managing fraud,bribery and corruption risks in the ... · • increases fraud risks and heightens...

Managing fraud, bribery and corruption risks in the hospitality industryFraud Investigation & Dispute Services

B | Managing fraud, bribery and corruption risks in the hospitality industry

ForewordIndia’s rich history, diverse culture, variety of languages, landscapes and rituals continue to fascinate travelers. This has prompted an increased flow of global tourists which in turn has made companies realize the tremendous business potential available in the country. Many companies have already invested and/or are continuing to invest in the Indian tourism and hospitality sector. This sector is the third largest foreign exchange earner and among the top 15 sectors in India that attract the highest foreign direct investment (FDI). The Indian hospitality industry falls within the spectrum of the tourism and hospitality sector.

With India’s rising prominence as a preferred tourist destination, growth in investment and enhanced role of technology, the sector is aptly poised for growth in the coming years. Global players have made long term plans to scale up their India operations, with these forays expanding to include Tier 2 cities. To boost this sector, the Government of India has also taken several initiatives, such as Electronic Travel Authorization, medical tourism, five-year tax holiday offered to 2,3, and 4 star category hotels located around select UNESCO World Heritage sites, 100% FDI through the automatic route, formulation of National Tourism Policy, and so on.

While the sector is growing, companies operating in the hospitality industry face an increased exposure to fraud, data theft and bribery and corruption risks.

1Managing fraud, bribery and corruption risks in the hospitality industry |

The influencing factorsRecent trends in the hospitality sector in India

The numerous requirements on this front, governing the hotel industry can be segregated into three phases:

• Construction and commissioning of hotels (more than 60 approvals)

• Operations and management

• Taxation and regulatory compliance

Web of taxes and approvals:

Power, manpower and food and beverage (F&B) are the three main cost areas (at least 75%) in operating a hotel. Hotels are therefore coming up with innovative models to reduce costs, such as outsourcing non-guest facing operations, minimizing energy wastage consumption by adopting a “green” building approach and enhancing in-house employee training capacity.

Cost reduction avenues:

Demand continues to rise, flowing from cross-border business, economic and commercial activities; the rise in disposable income (which drives domestic travelers); improved infrastructure and transport facilities; the advent of new locations; and technological advancements. The following factors too have played a significant role in the uptake within the industry:

• Millennials (also known as the Millennial Generation or Generation Y) have become the fastest growing customer segment within this industry.

• Rising use of social media by individuals and online travel agents is giving rise to tracking of online behavioral analytics, performance and perception on social media platforms and review sites.

• Mobile apps are increasingly being used to engage with guests at the touch of a button. Newer processes include mobile check-in facilities, door control via mobile phone interfaces instead of a card key, etc.

• New revenue segments such as Meetings, Incentives, Conferences, and Events (MICE) are being focused upon to maximize revenue. Hotels are also introducing innovative offerings in terms of design, services and stay. They are promoting concepts such as “healthy holidays,” offering 24*7 Yoga tutors, Yoga books, the option to use olive oil in meals, Ayurvedic massages on the spa menu, soundproof meditation rooms, etc.

Rising demand and innovation:

There is rising preference toward management contracts or a franchise model rather than owning and constructing hotels. The option of leasing a hotel for a long timeframe is also steadily increasing. Additionally, there is an increase in Indian companies investing in international markets.

Changing operating model:

Due to heightened customer satisfaction requirements, intense competition and squeezed margins, the sector is seeing a rise in instances of employee and third party frauds with visible impact on profitability. Instances of bribery and corruption – right from construction approvals to entertaining government officials to win long-term room contracts – are mounting.

Rising fraud, bribery and corruption risks:

2 | Managing fraud, bribery and corruption risks in the hospitality industry

Why the industry is vulnerable to fraud – a hit and miss comparativeAs the industry prioritizes customer service vis-à-vis internal controls, the vulnerability to fraud is very high.

• Guest-facing employees focus on guest interaction

• Procurement of licenses and clearances on urgent basis

• Dated IT systems and data security measures

• Free availability of cash and extensive use of credit cards

• Complex business structures and discretionary processes

• Frequent use of subcontractors

• Winning government contracts and/or to stay in favor with regulatory agencies

• Lack of prioritization of control procedures meant to prevent or detect fraud (e.g. updating the guest register, safe use of access cards, etc.)

• Engagement with dubious third parties to enable camouflage of bribes

• Inadequate data security leads to leakage of sensitive guest data such as credit card details, passport details and other financial transactions

• Presents an opportunity for cash larceny

• Increases propensity of manipulation of financial reporting

• Increases fraud risks and heightens risk of employee collusion with third party vendors and contractors

• Induces negative industry practices such as gifting complementary hotel stay and car travel to government officials

Commonly observed practices

(industry practices)

Resulting potential vulnerabilities

(areas of concern)


Perspectives – rationalizing fraud

Guest• Hotel employees will easily collude in lieu of tips

• They charge premium for every meal and service

• No one will risk questioning the guest

Third party• The hotel makes huge revenue, I should also benefit

• I have the purchase manager’s affiliation

• They have not and are not going to check my background

Employee• Guests of luxury hotels would not feel the pinch of a negligible increase in costs

• I have the management’s support and everyone is doing it►

• No one has seen me or has any proof of the act


Background: An international hotel chain was facing continued losses in room revenue.

Action taken: A company undertook an investigation into the Front Office (FO) operations.

Front office fraud

Room charge was generated in the Front Office Software (FOS) for the stay of Guest A. However, the FO manager collected the cash from Guest A and did not show settlement in Guest A’s folio. Instead, the room revenue of Guest A was transferred to the folio of Guest B who had settled his bills by credit card. The FO Manager did not post a room charge for Guest B. Thus, only one room charge was accounted for two rooms used by two guests.

For walk-in guests, the FO manager initially offered category “B” room for INR10,000. When the guest asked for upgrade to a higher category room, the FO manager offered higher category “A” room for INR 15,000 with a caveat - if the guest pays INR 2,000 in cash, the manager can offer the category “A” room for INR 10,000. This collusion led to reduced room revenue for the hotel.

Out of order rooms were being sold for cash and not being accounted for as revenue.

A.

B.

C.

1

Case studies

Findings revealed:

The investigation revealed several modus operandi:


Background: A premium Indian hotel chain received a tip that there is a nexus between select personnel from the new sales team, the FO team and a team of travel agents.

Action taken: The company conducted market intelligence to assess the allegations of the whistle blower.

Findings revealed:

The newly appointed sales director was a close family friend of one of the travel agents who clocked the highest commission in the current year.

• There were two more travel agents who received commission at enhanced rates despite not achieving their targets.

• To show better performance of their favored travel agents, the reservation team manipulated the booking details by mentioning the names of these travel agents in cases of direct reservations.

• The newly appointed sales director also approved higher rates of commission for specific travel agents.

• These excess payouts were subsequently shared among the sales, FO and reservations teams.

Market intelligence uncovered conflict of interest and collusion2


• Misrepresentation in the feasibility study report

• Awarding franchise contract to a company with corrupt history

• Relying on unrealistic budget and financial projections prepared with a fraudulent intent, to attract and siphon off investment

• Project consultant empaneled through employee collusion

• Pilferage/siphoning of construction material

• Inclusion of ghost employees in payroll processing documents

• Bills of quantities being certified, without proper measurement of work

• Is the project cost under-reported to match the budget?

• Did the consultants fake their credentials to win tenders? Is there potential for kickbacks?

• Is the construction material being diverted to a competing hotel? Is there a mechanism in place to prevent and detect quality issues?

• In a race to complete construction, is the project team violating local laws?

Is your business geared to address key risks in these 3 phases

Investment phase

Fraud scenario

Fraud scenario

1

2

Questions to ask

Questions to ask

Construction phase

• Did favoritism result in selecting the third party advisor and project consultant? Was a due diligence performed?

• How secure is the brand in the hands of the business partner?

• Is the site selected for investment free of legal tangles? Are there any political interests involved?

• Given the complexities of the Indian environment, what is the company supposed to do where gift giving, even to government officials, is culturally acceptable and expected?


Front Office• Early check-in charges/late check-out charges collected in cash

and not accounted for

• Fictitious paid-out posted in guest folio, supported by fake invoices

• Let out of “Out of order” room for cash, folio not opened in FOS

F&B• Buffet meals not accounted for/charged in cash at 50% discount

• Underreporting of attendees/liquor sale at banquet functions

• Pretext of “guest dispute” used to siphon cash in F&B/banquets

Marketing• Inflation of invoices by media agency and use of additional funds

to buy expensive gifts for customer’s employees

• Payment made for displays for brand activation without actual renting of display/shelf space

• Providing excess discounts and complimentary stays to select guests, in return for kickbacks

Purchases and stores• Blacklisted vendor supplying material under a different name

• Fraudulent acceptance of low quality/damaged materials

• Bid-rigging, price-fixing during tendering process

• Manipulation of standard yield ratios/excess stock issues to hide short receipts

• Issue of stock before physical receipt of material

Finance• Back office allowances of cash settlements

• Cash collections from debtors knocked off as bad debts

• Fraudulent refund of old balances to suppliers

Fraud scenario

3Operation phase

Human resources• Unauthorized amendments to payroll input master

• Fraudulent payments pertaining to contractual labor

• Fake experience and educational documents submitted for employment

Franchise fraud• Inflated revenue reporting/under-reporting of expenses

• Paying bribes to win government contracts

• Collusion with competing hotel owner

Bribery/corruption• Complementary rooms to government officials and their relatives

• Hiring ex-government officials and using their influence for overall smooth functioning during construction period

• Bribing government officials for misreporting of statutory compliance reports/permitting under reporting excisable goods

• Is the financial reporting fraudulent? Is the hotel actually incurring losses?

• Are the third parties obtaining licenses for the company by paying bribes?

• Does the company have robust processes and systems in place?

• How effective are the anti-fraud and anti-bribery controls?

• Is the procurement manager colluding with the supply vendor and buying at inflated prices in lieu of kickbacks?

• Are the employees engaging in skimming schemes?

Questions to ask


Our solutions

About EY Fraud Investigation & Dispute Services (FIDS)Dealing with complex issues of fraud, regulatory compliance and business disputes can detract from efforts to succeed. Better management of fraud risk and compliance exposure is a critical business priority — no matter the industry sector. With our more than 4,200 fraud investigation and dispute professionals around

the world, we assemble the right multidisciplinary and culturally aligned team to work with you and your legal advisors. And we work to give you the benefit of our broad sector experience, our deep subject matter knowledge and the latest insights from our work worldwide.

ProactiveReactive

Fraud analytics• Data-driven intelligence, trend analysis and visualization

Background check services• Background check of vendors, franchise owners and

operators

Anti-bribery and anti-corruption (ABAC) services• Pre-acquisition and post-acquisition due diligence

• Setting up the ABAC framework

• ABAC compliance assessment

Anti-fraud services• Fraud risk assessment

• Developing anti-fraud policy

• Recommendations on controls and processes to manage fraud risk

• Assistance in monitoring and improving anti-fraud controls and processes

Dispute advisory services• Dispute advisory

• Arbitration and litigation support

Forensic technology and discovery services• Evidence gathering through disk imaging and analysis

• Response to IT-related incidents

Fraud investigation• Investigations around specific allegations/suspicions

around third party frauds, employee involvement, collusion, misconduct, etc.

• Financial misstatement fraud investigation

• Bribery and corruption investigations/reviews

Brand integrity services• Field enquiries and market intelligence-led investigation

into:

• Collusion with third parties

• Kickbacks

• Diversion of business to competing hotels

• Conflict of interest


EY offices

Contact usArpinder Singh Partner and National Leader + 91 22 6192 0160 [email protected]

Sandeep Baldava Partner + 91 40 6736 2121 [email protected]

Vivek Aggarwal Partner + 91 12 4464 4551 [email protected]

Mukul Shrivastava Partner + 91 22 6192 2777 [email protected]

Anurag Kashyap Partner + 91 22 6192 0373 [email protected]

Anil Kona Partner +91 80 6727 3300 [email protected]

Rajiv Joshi Partner +91 22 6192 1569 [email protected]

Yogen Vaidya Partner +91 22 6192 2264 [email protected]

Dinesh Moudgil Partner +91 22 6192 0584 [email protected]

Jagdeep Singh Partner +91 20 6603 6119 [email protected]

Amit Rahane Partner +91 22 6192 3774 [email protected]

Vinay Garodiya Executive Director +91 22 6192 2164 [email protected]

Rasesh V Thakore Senior Manager +91 22 6192 1588 [email protected]

Ahmedabad2nd floor, Shivalik Ishaan Near C.N. VidhyalayvaAmbawadiAhmedabad - 380 015Tel: + 91 79 6608 3800Fax: + 91 79 6608 3900

Bengaluru12th & 13th floorUB City, Canberra BlockNo.24 Vittal Mallya RoadBengaluru - 560 001Tel: + 91 80 4027 5000 + 91 80 6727 5000 Fax: + 91 80 2210 6000 (12th floor)Fax: + 91 80 2224 0695 (13th floor)

1st Floor, Prestige Emerald No. 4, Madras Bank RoadLavelle Road JunctionBengaluru - 560 001Tel: + 91 80 6727 5000 Fax: + 91 80 2222 4112 Chandigarh1st Floor, SCO: 166-167Sector 9-C, Madhya MargChandigarh - 160 009 Tel: + 91 172 671 7800Fax: + 91 172 671 7888

ChennaiTidel Park, 6th & 7th Floor A Block (Module 601,701-702)No.4, Rajiv Gandhi Salai, Taramani Chennai - 600113Tel: + 91 44 6654 8100 Fax: + 91 44 2254 0120

HyderabadOval Office, 18, iLabs CentreHitech City, MadhapurHyderabad - 500081Tel: + 91 40 6736 2000Fax: + 91 40 6736 2200

Kochi9th Floor, ABAD NucleusNH-49, Maradu POKochi - 682304Tel: + 91 484 304 4000 Fax: + 91 484 270 5393

Kolkata22 Camac Street3rd floor, Block CKolkata - 700 016Tel: + 91 33 6615 3400Fax: + 91 33 2281 7750

Mumbai14th Floor, The Ruby29 Senapati Bapat MargDadar (W), Mumbai - 400028Tel: + 91 22 6192 0000Fax: + 91 22 6192 1000

5th Floor, Block B-2Nirlon Knowledge ParkOff Western Express HighwayGoregaon (E)Mumbai - 400 063Tel: + 91 22 6192 0000Fax: + 91 22 6192 3000

NCRGolf View Corporate Tower BNear DLF Golf CourseSector 42Gurgaon - 122002Tel: + 91 124 464 4000Fax: + 91 124 464 4050

6th floor, Wing A & B, Worldmark 1, Aero city Opp. Holiday Inn, Mahipalpur,New Delhi - 110037Tel: + 91 11 6671 8000 Fax: + 91 11 6671 9999

4th & 5th Floor, Plot No 2B, Tower 2, Sector 126, NOIDA 201 304 Gautam Budh Nagar, U.P. IndiaTel: + 91 120 671 7000 Fax: + 91 120 671 7171

PuneC-401, 4th floor Panchshil Tech ParkYerwada (Near Don Bosco School)Pune - 411 006Tel: + 91 20 6603 6000Fax: + 91 20 6601 5900

Are French companies getting it right in India?

A survey by Fraud Investigation & Dispute Services

Ernst & Young LLPEY | Assurance | Tax | Transactions | Advisory

About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

Ernst & Young LLP is one of the Indian client serving member firms of EYGM Limited. For more information about our organization, please visit www.ey.com/in.

Ernst & Young LLP is a Limited Liability Partnership, registered under the Limited Liability Partnership Act, 2008 in India, having its registered office at 22 Camac Street, 3rd Floor, Block C, Kolkata - 700016

© 2016 Ernst & Young LLP. Published in India. All Rights Reserved.

EYIN1605-045

ED None

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

MAS

managing fraud,bribery and corruption risks in the ... · • increases fraud risks and heightens...

Documents