Food Fraud: Understanding the Problem, Managing its Risks, and Seizing Opportunities

The media often reports on food fraud with the goal of educating consumers on how they may be impacted and tips for protecting themselves. However, businesses play the most critical role in managing food fraud.  

The impact of food fraud is difficult to estimate, but it is believed that it amounts to over US $40 billion worldwide every year. The Grocery Manufacturers Association adds that each food fraud event can impair the annual revenue of a food company by 2 percent to 15 percent. In addition, several factors indicate that this is a growing phenomenon. The good news is that acting properly may be easier and cheaper than it may appear.

What is food fraud?
Food fraud occurs when there is intentional misrepresentation to the public, buyers or authorities as to the nature, the origin or the ingredients of a food product. This may involve diluting a product with lower-quality materials or ingredients, adding foreign substances to the original product, selling non-organic products as “organic”, misrepresenting the animal or fish species or using a misleading label.

The growth of food fraud risk is stimulated by structural inputs such as trade expansion, the increasing number of parties involved in food products processing and trade, as well as the development of channels and the introduction of value-added products.

Known food fraud events have all highlighted one thing: controls are either absent, inadequate or poorly allocated. If more businesses and buyers took the time to properly test the quality of food they process or buy, food fraud schemes would not reach such an extent or cause as much damage. Examples of such cases include the sale of tainted meat in Brazil, the melamine milk scandal in China, as well as misrepresentations as to the origin of food products or the substitution of olive oil, wine or meats with cheaper alternatives.

What is the impact to my business?
For agri-food businesses, whether they operate in the farming, processing, retailing or trade fields, food fraud may entail serious consequences as it can potentially endanger consumer health (through allergic reactions or food poisoning) and jeopardize a business’s reputation, as well as its ability to meet its goals.

Food fraud also presents a particular feature: it can drive a business in a panic mode and push it to over-invest in prevention. In other words, if a business neglects the risks of food fraud, it increases its odds of suffering the consequences while weakening both their value chains and industry, and increasing the long-term costs related to food fraud for the industry as a whole.

How should I invest in risk management?
Experience shows that unfortunately, some leadership teams are afraid they may be over-investing in this aspect. They believe that risk management allocates valuable corporate resources to activities that bring no direct value to their consumers, at the expense of productive, high-value activities such as sales or innovation.
On the one hand, it is true that there are no limits to the levels of sophistication or complexity—and, by extension, cost—of food fraud prevention and detection mechanisms. Overreaction is just as damaging to a business as inaction.

On the other hand, risk management can contribute to creating long-term value. Remember that agri-food businesses are first and foremost businesses and as a result, they usually set long term value creation goals for their owners. The achievement of these value creation goals may be slowed down or even stopped by numerous events that may go beyond food fraud.

Indeed, food fraud risk goes side by side with other risks that are common to all industries, including those of quality, strategic, reputational, financial, IT, health and safety, political and regulatory nature. Some situations other than food fraud that resulted in substantial losses for several companies include the “fake CEO” fraud at La Coop fdre in 2014, the listeriosis crisis that hit Maple Leaf and the cheese industry in the summer of 2008, and the maple syrup heist discovered in 2012.

To ensure a high performance risk management process that will create value for your business, we recommend following these steps:
  1. Define the goals and strategy of your business: How does your enterprise create value over the long term? Risk management covers any event that could prevent your business from achieving its goals. If your goals and strategy are unclear, your risk management initiatives will be inaccurate and will bring less value to your business.
  2. Identify risks (financial, strategic, human, IT, political, regulatory, etc.): Consider all intentional or unintentional potential events, whether the threat is internal or external to the organization. For example, food fraud is by definition intentional, but could result from the actions of an employee (internal) or a supplier (external). To identify any potential risks of fraud (food fraud or financial fraud), try putting yourself in a fraudster’s shoes.
  3. Identify risk factors of these threatening events and identify their consequences, if they should occur.
  4. Develop and implement a plan designed to prevent the most important risks. Compare various alternatives and choose the ones that best fit your business’s reality. For example, food fraud risk often comes from suppliers. Setting up a sampling plan can be a low-cost way to give adequate reassurance to your leadership team.
  5. Make your process dynamic and continuous and take into consideration the nature and relevance of each risk as it evolves. For example, the knowledge gained following the discovery of tainted meat sales in Brazil certainly changed buying practices in the meat industry quickly.
In the event that a crisis still occurs, you could reduce its impact through the use of interrelated systems. For example, using accurate financial reporting systems makes damage appraisals easier in the event of an insurance claim or a litigation. A business continuity plan can help you resume your operations more quickly following a disaster or a crisis.

It is easy to set up your risk management internally. On the other hand, hiring a team of experts can help you quickly implement a high-performance risk management system tailored to the strategic goals of your business and could even reduce your risk management costs.

By improving your risk management processes, you are less likely to stand as a victim of food fraud (or be subject to any other type of risk) and you can contribute in making the food industry more resilient and prosperous. Furthermore, you can give your business a competitive edge with your buyers, who are as sensitive to the risk of food fraud as you.

Read and download BDO Canada’s full Food & Beverage Quarterly on fraud in the food and beverage industry here.

For more information on food fraud, contact Diane Fugre at dfugere@bdo.ca or Louis-Samuel Jacques ljacques@bdo.ca. Be sure to keep up with our latest thoughts by subscribing to our blog on the Consumer Business Compass homepage here, and follow us on Twitter at @BDOConsumer and @BDO_Canada