The cost of fraud for our society and for your company

Fraud, in all possible forms, costs our Belgian state billions every year. We had a chat with Peter De Keyzer, Chief Economist and Managing Partner at Growth Inc., about the global issue. In this first part, he outlines, among other things, the cost of fraud for our society and for your company. The opportunities to tackle this thoroughly are enormous.

Definition

There are many definitions to describe the term fraud. How would you define fraud?

“Identity fraud, tax evasion, misuse of information, money laundering, corruption, etc. Broadly speaking, we call it all fraud,” says Peter De Keyzer. “But if you just look at it physically, it's actually using an – often complicated and digital – methodology to take money from someone. Operationally, you're conjuring things that don't match reality to the other party, with a view to cheating in some way."

From a macro-economic point of view, there is a cost involved.

“Fraud can actually be classified as transactional costs. Fraud makes transactions more difficult, more expensive and less reliable. In countries that are particularly corrupt, you notice that a lot fewer transactions take place.”

“If you suspect that a certain transaction is susceptible to fraud, you will want to cover yourself in all kinds of ways to reduce that risk. For example, you will perform additional checks. That means that transaction costs increase and it decreases the chance that you will effectively enter into a transaction. So you get the opposite of a smooth process, in which an economy should run normally. Fraud is like sand in the machine. It will therefore start to run less quickly and smoothly and that is the macroeconomic cost of fraud.”

Cost to society

The greater the suspicion of fraud, the higher the transaction costs and the more difficult processes are therefore. Can this cost to society be expressed in figures?

“The University of Portsmouth once looked into this. It states that it concerns 6.4% of the global gross domestic product. In other words, that's £4.37 trillion or twice the UK's entire GDP. So it is a huge amount that we can hardly imagine. But simply put, you lose 6.4% in transaction costs to be able to do business in a normal way.”

Cost for Belgium

“If you then see what that 6.4% means for Belgium, it concerns an amount of around 25 billion euros every year. Every year! In other words, big enough to close the gap in our budget in one go and enough to finance half of our social security in the following years.”

A better fight against tax fraud can always be found in the budget. However, our government only counts on a few hundreds of millions each time.

“Usually it indicates how the negotiations went. The larger that amount, the more difficult the negotiations, because a better fight against tax fraud is usually such a residual item that is added to the budget to make it right. While the potential for Belgium, if we base ourselves on the global figures, is no less than 25 billion euros.”

“But then our government will of course have to use other and better methods to be able to recover that amount, or even just a fraction of it. But it can. And if it can tap even a few percent of that amount, then our state already has more than that modest 500 million that is now often talked about.”

Cost for your company

The 6.4% can also be applied to companies. So as a company, and as a cog in our overall economy, I also benefit from fighting fraud.

"Yes, of course. Do the math. Is your turnover 1 million? 10 million? 100 million? Well, 6.4% is lost to fraud in one way or another. So what is it worth to you to recoup that 6.4%? In other words, how do you expose those 'complicated methods' that fraudsters use? How do you get to know those methods before those who are working on them? That's the ultimate story. Fraud has been around as long as humanity. It reappears in various forms in various sectors. Digitisation has opened up a lot of opportunities for society, but also for those who want to abuse it.”

“So it's a constant race between the fraudster and the investigator. And the more and better weapons the sleuth has and the more inventive they are, the smaller the difference will be in that race. But again, with 25 billion euros, the opportunities are huge.”

In a second part of the conversation, Peter De Keyzer takes a closer look at the link between fraud and society. Is one company more susceptible to fraud than another? We can already tell you the answer: yes. But our conversation partner also has a suitable answer for it.