Economic crime remains critical in key markets

Economic crime in two of Africa’s key markets is a tale of two halves, with South Africans more likely than ever to experience the problem but Kenyans enjoying a slight reduction in the risk. Interestingly both South Africans and Kenyans admit the cost of economic crime continues to be a high price to pay for their businesses, but new reports out from PricewaterhouseCoopers (PwC) highlight solutions for risk managers and senior management. The reports, which came out of PwC’s 2014 Global Economic Crime Survey, contain some new concerns for risk managers, however. One stark statistic that emerges is that senior management is now the main perpetrator of economic crimes committed by insiders in South Africa. The respondents recorded an increase in reported fraud and the survey identified the most likely insider fraudster in South Africa is: Male; Aged between 31 and 40; Has obtained a university degree; and Has been with his employer for more than 10 years. hideMajor concern for South Africans South African risk managers also have another major concern—the country topped the list of states surveyed in terms of the numbers suffering an economic crime. This is not a statistic to be proud of with 69% of South African respondents indicating that they had experienced economic crime, which is nine percentage points higher than in 2011. PwC has also warned bribery and corruption has been the fastest-growing economic crime category in South Africa since 2011, with 86% of South African CEOs ‘somewhat’ or ‘extremely’ concerned about corruption. Globally, the construction, energy and mining sectors experience the most bribery, while South African organisations suffer significantly more procurement fraud, human resources fraud, bribery and financial statement fraud than organisations globally. Firms are fighting back. PwC said: “Formal fraud risk management programmes have become the most effective fraud detection method.” But it also warned, despite this, a significant portion of South African organisations do not carry out fraud risk assessments. Further to that, the survey asked respondents to indicate which regulatory enforcement-related risk they were most concerned about. Bribery & corruption was by far their greatest worry. This is further highlighted by the fact that more than a quarter of South African respondents reported that their organisations had been asked to pay a bribe in the last 24 months. In addition, one fifth of South African respondents believe they lost a business opportunity because a competitor had paid a bribe. In comparison, 36% of the respondents in Kenya indicated they had been asked to pay a bribe to get business. An additional 45% indicated they had lost business to a competitor who they believed paid a bribe. These figures are twice as high as the global responses where the figures were 18% and 22% respectively. Corruption risk high for Kenyans 53% of Kenyan respondents stated they had actively pursued opportunities in markets with a high level of corruption risk. Out of these 38% indicated that they had to change their business strategy to pursue the opportunity. For 68% of these respondents, this mainly involved carrying out additional due diligence whereas 42% indicated they altered their terms of business. Of respondents who pursued opportunities in markets which they perceived had a high level of corruption risk, 38% indicated they walked away from these opportunities. While not the most prevalent economic crime, PwC says bribery and corruption may pose the greatest risk to organisations doing business across borders, especially if they are affiliated with the US or the UK. This is because offences are often pursued by regulators across borders and laws such as the US Foreign Corrupt Practices Act and the UK Bribery Act have far-reaching ambits. Overall, in Kenya, PwC found a reduced number of incidents compared to a similar survey in 2011, with 52% of respondents reporting an incident, compared to 66% in 2011. However, it says there are still areas of concern, because Kenyan respondents ‘continue to report relatively high rates of economic crime compared to other countries surveyed globally’. Furthermore, for the 52% of respondents in Kenya who reported experiencing economic crime in the last 24 months, the frequency of incidences has tended to increase and the cost impact tends to be greater. PwC warns the nature of economic crime reported in Kenya is changing. Along with asset misappropriation, accounting fraud and bribery and corruption, the survey reveals high levels of cybercrime and procurement fraud. The firm said: “We are also concerned that the frequency of Fraud Risk Assessments in Kenyan organisations has reduced since our last survey, and that 39% of respondents do not know what a Fraud Risk Assessment entails. Contributing factors could include a lack of sufficient knowledge and a poor understanding of the importance of proactive fraud risk management, cost-cuts and/ or a reactive culture of dealing with fraud risks. We believe the changing trends and threats of economic crimes call for a serious rethink.” The survey suggests effective risk management must be implemented holistically across an organisation to combat economic crime effectively. “Everyone has a responsibility for combating economic crime,” it stressed. “Practical steps to combat economic crime include, at a minimum, adopting the mind-set of ‘a state of compromise’ (the point of view that internal systems have already been breached), identifying critical assets and recognising the vulnerabilities of your organisation.” The report also asks: “How can organisations in Kenya manage the changing face of economic crime? How can they effectively detect and deter cyber attacks? Are procurement processes robust enough to ensure the integrity of procurement? Are organisational controls strong enough to mitigate the risk of asset misappropriation? Is there a no-tolerance culture to bribery and corruption? Is the management team incentivised to report accurate results? And above all, if an economic crime has occurred, will it be detected in a timely manner and do you have an appropriate response mechanism?” PwC found the preferred action taken when dealing with internal fraudsters is still dismissal at 85% according to the respondents in Kenya, which mirrors global responses at 79% while Africa reported 76%. The rise in the tendency to dismissals as a response to incidences of internal fraud from 81% in 2011 to 85% in 2014 might suggest that organisations are taking firm stances against perpetrators of crime. Informing law enforcement agencies came second at 56%. There was a significant decline in the number of respondents taking civil action including recoveries from 54% in 2011 to 36% in 2014. PwC concluded this may be as a result of the dismal success rate in as far as civil proceedings are concerned. It said: “The need to focus on suitable fraud response mechanisms and an investigation approach that would aid in effective gathering of credible evidence that would lead to successful civil and criminal proceedings cannot be over-emphasised. Alternatively the reduced tendency to seek civil action could also indicate unwillingness by organisations to start civil action that could lead to recovery due to the lengthy and costly legal processes in Kenya.” When dealing with external perpetrators of fraud, notifying relevant regulatory authorities is important in Kenya for 58% of respondents while informing law enforcement agencies is key for 54%. Only 50% of respondents ended the business relationship with the external party that perpetrated the fraud. This appears low but may suggest alternative avenues of recovery from external parties or a reliance on them, said PwC. PwC concluded that the real story is not about the figures themselves, but ‘that economic crime is threatening business processes, eroding the integrity of employees and tarnishing reputations’. THE WAY FORWARD Regardless of industry or region of operation, PwC believes organisations should focus on these four areas to diminish the risk of bribery & corruption: Management and tone at the top While compliance is everyone’s responsibility, setting the right tone must start at the top. Senior management should have an understanding of anti-corruption statutes and give a clear and consistent message that bribery will not be tolerated and adequate resources will be allocated to combat the threat. Control environment Staying on top of corruption risk requires a robust communication plan and vigilant internal enforcement procedures. A formal code of conduct, employee training (including on compliance-sensitive issues such as gifts and entertainment) and a system of controls monitoring suspicious transactions should be in place. Organisations are only as compliant as their weakest link so business partners, vendors and other third parties must be vetted and monitored. Risk assessment Both the business and compliance environment are constantly evolving. That’s why it is essential that periodic risk assessments are conducted and that any previously identified risks have been addressed. Evaluating effectiveness Risk assessment and control plans, of course, do not of themselves lead to compliance. Due diligence reviews, periodic visits from management to high-risk locations, compliance reporting to the board, hotline follow-ups and business-partner audits should all be maintained and re-evaluated on an ongoing basis as part of an effective internal compliance programme.

Economic crime remains critical in key markets

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