Managing fraud bribery and corruption risks in the hospitality industry

Managing fraud, 

bribery and corruption 

risks in the hospitality 

industry 

Fraud Investigation & Dispute Services

Foreword 

India’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. 

B 

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

The influencing factors 

Recent trends in the hospitality sector in India 

Rising demand and innovation: 

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. 

Changing operating model: 

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. 

Web of taxes and approvals: 

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 

Cost reduction avenues: 

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. 

Rising fraud, bribery and corruption risks: 

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. 

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

1

Why the industry is vulnerable to fraud – a hit 

and miss comparative 

As the industry prioritizes customer service vis-à-vis internal controls, the vulnerability to fraud is very high. 

Commonly observed practices 

(industry practices) 

Resulting potential vulnerabilities 

(areas of concern) 

• Guest-facing employees focus on guest interaction 

• Lack of prioritization of control procedures meant to 

prevent or detect fraud (e.g. updating the guest register, 

safe use of access cards, etc.) 

• Procurement of licenses and clearances on urgent basis 

• Engagement with dubious third parties to enable 

camouflage of bribes 

• Dated IT systems and data security measures 

• Inadequate data security leads to leakage of sensitive 

guest data such as credit card details, passport details 

and other financial transactions 

• Free availability of cash and extensive use of credit cards 

• Presents an opportunity for cash larceny 

• Complex business structures and discretionary processes 

• Increases propensity of manipulation of financial 

reporting 

• Frequent use of subcontractors 

• Increases fraud risks and heightens risk of employee 

collusion with third party vendors and contractors 

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

regulatory agencies 

• Induces negative industry practices such as gifting 

complementary hotel stay and car travel to government 

officials 

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

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 


3

Case studies 

1 

Front office fraud 

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. 

Findings revealed: 

The investigation revealed several modus operandi: 

A. 

B. 

C. 

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. 


2 

Market intelligence uncovered conflict of 

interest and collusion 

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. 


5

Is your business geared to address key risks in 

these 3 phases 

Investment phase 

1 

Fraud scenario 

• 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 

Questions to ask 

• 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? 

Construction phase 

2 


• 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? 


Operation phase 

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 

3 


• 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? 

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 

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 

• Fraudulent refund of old balances to suppliers 


7

Our solutions 

Proactive 

Reactive 

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 

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. 


EY offices 

Ahmedabad 

2nd floor, Shivalik Ishaan 

Near C.N. Vidhyalayva 

Ambawadi 

Ahmedabad - 380 015 

Tel: + 91 79 6608 3800 

Fax: + 91 79 6608 3900 

Bengaluru 

12th & 13th floor 

UB City, Canberra Block 

No.24 Vittal Mallya Road 

Bengaluru - 560 001 

Tel: + 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 Road 

Lavelle Road Junction 

Bengaluru - 560 001 

Tel: + 91 80 6727 5000 

Fax: + 91 80 2222 4112 

Chandigarh 

1st Floor, SCO: 166-167 

Sector 9-C, Madhya Marg 

Chandigarh - 160 009 

Tel: + 91 172 671 7800 

Fax: + 91 172 671 7888 

Chennai 

Tidel Park, 6th & 7th Floor 

A Block (Module 601,701-702) 

No.4, Rajiv Gandhi Salai, 

Taramani Chennai - 600113 

Tel: + 91 44 6654 8100 

Fax: + 91 44 2254 0120 

Hyderabad 

Oval Office, 18, iLabs Centre 

Hitech City, Madhapur 

Hyderabad - 500081 

Tel: + 91 40 6736 2000 

Fax: + 91 40 6736 2200 

Kochi 

9th Floor, ABAD Nucleus 

NH-49, Maradu PO 

Kochi - 682304 

Tel: + 91 484 304 4000 

Fax: + 91 484 270 5393 

Kolkata 

22 Camac Street 

3rd floor, Block C 

Kolkata - 700 016 

Tel: + 91 33 6615 3400 

Fax: + 91 33 2281 7750 

Mumbai 

14th Floor, The Ruby 

29 Senapati Bapat Marg 

Dadar (W), Mumbai - 400028 

Tel: + 91 22 6192 0000 

Fax: + 91 22 6192 1000 

5th Floor, Block B-2 

Nirlon Knowledge Park 

Off Western Express Highway 

Goregaon (E) 

Mumbai - 400 063 

Tel: + 91 22 6192 0000 

Fax: + 91 22 6192 3000 

NCR 

Golf View Corporate Tower B 

Near DLF Golf Course 

Sector 42 

Gurgaon - 122002 

Tel: + 91 124 464 4000 

Fax: + 91 124 464 4050 

6th floor, Wing A & B, 

Worldmark 1, Aero city 

Opp. Holiday Inn, Mahipalpur, 

New Delhi - 110037 

Tel: + 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. India 

Tel: + 91 120 671 7000 

Fax: + 91 120 671 7171 

Pune 

C-401, 4th floor 

Panchshil Tech Park 

Yerwada 

(Near Don Bosco School) 

Pune - 411 006 

Tel: + 91 20 6603 6000 

Fax: + 91 20 6601 5900 

Contact us 

Arpinder Singh Partner and National Leader + 91 22 6192 0160 arpinder.singh@in.ey.com 

Sandeep Baldava Partner + 91 40 6736 2121 sandeep.baldava@in.ey.com 

Vivek Aggarwal Partner + 91 12 4464 4551 vivek.aggarwal@in.ey.com 

Mukul Shrivastava Partner + 91 22 6192 2777 mukul.shrivastava@in.ey.com 

Anurag Kashyap Partner + 91 22 6192 0373 anurag.kashyap@in.ey.com 

Anil Kona Partner +91 80 6727 3300 anil.kona@in.ey.com 

Rajiv Joshi Partner +91 22 6192 1569 rajiv.joshi@in.ey.com 

Yogen Vaidya Partner +91 22 6192 2264 yogen.vaidya@in.ey.com 

Dinesh Moudgil Partner +91 22 6192 0584 dinesh.moudgil@in.ey.com 

Jagdeep Singh Partner +91 20 6603 6119 jagdeep.singh@in.ey.com 

Amit Rahane Partner +91 22 6192 3774 amit.rahane@in.ey.com 

Vinay Garodiya Executive Director +91 22 6192 2164 vinay.garodiya@in.ey.com 

Rasesh V Thakore Senior Manager +91 22 6192 1588 rasesh.thakore@in.ey.com 


9

Ernst & Young LLP 

EY | Assurance | Tax | Transactions | Advisory 

About EY 

EY 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 hospitality industry

Create successful ePaper yourself

Delete template?

Save as template?