Reported economic crime in South Africa hits record levels; cost and accountability concerns rising

77% of SA organisations have experienced economic crime;

Fraud committed by consumers ranks as the second most reported crime in SA;

CEO and board increasingly being held accountable for economic crime;

Only 37% of respondents have conducted an anti-bribery/anti-corruption risk

assessment;

19% of organisations have spent between twice and ten times as much on

investigations as the original amount lost to economic crime.

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 (www.PwC.com) biennial Global Economic Crime Survey released today.

South African organisations that have experienced economic crime arenow at a staggering

77%, followed in second place by Kenya (75%), and thirdly France (71%). With half of the

top ten countries who reported economic crime coming from Africa, the situation at home is

more than dire.

The Global Economic Crime and Fraud Survey examines over 7200 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% South Africa’s rate of reported

economic crime remains significantly higher than the global average rate of 49%. However,

this year saw an unprecedented growth in the global trend, with a 36% period-on-period

increase since 2016.rdquo;

Economic crime in South Africa is now at the highest level over the past decade.

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 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% increase since 2016 to 53% in respondents who indicated they had

experienced economic crime. The US was a close second with a 17% increase over 2016 to 54%

of respondents, while Asia Pacific and Eastern Europe experienced increases of 16% and

14%, respectively.

White comments further: 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.rdquo;

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.rdquo;

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. One of the new categories of

economic crimes was that of fraud committed by the consumerrdquo;. It is the second most

reported crime in South Africa at 42% and takes third place globally at 29%. This was

followed closely by procurement fraud (39% in South Africa versus 22% 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%), 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% to 22%.

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% of South African respondents lost more than

$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 $100 million (R1.2 billion). When

combined with the costs to address this issue through investigations or other

interventions, where 41% of respondents reported having had to spend an equal or greater

amount (10% reported having to spend upward of three times the amount, with 3% spending as

much as ten 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.

Fighting fraud

South African businesses continue to take measures to combat economic rimes, with

44% (Africa: 41%) of respondents having increased their spend on combating fraud since

2016 and 46% plan to increase their spend over the next 24 months (Africa: 45%). It is

positive to note that almost two-thirds (64%) of South African respondents monitor

whistleblower lines as a means to ensure the effectiveness of their compliance and

governance programmes (Africa: 51%). This represents a 9% 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% of South African respondents (versus 91% of Global and 94% 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 endeavors.rdquo;

Despite higher levels of understanding and reporting of fraud, blind spots still

prevail. 46% 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%) 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,rdquo; Hills comments.

Regulatory risk continues to grow

Across the board, regulations and reporting requirements, touching on both legal

and ethical behaviour, continue to expand. There is a 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% 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.rdquo;

The survey shows that almost every serious incident of fraud has been brought to

the attention of senior management (95%).85% of South African respondents indicated their

organization had a formal business ethics and compliance programme in place. In addition,

20% 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.rdquo;

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 behavior.rdquo;

Download Global Economic Crime and Fraud Survey 2018 – 6th South African

edition:https://goo.gl/ZCWhUd

Source:PricewaterhouseCoopers LLP (PwC)