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White collar crime thrusts corporates and SA’s economy into turbulent waters

White collar crime thrusts corporates and SA’s economy into turbulent waters

A rise in fraud, corruption and money laundering is having a devastating effect on South Africa’s ability to grow its economy, build infrastructure and create jobs, says Deloitte.

And while multinational companies have to jump through more regulatory hoops than ever before in an effort to stamp out corrupt practices, the application of these rules is not being applied consistently across all jurisdictions, leaving too many gaps for criminals to exploit. 

“We are at a critical phase in our development, yet tender fraud, money laundering, illicit gains, poaching and untaxed money, among others, are on the rise and too few of these criminals are getting caught. This money, which circumvents the fiscus as no tax is paid, only makes it more difficult to ramp up infrastructure development, growth and job development,” says regulatory expert from Deloitte, Anthony Smith.

The Association of Certified Fraud Examiners' 2014 Report to the Nations on Occupational Fraud and Abuse estimates that the typical organization loses 5% of revenues each year to fraud. If applied to the 2013 estimated gross world product, this would translate to a potential projected global fraud loss of nearly US$3.7tn.

The median loss caused by the frauds was US$145,000, with Sub-Saharan Africa only behind the US. Clayton Thomopoulos a Director from Deloitte says better solutions are needed, as it is not enough for companies to be reactive.

“SA is a target for inbound and outbound fraud and money laundering because of the low levels of prosecution. Commercial crime is becoming an increasing burden as its cost to businesses is increasing,” he says.

The December 2014 Illicit Financial Flows from the Developing World: 2003-2012 report by Global Financial Integrity finds that the developing world lost US$6.6tn in illicit financial flows from 2003-2012, with illicit outflows alarmingly increasing at an average rate 9.4% per year.

As a percentage of GDP, Sub-Saharan Africa suffered the biggest loss of illicit capital. Illicit outflows from the region averaged 5.5% of GDP annually. Globally, illicit financial outflows averaged 3.9% of GDP. The report found SA was losing roughly an average of $12 billion every year, which would be about R150bn at today’s exchange rate.

Mr Smith says while billions of rand are already being spent by banks on combatting money laundering, it is the lack of prosecutions that remains a major concern.

“It is time to rethink how control systems work. The true test is when these people are brought to book – that is the link in the chain of criminality that still needs to be broken – the ability to prosecute and ability of courts to handle it,” he says.

Levels of enforcement and legislative sophistication often differ in the countries in which multinational companies operate – but especially in Africa. “There is definitely a risk for these companies relating to the level of protection they will receive,” says Smith.

Thomopoulos says the key to tackling the problem is to spot and deter motive, opportunity and rationalisation of the crime. 

“For example, a motive may be that some employees have financial difficulties and the opportunity may be easy to bypass internal controls. These two factors combined with potential employee discontent may create a fertile ground for fraud to occur. The rationalisation may then be that others are doing it already, so why not join in,” he says.

Thomopoulos says more focus is needed on the root causes of the fraud and to proactively detect and prevent the crime.

“A problem is organisations are rarely one step ahead. In house fraud risk assessments to spot vulnerabilities, anonymous surveys of staff, awareness and education, industry benchmarks, risk registers, forensic data analytics, continuous control monitoring and anonymous reporting facilities are all the types of solutions that more companies need to consider to close the gaps and exposure to fraud,” he says.

Smith says tackling fraud and corruption is critical as it has a direct link to inward foreign investment.

Transparency International’s 2014 Corruption Perceptions Index places SA at 67 out of 175 countries with 44/100 – a score of 100 would mean a country is “very clean” according to the survey methodology. SA  ranked 15/28, or a score of 7.6/10, on the likelihood of its firms to bribe abroad.

“US interest rates are going up, SA growth is slowing  and there will be a flight of capital as the US is seen as a less risky place to invest – especially when it offers higher returns. A country seen as having a low risk of prosecution will chase these investors away,” says Smith.

But companies also need to improve their preparation for a backlash by regulators who are under pressure to apply higher global standards.

“SA is very advanced in this regard and one of the positives is that our banks already apply the higher standard in a home or host country. But it is now important to ensure this is applied across Africa,” he says.

South Africa is party to the organisation for Economic Cooperation and Development (OECD) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. South Africa is also a Member of the OECD Working Group on Bribery in International Business Transactions which is responsible for monitoring the implementation and enforcement of the OECD Convention.

The Financial Intelligence Centre Act, 2001 contains an obligation on all South African businesses to report transactions that they suspect may involve the proceeds of crime, or that appear not to have an apparent business purpose. The FIC works to align South Africa’s anti-money laundering legislative framework.

SA is also a member of the Financial Action Task Force (FATF,) which is a G20 initiative to set global standards for measures to combat money laundering, terror financing and the financing of the proliferation of weapons of mass destruction.

Smith says South Africa has participated actively throughout the process to develop the new standards and to include perspectives from developing countries.

In late April 2015 the National Treasury and the Financial Intelligence Centre published the draft Financial Intelligence Centre Amendment Bill, 2015 as approved by Cabinet at its meeting of 15 April 2015.

Smith says the aim is to enhance South Africa’s ability to combat financial crimes by proposing measures to address threats to the stability of South Africa’s financial system posed by money laundering and terrorism financing. In its review of SA, the FATF said while the country had made good progress in developing its system for combating money laundering and the financing of terrorism, powers to supervise and enforce compliance with anti-money laundering and counter-terrorist financing provisions were not adequate. However, it welcomed the amendments to the FIC Act as these were expected to “significantly enhance” the compliance regime. “This is why we are seeing a lot of movement now in SA to improve our defences against money laundering,” he says.

Smith says regulators need more support and resources.

“If we are serious about nipping all the criminal activity in the bud, up-skilling of professionals tasked with making this happen and increasing their tools and resources will be crucial,” he says.

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