ECONOMIC CRIME SPIRALS OUT OF CONTROL

South African (SA) organisations continue to report the highest instances of economic crime in the world, with economic crime reaching its highest level over the past decade

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South African organisations that have experienced economic crime is now at a staggering 77%, followed in second place by Kenya (75%) and thirdly, France (71%). With half of the top 10 countries that reported economic crime coming from Africa, the situation at home is more than dire.

These are some of the key findings from PwC’s biennial Global Economic Crime Survey, 2018. The survey examines over 7 200 respondents from 123 countries, of which 282 were from South Africa.

Economic crime continues to disrupt business—this is the second year that South Africa has the highest level in the world. The global results were equally dismal—at 49%—revealing the highest level of reported fraud and economic crime since this thought leadership publication was launched in 2001. This year also saw an unprecedented growth in the global trend, with a 36% period-on-period increase since 2016. It is also 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.

While the overall rate of economic crime 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% increase since 2016 to 53% in respondents who indicated that they had experienced economic crime. The US was a close second with a 17% increase over 2016 to 54% of respondents.

Types of economic crime

Asset misappropriation continues to remain 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. Additionally, more than a quarter of South African organisations (26%) believe that cybercrime will be the most disruptive economic crime to affect their organisations over the next 24 months.

One of the new categories of economic crime was that of “fraud committed by the consumer”. This particular crime, which highlights the propensity of the ‘man in the street’ to be a perpetrator of economic crime, makes one look at whom the victims of economic crime are with new eyes. This type of crime ranks in second place in the South African (with 42% of respondents having experienced this crime) and third place globally.

This is indicative 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 one-third of organisations at 34%), the resultant erosion in value from our country’s gross domestic product (GDP) is alarming.

Costs of economic crime

South African companies continue to invest significantly in fighting the challenges that fraud and economic crime introduce into the business dynamic. According to our survey results, 44% (Africa 41%) of organisations have increased their spend on combating fraud since 2016 and 46% plan to increase their spend over the next 24 months (Africa 45%).

35% 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% 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, we are faced with the damning realisation that the actual cost of these crimes is crippling our economy.

On a more positive note, business leaders are taking an active interest in their governance responsibilities and are becoming aware of, or rather want to be made aware of, the effects and issues that economic crime and fraud have on their organisations.

The survey findings indicate a shift in thinking whereby organisations are making better use of fraud risk management (18%—more than twice the instances noted in 2016) and data analytics to detect criminal activity.

At the same time, it appears that the environments within organisations have become more receptive to trusting internal tip-off processes, as seen by the upsurge in the detection of fraud by means of internal tip-offs (14% compared to 6% in 2016). This is a further feather in the cap of corporate governance in that employees trust that management will do the right thing, and society is becoming an active agent of change for both corporate and public entities alike.

Fighting economic crime

The rules are changing for businesses, with a tolerance for corporate and/personal misbehaviour vanishing. Not only is public sensitivity about corporate misconduct at an all-time high; in some cases, corporations and leaders are also being held responsible for past behaviour, particularly when the ‘unspoken rules’ of doing business might have been laxer.

Since our last survey, we have seen some progress in the number of fraud detection measures taken by respondent companies. This is a good thing. Not only can a fraud risk assessment help you identify the unique and specific fraud risks you should be looking for, but also regulators in enforcement actions increasingly favour these assessments.

Still, the survey shows there is a significant room for improvement. Only three in four South African organisations said they had conducted any kind of fraud or economic crime risk assessments.

Accountability of the board

Accountability for fraud and economic crime has moved into the executive suite, with the C-suite increasingly taking the responsibility, and the fall, when economic crime and fraud occur. We have seen paradigm shifts in the manner and style that businesses are being run. Organisations are beginning to shed their denial complex regarding the many blind spots they have in denying fraud and are learning how to address them.

The survey shows that almost every incident of fraud has been brought to the attention of senior management (95%). The market is no longer tolerating bad behaviour. No matter how much of a stock market darling a company is today, if every aspect of conduct risk has not been managed carefully and soberly, both the company and leadership could lose much of their goodwill faster than they acquired it. In addition, many South Africans have witnessed many a house of cards come tumbling down in recent times.

Recent events have demonstrated that not only has the threat of economic crime continued to intensify; the rules and expectations of all your stakeholders—from regulators and the public to social media and employees—have changed, irrevocably. Today, transparency and adherence to the law are more critical than they have ever been. 

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