As a nation, South Africa has many attractive features – and a few undesirable ones too. A fresh survey by PricewaterhouseCoopers (PwC) reveals a few of the latter – bribery and corruption, procurement fraud, cybercrime, insider trading, and more.
Titled the 2014 Global Economic Crime Survey, it unpacks economic crime in the country, and was conducted among 134 respondents from organisations in 17 industry sectors, all of whom gave their insights into the problem. The professional services firm says the exercise was undertaken to “inform South African business leaders about developments in the continuously changing landscape of economic crime in our country and to encourage debate around strategic and emerging issues in this sphere”.
The results don’t paint a pretty picture – economic crime is still a serious concern for South African companies, and 69% of respondents say they have experienced some form of economic crime in the last 24 months. The global average is 37% – an increase of 3% since the last report was released in 2011, compared to a 9% increase in South Africa.
The local figure is not far off the 79% of business people, polled at the recent Corruption Watch business colloquium, who said that they had experienced some form of actual or attempted corruption.
The 2014 survey is linked to PwC’s biennial global economic crime survey, and may be downloaded as a supplement to the main publication.
Economic crime on the rise
The 2014 report is the first since 2005, reports PwC, to show that economic crime is increasing. Before that, it had decreased markedly to 60% in 2011 from 83% in 2005.
The reasons for this increase are not specified in the report, but mention is made of a steady decline in the effectiveness of whistle-blowing systems, which may be related to senior management committing more crimes. In South Africa, senior management is identified as the main insider perpetrator of economic crime – globally, it is middle management. Externally, the main culprits are agents or intermediaries, followed by customers.
According to an article on the survey in The Times, the rise in economic crime is directly linked to the demise in 2009 of the corruption-busting Directorate of Special Operations, or Scorpions, which was disbanded in 2009 and replaced by the Directorate for Priority Crime Investigation – also known as the Hawks.
The types of economic crime experienced by South Africans are:
- Asset misappropriation 77% (globally 69%);
- Procurement fraud 59% (29%);
- Bribery and corruption 52% (27%);
- Human resources fraud 42% (15%);
- Financial-statement fraud 35% (22%);
- Cybercrime 26% (24%);
- Money-laundering 14% (11%);
- Tax fraud 11% (6%); and,
- Illegal insider trading 9% (5%).
Other types of crime reported include market fraud involving price fixing (8% vs 5%); intellectual property infringement, including data theft (7% vs 8%); mortgage fraud (4% v 7%); and espionage (3% locally and globally). The only types of economic crime that have not increased are intellectual property infringement and mortgage fraud.
The fastest-growing economic crime category in South Africa is bribery and corruption, which together with procurement and human resources fraud as well as financial statement fraud, sets local organisations above their global counterparts – and not in a good way. Bribery and corruption has risen from 42% to 59% since the last survey.
Just over half (52%) of South African respondents reported bribery. And with numerous South African companies expanding into Africa and abroad, bribery and corruption may pose a significant threat to them, especially if they do business in the US or UK. This is because offences are often pursued by regulators across borders through far-reaching laws such as the US Foreign Corrupt Practices Act and the UK Bribery Act.
Procurement fraud, another of Corruption Watch’s focus areas, was experienced by 59% of South African respondents during the past 24 months, compared to only 29% of global respondents. Locally, the most vulnerable step in the procurement process is vendor selection, but other areas such as the invitation to bid, drawing up the contract, and the payment process are also targeted.
Between January 2012 and January 2014, Corruption Watch received 465 reports related to procurement corruption in the public sector. Globally, 46% of procurement fraud is committed by governments.
In terms of human resources fraud, 42% of South African respondents report some form of it during the past 24 months, compared to 15% globally. Types of human resource fraud detected include false wage claims, ghost or fictitious employees, and a fraudulent reduction in payroll taxes.
Millions lost to economic crime
The report reveals that 77% of all internal fraud in South African companies is committed by senior and middle management – 41% (more than double the global figure of 20%) and 36% respectively. The typical culprit is male, aged between 31 and 40, has a tertiary qualification, and has been with his employer for 10 years or more.
According to PwC South Africa director Louis Strydom, four of the 134 respondents reported a loss of more than R1-billion each through fraud. In the public sector, it’s estimated that about R30-billion helps to line government pockets each year. “If management doesn’t advocate against such practices, we cannot beat [economic fraud],” says Strydom.
At the Corruption Watch business colloquium, 72% of businessmen polled said corruption had worsened over the past two years, while 70% had lost a bid for business because of corrupt officials and 87% believed their competitors engaged in corrupt behaviour to seize unfair advantage.
The PwC survey reports that formal fraud risk management programmes have become the most effective fraud detection method, but that risk assessments are a neglected area of doing business in South Africa. Fewer than half the colloquium attendees had conducted a thorough due diligence to assess corruption risk, a figure borne out by the PwC survey, which reports that just 51% of companies in South Africa carry out formal risk assessments at least annually or more frequently.
The survey also reveals that South African companies are ahead of the global race in this regard. Over the last two years, 17% of fraud has been detected this way in South Africa, compared to the global figure of 11%.
In addition, 82% of South African respondents (against 62% globally) indicate that their organisations have implemented a formal whistle-blowing system. However, the survey also finds that the effectiveness of whistle-blowing mechanisms has decreased over the years, but it does reveal an increase in the number of crimes detected by accident.
And once the crime has been sniffed out, more South African companies (82% versus 49% globally) hand the case over to law-enforcement agents to deal with internal culprits. Externally, 63% of culprits in South Africa land up in a police cell, versus 61% globally.