By Kathy Gibson – South Africa has the dubious distinction of leading the world when it comes to economic crime, which has now reached 77% – its highest level in 10 years.
This is against a backdrop of rising levels of reported economic crime worldwide, according to PwC’s biennial Global Economic Crime Survey. Globally, the figure is 49%.
“It’s not just a South African problem: this is a global issue – all regions of the world are affected,” comments Trevor White PwC partner: forensic services and South Africa survey leader.
The whole problem cannot be blamed on state capture, White adds. “The other side of a fraudulent contract with government is the private sector. It’s not possible for any sphere of government to commit fraud on the magnitude we have seen over the past decade, without business being a willing participant. And many of the companies involved have turned out to be foreign multinationals.”
The country reporting the second-most economic crime is Kenya (75%), followed by France (71%), then Russian Federation (66%), Uganda (66%), Zambia (65%), Belgium (65%), China (63%), Mexico (58%) and Tanzania (57%).
Although Africa is the leading region for economic crime, it has gone up – in some cases radically – in the rest of the world too.
Will the graph keep going up? “I like to think that in South Africa there have been a lot of changes in the last two month, new ideas about what is acceptable and not,” says White. “In the next 12 months, we will probably see a clean-up and then see a change in hat is seen as acceptable behavior.”
South Africans do have a high or excessive knowledge of fraud taking place in their organisations – 70% of executives compared to 60% globally.
White says: ” Economic crime continues to disrupt business, with this year’s results showing a steep incline in reported instances of economic crime. At 77% South Africa’s rate of reported economic crime remains significantly higher than the global average rate of 49%. However, this year saw an unprecedented growth in the global trend, with a 36% period-on-period increase since 2016.”
He adds that it is alarming to note that 6% of executives in South Africa (Africa 5% and global 7%) simply did not know whether their respective organisations were being affected by economic crime or not.
From a regional perspective, the biggest increase in experiences of economic crime occurred in Latin America, where there was a 25% increase since 2016 to 53% in respondents who indicated they had experienced economic crime. The US was a close second with a 17% increase over 2016 to 54% of respondents, while Asia Pacific and Eastern Europe experienced increases of 16% and 14%, respectively.
“We believe that these jumps in reported crime are being driven by a heightened state of fraud awareness by respondents, and in this lies the silver lining,” White adds.
“We have seen paradigm shifts in the way that businesses are being run. Notably, the accountability for fraud and economic crime has moved into the executive suite, with the C-suite increasingly taking responsibility, and the fall, when economic crime and fraud occur. Organisations are beginning to shed their denial complex regarding the many blind spots they have in identifying fraud and are learning how to address them.”
Asset misappropriation continues as the most prevalent form of economic crime reported by 45% of respondents globally and 49% of South African respondents.
While the instances of reported cybercrime showed a small decrease in the South African context (29% in 2018 versus 32% in 2016), it retained its second place in the global rankings (31%) albeit at a lower rate of occurrence than 2016.
One of the new categories of economic crimes was that of “fraud committed by the consumer”. It is the second most reported crime in South Africa at 42% and takes third place globally at 29%. This was followed closely by procurement fraud (39% in South Africa versus 22% globally). This indicates that the entire supply chain in South Africa is fraught with criminality.
When combined with the high instances of bribery and corruption reported (affecting more than a third of organisations at 34%), the resultant erosion in value from the country’s gross domestic product (GDP) is startling.
“What we can see is that bribery and corruption, at 34%, is still very high – significantly above the global average,” says White. “This means that one-third of organisations are suffering bribery and corruption in one form or another.”
Accounting fraud, which has grown to 22%, is the fraud committed by senior management, White adds. “This is where the numbers and the losses are most significant.”
Cyber crime is seen as the most disruptive crime that companies are likely to suffer within the next two years, followed closely by bribery and corruption. To date, compromised data has been the top instance cyber crime experienced by companies. Consumer fraud and false identities also contribute, along with breaches from people inside the organisation.
As awareness, and the profile of fraud and economic crime has risen, so too have investments to combat it, linked also to the direct financial losses reported in the past two years. According to the survey 35% of South African respondents lost more than $100 000 (about R1,2-million) to what they regarded as the most disruptive economic crime to affect them, with 1% reporting losses of greater than $100-million (R1.2-billion).
With these figures, economic crime can be prohibitively expensive for South African organisations, White says.
When combined with the costs to address this issue through investigations or other interventions, where 41% of respondents reported having had to spend an equal or greater amount (10% reported having to spend upward of three times the amount, with 3% spending as much as 10 times the value of the initial loss), we are faced with the damning realisation that the actual cost of these crimes is crippling the economy, he adds.
“You have to realise that these types of economic crimes are extremely complex and happen across different jurisdictions. So it takes big teams with a lot of expertise to investigate them. They have to go back to investigate what happened, who is responsible and where the money went.”
Companies are also spending so much on investigating crimes, to contain reputational damage, to be seen to be doing the right thing, White says. “The days of sweeping it under the carpet are gone. With social media, these things get out, and out of control of the organisation. By setting up an investigation, they can control the process.”
Internal actors now account for 49% of economic crime – and senior management is now responsible for 20%. Idle management account for 33% and junior management for 24% of these internal criminals.
The impact of crime inside and outside the organisation is mostly on employee morale, at 46%; business relations at 33%, and reputation/brand strength at 28%.
Corporate controls are responsible for the most economic crime detection, now sitting at 51% (up 7% from 2016). Corporate culture has risen 11% to 30% and things beyond the influence of management has decline 17% to 19%.
Corporates in South Africa are spending more money on corporate controls, and they plan to spend even more I the future, White points out.
When it comes to corporate culture, internal tip-offs account for 14%, eternal tip-offs for 8% and whistle-blowing accounts for 8% of crimes detection.
South African businesses continue to spend on crime prevention, with 44% (Africa: 41%) of respondents having increased their investment in combating fraud since 2016, and 46% planning to increase their spend over the next 24 months (Africa: 45%). It is positive to note that almost two-thirds (64%) of South African respondents monitor whistleblower lines as a means to ensure the effectiveness of their compliance and governance programmes (Africa: 51%). This represents a 9% increase since 2016.
White says it is also reassuring that business leaders are taking an active interest in their governance responsibilities and are becoming more aware of, or rather want to be made aware of, the effects and issues that economic crime and fraud have on their organisations. 95% of South African respondents (versus 91% of global and 94% of African) said that the most disruptive incidents of economic crime were brought to the attention of the board executives or governance leaders within their organisations.
Respondents also reporting using technologies like artificial intelligence (AI) and advanced analytics as part of their efforts to combat and monitor fraud. The survey shows that companies in emerging markets, including South Africa, are currently investing in advanced technologies at a faster rate than their counterparts in developed nations.
Trevor Hills, forensic services leader for PwC Southern Africa, says: “Technology is clearly a fundamental tool in the fight against fraud, but it’s not the only one. Ultimately, when it comes to blocking that ‘last mile’ to fraud, the returns from investment on people initiatives are likely to far exceed those from investing in another piece of technology.
“Focusing on human behaviour offers the best opportunity for reducing or preventing fraud, because ultimately, machines don’t commit fraud, people do -they just happen to be using technology more and more in these endeavors.”
Despite higher levels of understanding and reporting of fraud, blind spots still prevail, and 46% of respondents globally said their organisations have still not conducted any kind of risk assessment for fraud or economic crime. Only three in four South African organisations said they had conducted any kind of fraud or economic crime risk assessment. Additionally, only around a third (37%) of respondents had conducted an anti-bribery/anti-corruption risk assessment.
“This is a worrisome statistic, considering how impactful and expensive this crime has become worldwide on both the regulatory and financial sides,” Hills says.
Companies still find it difficult to get assistance from law enforcement authorities, White adds. “It is very difficult at the moment to report an economic crime, and get a response. The local police don’t have the technology, knowledge or expertise to investigate. And, until recently, the Hawks were not taking on private sector fraud cases.”
This is changing, he adds. “We know of some cases where the Hawks are involved in significant private sector investigations.. And they have significantly higher levels of skills.
“The old commercial crime divisions have mostly been depleted of their skills and resources over time. Hopefully that will change soon.”
Across the board, regulations and reporting requirements, touching on both legal and ethical behaviour, continue to expand. There is a greater awareness and visibility on the part of organisations regarding how and why fraud occurs. South Africa is undoubtedly undergoing far-reaching changes and visible enforcement is on the rise. Seventy-one percent of local respondents expect recent changes in the geopolitical regulatory environment to have an increasing impact on their organisations in the next two years, and 63% of them expect more changes as regards the enforcement of regulations.
Hills says: “Accountability for fraud and economic crime has moved into the executive suite, with the C-Suite increasingly taking responsibility, and the fall, when economic crime and fraud occur.”
With increasing regulatory requirements there is significantly more risk for board members who are not fully engaged, White adds. “They are going to be held accountable at the end of the day.”
This means economic crime becomes a risk that must be managed at the highest level of the organisation. This is serious business.”
The survey shows that almost every serious incident of fraud has been brought to the attention of senior management (95%). Eighty-five percent of South African respondents indicated their organisation had a formal business ethics and compliance programme in place.
In addition, 20% of local respondents indicated that the CEO (who is part of the first line of defence) has primary responsibility for the organisation’s ethics and compliance programmes, and is therefore more instrumental to the detection of fraud and the response to it.
White says: “Many companies are finding themselves caught in a tug of war between three business drivers: the market’s appetite for innovative disruptors; shareholders’ desire for financial outperformance; and society’s expectations for ethical conduct.
“The truth is that when businesses misbehave, investors often tend to look the other way as long as their investment is not threatened. The C-suite should be careful not to do the same. We often see that organisations can be easily lured into a false sense of security when scenarios appear to be rosy and when the ‘tone at the top’ appears to be consistent with the right words. What really counts is not tone at the top, but rather action at the top. The market may love disruptors or outperformers – but not enough to tolerate bad behaviour.”
White advises that companies spend more on their people to mitigate economic crime. Controls, openness and culture are the three keys to changing employee behaviour, he adds.
“This is the time, the chance, for South Africa companies to get on board and take a stand. It is possible to significantly reduce fraud and corruption in South Africa – it may not be eradicated completely, but we can reduce it. It just takes one of the parties involved to say enough is enough, and to stop the fraudulently corrupt activities.
“Corporate South Africa needs to do its part.”
The Global Economic Crime and Fraud Survey examines over 7200 respondents from 123 countries, of which 282 were from South Africa.