor to the report. He argues that vital lessons can be learned from policing, where technology has been instrumental in the reduction of crime and is increasingly used to identify, gather evidence, and even predict where crime will occur.

“Since the early to mid-1990’s, crime against people and property has significantly fallen. In the G7 group of countries for example, between 1995 and 2010 robbery fell approximately 20%, murder by over 30%, and vehicle theft has halved . Reasons for these reductions are varied, but the adoption of technology in detection and prevention has definitely been a key factor.”

“While perpetrators of fraud have used technology to their own ends, on the whole, technology favours those investigating it. It is now possible to combine large amounts of data to identify threats and possible weaknesses in control,” said Watson.

Business has enlisted these measures against fraud in areas such as finance in the ways they have reacted to cybercrime and money laundering threats. However, Watson says construction companies are well behind the curve in their adoption of these types of protective measures.

“The Construction industry in Australia is 10-15 years behind the curve in the use of fraud detection and prevention technology.

“Fraud poses a significant threat to the profitability of these businesses. It is now so commonplace that it is often seen as part of the cost of doing business. With the systems now available, this does not have to be the case.

For example, given the prevalence of bid-rigging in Construction – where collusive tendering takes place during the procurement process - companies can use technology such as e-auctions, which can be effective in preventing supplier collusion or instances of corruption. Likewise, a data dump of employee and contractor addresses and bank accounts can be used to highlight suspicious links”, Watson said.

“There are now many ways available for the sector to raise their game”.

The report also recommends companies put aside reputational issues and speak more openly about the issue of fraud, and in turn, foster a greater willingness by companies to prosecute the perpetrators.

“More companies need to take their head out of the sand and recognise that fraud and corruption costs, not only in terms of profits, but also a company’s reputation. It’s a real threat to growth,” said co-contributor, Sian Sinclair, Grant Thornton’s Australian leader, Real Estate and Construction.

“Companies should consider a more open approach and prosecute perpetrators more often. This will send out a message that the construction industry is not open for fraud.”

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For more information or to speak with the Administrators, please contact:

Helina Lilley
National Public Relations Manager
T  +61 2 8297 2421
M  0437 725 520
E helina.lilley@au.gt.com

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Notes to editors
Time for a new direction: fighting fraud in Real Estate and Construction is a report produced by Grant Thornton. The Chartered Institute of Loss Adjusters produced a report in 2011 estimating that fraud in construction in the UK amounted to 10% of revenue, totalling £6.5 billion, or £40,000 per company. In 2012 the Association of Certified Fraud Examiners estimated that globally 5% of construction revenue is lost to fraud. In July 2013 Global Construction Perspectives and Oxford Economics published a report entitled Global Construction 2025 in which they estimated that in 2012 the global construction market was worth US$8,663 trillion in 2012 and with projected growth of 4.3% a year would rise to a value of US$15,030 trillion by 2025.

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Footnotes
1 In July 2013 Global Construction Perspectives and Oxford Economics published a report entitled Global Construction 2025 in which they estimated that in 2012 the global construction market was worth US$8,663 trillion in 2012 and with projected growth of 4.3% a year would rise to a value of US$15,030 trillion by 2025. The Chartered Institute of Loss Adjusters produced a report in 2011 estimating that fraud in construction in the UK amounted to 10% of revenue. In 2012 the Association of Certified Fraud Examiners estimated that globally 5% of construction revenue is lost to fraud. Using the estimated 5% to 10% of revenue lost to fraud, would give an estimate of up to $US1.5 trillion in Construction fraud per year.

According to the Australian Bureau of Statistics in 2010/11 the Construction Industry produced $102 billion of value, equating to 7.7% of the total economy. Applying the Association of Certified Fraud Examiners 2012 estimate of 5% of revenue lost to fraud, would give a total estimate of AU$5.1 billion in Construction fraud per year.

2 The Economist (July 2013)