Fraud risk of sovereign wealth funds: fraud triangle and agency theory perspectives

Abstract

Purpose

The purpose of this paper is to examine failures in internal and external controls associated with sovereign wealth funds (SWFs), using three caselets to illustrate the fraud triangle theory factors.

Design/methodology/approach

This study uses a qualitative research approach. Caselets are used to illustrate the fraud triangle factors associated with SWFs.

Findings

Ideally, SWFs would be characterized by opacity and the strategic flexibility to advance political goals, but this operational agility facilitates an environment ripe for fraud, in large part because there is little transparency with regard to their regulatory structure. Elements of the fraud triangle inherent in the structure of SWFs contribute to the fraud found in the three case examples.

Research limitations/implications

The authors use three SWF fraud cases rather than statistical sampling of all SWFs, which limits the generalizability of the findings. Future research should explore additional recommendations for the evaluation of SWF governance.

Practical implications

The overlap between public sector governance and SWF governance creates an environment amenable to fraud, and as a result, fraud has occurred in several SWFs. Governance recommendations should take into account the lessons learned from previous SWF fraud cases.

Social implications

Ideally, SWFs would be characterized by opacity and the strategic flexibility to advance political goals, but this operational agility may also facilitate an environment ripe for fraud, in large part because there is little transparency with regard to their regulatory structure.

Originality/value

To the best of the authors’ knowledge, this paper is the first to identify the fraud triangle risk factors associated with sovereign wealth funds using SWF fraud caselets.

Citation

Lootah, M., Gleason, K., Smith, D. and Zoubi, T. (2024), "Fraud risk of sovereign wealth funds: fraud triangle and agency theory perspectives", Journal of Financial Crime, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JFC-05-2024-0155