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4 minute read
4 Mar 2020
8:58 am

The evolution of economic crime in South Africa


Customer fraud is on the up, as is company fraud committed at a senior level.

Non-executive directors, realising they could be held personally responsible, are starting to take their responsibilities more seriously. Image: Shutterstock

Economic crime has resulted in global losses of $42 billion a year in the corporate sector, with South Africa accounting for $1.7 billion, according to PwC’s 2020 Global Economic Crime and Fraud Survey.

The evolution of economic crime in South Africa the 7th South African edition of the biennial report, PwC says the value of economic crime has increased in South Africa, but the rate of reported economic crimes declined for the first time in the last decade.

As indicated in the graph below, the percentage of companies that experienced fraud and economic crime in the previous two years has dropped from 77% to 60%. However it remains significantly higher than the global average of 47%.

Reported rate of economic crime in SA

Source: PwC

Trevor White, PwC forensic partner and global economic crime and fraud survey leader for South Africa, believes boards are starting to take the issue more seriously.

“What is coming out of the survey is that the corporates are starting to see that there are more serious consequences,” he says.

“The non-executive directors in some of these boards are now starting to say ‘If my company is involved in committing some of these big corporate accounting scandals, I could personally be held responsible. I could be fined. I could be criminally prosecuted’.

“So I think it is starting to hit home now, that they need to start taking collective ownership.”

White points out that the corporate scandals that have been exposed in the last couple of years didn’t happen overnight.

“It is not something that happened now, but what [I] think what really caused them to start to be exposed, is because of the downturn in the economy – there really are not that many places to hide.

“As a result, the organisations can no longer keep this house of cards going and as soon as there is a crack, the whole house crumbles.”

White says the recruitment of new management has also led to the exposure of wrongdoings within numerous companies. “The introduction of new management has also been a reason for a lot of exposure of wrongdoing in the private sector. As soon new management comes in they start to ask the difficult questions and that is when everything starts to be exposed.”

Sharp decline in asset misappropriation 

On the upside, the misappropriation of assets is no longer the most prevalent economic crime in SA, having drastically decreased to 23% from 49% in 2018.

People aren’t considering petty theft or the theft of assets as economic crimes anymore, says White. “Because there is now exposure of bribery and corruption and financial statement fraud, we believe the respondents of our survey are saying those are the real economic crimes,” White said.

Customer fraud is taking over

The rise of customer fraud remains a concern however. Introduced as a category for the first time in the 2018 survey, it is now the most prominent economic crime, followed by bribery and corruption and financial statement fraud.

Customer fraud refers to fraud committed by the end user and includes mortgage fraud, credit card fraud, claims fraud, cheque fraud, identity fraud and similar fraud types.

In South Africa customer fraud rose by 5% to 47%. Globally it is at 35%.

“The rise of customer fraud is an indication of the erosion of the ethical fabric of our society,” the report notes.

Cooking the books

There has also been an increase in accounting and financial statement-related fraud, which has risen from 22% to 34%.

The report describes this as very concerning as this type of fraud is committed at a senior level.

“The negative effect of this crime on all stakeholders and the future sustainability of the entity as a whole can be catastrophic,” it reads.

It says that in the past, this crime has left many casualties and it calls upon companies to introspect.

“It has perhaps been one of the major factors prompting companies to take a cold, hard look at themselves and to honestly reflect on what is being done to counter the scourge of economic crime,” it reads.

Crimes expected this year

Recent fraud scandals that have rocked South Africa, in both the public and private sectors, have left very little faith in the integrity of South Africans. A fifth of respondents believe bribery and corruption will be the most serious and disruptive economic crimes to affect organisations in the coming years.

Source: PwC

Be warned

White says PwC is working with several companies and the authorities to clamp down on economic crime in the country.

“A number of those cases are pretty advanced, and I know that there is a strong will on the behalf public prosecuting authorities to take action and to show the economy at large that things are happening [to stop crime].”

He points out that investigations into cases of economic crime are painstaking and can take years, saying that a solid case of evidence that shows the “fingerprint of the perpetrator on each page and email” needs to be built up.

“No one wants to go to court on these big cases and fail, and where we are involved [with these investigations], we fully support that.”

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