Economic crime in SA hits record levels
Economic crime in SA hits record levels
THE SouthernTIMES Mar 20, 2018
Johannesburg – South African organisations continue to report the highest instances of economic crime in the world with economic crime reaching its highest level over the past decade, according to PwC’s biennial Global Economic Crime Survey released on Tuesday.
South African organisations, which experienced economic crime are now at a staggering 77 percent, followed in second place by Kenya (75 percent), and thirdly France (71 percent). With half of the top 10 countries who reported economic crime coming from Africa.
The Global Economic Crime and Fraud Survey examines over 7,200 respondents from 123 countries, of which 282 were from South Africa.
Trevor White, PwC Partner, Forensic Services and South Africa Survey Leader, says: “Economic crime continues to disrupt business, with this year’s results showing a steep incline in reported instances of economic crime. At 77 percent South Africa’s rate of reported economic crime remains significantly higher than the global average rate of 49 percent. However, this year saw an unprecedented growth in the global trend, with a 36 percent period-on-period increase since 2016.”
Economic crime in South Africa is now at the highest level over the past decade. It is also alarming to note that 6 percent of executives in South Africa (Africa 5 percent and Global 7 percent) simply did not know whether their respective organisations were being affected by economic crime or not.
While the overall rate of economic crime reported was indeed the highest for South Africa, the period-on-period rate of increase for South Africa and Africa as a whole was below that of our American, Asian and European counterparts.
From a regional perspective, the biggest increase in experiences of economic crime occurred in Latin America, where there was a 25 percent increase since 2016 to 53 percent in respondents who indicated they had experienced economic crime. The USA was a close second with a 17 percent increase over 2016 to 54 percent of respondents, while Asia Pacific and Eastern Europe experienced increases of 16 percent and 14 percent, respectively.
White further added that: “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.”
“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.”
Types of economic crime
Asset misappropriation continues to remain the most prevalent form of economic crime reported by 45 percent of respondents globally and 49 percent of South African respondents. While the instances of reported cybercrime showed a small decrease in the South African context (29 percent in 2018 versus 32 percent in 2016), it retained its second place in the global rankings (31 percent) 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 percent and takes third place globally at 29 percent. This was followed closely by procurement fraud (39 percent in South Africa versus 22 percent 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 percent), the resultant erosion in value from the country’s gross domestic product (GDP) is startling. Accounting fraud, which is usually perpetrated by senior management and results in the largest losses, increased from 20 percent to 22 percent?
Cost of fraud and prevention
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 percent of South African respondents lost more than US$100,000 (+/- R1.2 million) to what they regarded as the most disruptive economic crime to affect them, with 1 percent reporting losses of greater than US$100 million (R1.2 billion). When combined with the costs to address this issue through investigations or other interventions, where 41 percent of respondents reported having had to spend an equal or greater amount (10 percent reported having to spend upward of three times the amount, with 3 percent 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, White comments.
South African businesses continue to take measures to combat economic crimes, with 44 percent (Africa: 41 percent) of respondents having increased their spend on combating fraud since 2016 and 46 percent plan to increase their spend over the next 24 months (Africa: 45 percent). It is positive to note that almost two-thirds (64 percent) of South African respondents monitor whistle-blower lines as a means to ensure the effectiveness of their compliance and governance programmes (Africa: 51 percent). This represents a 9 percent increase since 2016.
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 percent of South African respondents (versus 91 percent of Global and 94 percent 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 endeavours.”
Despite higher levels of understanding and reporting of fraud, blind spots still prevail. 46 percent 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 percent) 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 comments.
Regulatory risk continues
Across the board, regulations and reporting requirements, touching on both legal and ethical behaviour, continue to expand. There is 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. 71 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.
Accountability of the board
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.”
The survey shows that almost every serious incident of fraud has been brought to the attention of senior management (95 percent). 85 percent of South African respondents indicated their organization had a formal business ethics and compliance programme in place. In addition, 20 percent 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.” – PwC
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