Fraud has become an alarmingly common occurrence in the world today, with a significant portion of the news involving individuals, organisations and companies engaged in deceptive activities.
Gareth Cremen, partner, and Nomcebo Ntuli, candidate legal Practitioner at Cox Yeats
Whether it is politicians, people in power, or everyday citizens, fraud is a pervasive issue. Financial fraud stands out as the most prevalent form, and its association with corruption often makes it even more concerning. Unfortunately, instances of corruption-related fraud do not always receive the attention they deserve in the media headlines.
Fraud and corruption are akin with criminal duo, Bonny, and Clyde. Their influence knows no boundaries and has become a global problem, extending beyond the borders of South Africa. However, there are steps that individuals and businesses may take to avoid being a victim of fraud.
Insurance fraud – a rising concern
One of the most alarming types of fraud is insurance fraud, which involves intentional deception by consumers or even organisations and agents, to gain unlawful benefits. According to the Insurance Crime Bureau, up to 20% of the R35-billion paid out on short-term insurance claims in 2019 were fraudulent.
Life insurers alone received 4 287 false and dishonest claims last year, marking a significant increase from the previous year. Fraudsters target various insurance types, from funeral coverage to car insurance, making their deceitful schemes endless. (Source: Association for Savings and Investment South Africa (ASISA)).
This is a significant increase from 2020, when 3 500 cases totalling R587,3-million were uncovered.
However, fraud is not limited to the life insurance industry; thieves are targeting all types of insurance. Funeral coverage payouts are being claimed by fraudsters for deceased relatives who do not exist. Car insurers are dealing with an increase in the number of claims for theft and non-existent damages – the fraud attempts are endless.
Corporate/business fraud – no distinction
Fraud is a common law offence that includes various aspects, leaving no clear distinction between corporate and business fraud. Professional crimes such as fraud, tax evasion, bribery, and counterfeiting fall under this category. Corporate bodies can be held accountable for crimes committed by their directors or employees within their scope of employment or authority, as outline in the Criminal Procedure Act (No. 51 of 1977) (CPA).
Ghost employees are one of the biggest growing types of fraud there is. Ghost employees is a term that refers to an employee which is added to a company’s payroll to collect a wage or salary, even though the company does not employ them.
The fraud is usually done in businesses with large numbers of employees, particularly when employees are spread over a number of physical locations and where the payroll function is controlled centrally. Small businesses may be victims when the payroll process is managed by one person, and that person either is the fraudster or does not pay much attention to the payroll process.
State-owned passenger rail company Passenger Rail Agency of South Africa (Prasa) is still chasing ghosts, with an investigation into thousands of unidentifiable workers on its payroll progressing. Investigations into the suspected “ghost employees” on the Prasa payroll flagged 2 142 employees as suspicious, including 1 480 who could not be physically verified.
Securities fraud – manipulation of markets and deceiving investors
Securities fraud including corporate fraud, internet fraud, insider trading, microcap fraud, accountant fraud, short selling abuses, advance payment fraud, broker embezzlement, hedge fund fraud Ponzi and pyramid schemes are all examples of illegal activities that aim to deceive investors or manipulate financial markets.
Recognising these scams is essential; if an offer seems too good to be true, verifying registration with relevant financial agencies and authorities. Conducting personal research into the investment’s viability can prevent falling victim to deceitful schemes.
Procurement fraud
Procurement fraud refers to the manipulation of payment systems during the procurement process. The four most common types of procurement fraud are employee contractor collusion, conflict of interest, bid rigging and product substitution.
* Employee and Contractor Collusion – This takes place when an employee responsible for the procurement process favours one vendor over another or awards a contract above market price. They do this in exchange for kickback money, goods, or services. The employee convinces his employer to buy unneeded products or services.
* Conflict of Interest – Conflict of interest in a procurement process is when a vendor is selected based on a personal relationship: the procurement manager awards a contract to a friend or family member based on that relationship rather than on specific aim criteria. They may do this as a personal favour or in exchange for some kind of material reward.
* Bid Rigging (collusive tendering) – Bid rigging involves collusion between vendors who manipulate the bids the business or government agency receives. Contractors may collude to offer identical prices, raise prices, remove competition, etc. In all these cases, it is the business or government agency that loses out. Bid rigging is a form of anticompetitive collusion and is an act of market manipulation. Often, competitors agree in advance who will give the winning bid on a contract to be awarded through a competitive bidding process. Bid rigging can be harmful to consumers and taxpayers, who may be forced to bear the cost of higher prices and procurement costs.
* Product Substitution – This scheme occurs after a contract is won. The contractor swaps out the promised goods or products for other, cheaper ones and pockets the difference. Substitute goods may be sub-standard, faulty, not certified, falsely certified, not meet specifications, etc. This kind of scheme can end up being extra costly if the business or government agency in question needs to replace the faulty products or repair damage done by them. The quality of the product is essential when choosing vendors. After winning the contract, the vendor must supply the level of quality it offered in its bid.
Penalties
The penalties for fraud can be severe, ranging from five to 25 years in prison, depending on the type of fraud and the losses incurred by the victims. Offenses involving significant funds can lead to maximum penalties. Trial courts in South Africa hold the authority to decide sentences based on the gravity of the offense, the offender’s circumstances, and public interest.
Proactive prevention
The insurance industry has adopted proactive measure to combat fraud, such as employing technology, data analytics, collaboration with law enforcement, and information campaigns. On an individual level, internet safety is crucial in protecting oneself from fraud. Properly disposing of documents having sensitive financial information and being cautious about disclosing personal details can significantly reduce the risk of falling victim to abuse.
In conclusion, the perpetuation of fraud in South Africa and beyond has made it a ‘second language’ for many. However, by understanding the various forms of fraud and taking proactive steps to prevent it, individuals and businesses can protect themselves and their assets from this ever-evolving landscape of deception.
There should be a zero-tolerance approach when dealing with fraud. It is paramount that entities, as well as individuals combat fraud by reporting it to the necessary authorities. Entities and individuals should be vigilant as to ensure that they are not victims of fraud.