Fraud mitigation becomes increasingly vital in digital world – consultancies

19th November 2019 By: Marleny Arnoldi - Creamer Media Online Writer

The scourge of corruption in the last decade has badly damaged the South African economy and the country loses about 5% of its revenue a year as a result of fraud in the public and private sectors, law firm Cliffe Dekker Hofmeyr corporate investigations director Zaakir Mohamed said on Tuesday.

This was over and above the costs of the various commissions of inquiry that were in progress, including the State Capture commission, which had cost taxpayers R365-million from August 2018 to date.

The law firm on Tuesday hosted a seminar on commercial crime, including fraud and corruption, amid International Fraud Awareness Week that is held from November 17 to 23.

Given the rise in organisational risks relating to commercial crime, organisations need to be alive to managing new and emerging commercial crime risks, while simultaneously continuing to manage long-established commercial crime risks, Mohamed pointed out.

The seminar discussed corporate investigations and risk consultancy Kroll’s ‘Global Fraud and Risk Report for 2019/20’, which noted that traditional boundaries surrounding business risk continued to be eroded, while new risks arose or evolved.

For example, globalisation had evolved from meaning that enterprises from a handful of developed countries were setting up operations in developing markets; now, the world had a truly distributed network of business relationships across all continents.

Additionally, mobile connectivity and social media had created a digital world in which information asymmetries had greatly lessened, giving rise to different consumer expectations and business models.

Those new business models had been scrambling the traditional definitions of industries, while all the developments had increased the number of “unknowns” and risks with which organisations had to contend.

Kroll’s report said the broadening of the risk landscape was visible in the types of significant incidents the survey respondents reported experiencing in the last year and the priority levels they had assigned to deal with it.

The most frequently cited incident was leaks of internal information, reported by 39% of the survey’s 588 senior executive respondents.

“However, this perennial challenge coexisted with risks from more recent threats, such as data theft and adversarial social media activity,” said Kroll business intelligence officer Oliver Stern.

Data theft and reputational damage owing to third-party relationships, at 29% each, tied as the second-biggest issue affecting companies globally. This was followed by fraud by external parties at 28% and fraud by internal parties at 27%.

“While money laundering and counterfeiting take the greatest toll on particular industries and countries, virtually every enterprise is potentially vulnerable to social media attacks or collateral damage from a business partner’s scandal,” said Stern.

THE AFRICAN CASE

Kroll’s report found that the risk profile of organisations in sub-Saharan Africa was dominated by bribery and corruption, reported by 33% of the region’s respondents, compared with 23% globally, and fraud, with 44% reporting fraud by internal parties, compared with 27% globally.

“Alarmingly, but not surprisingly, employees were more likely than average to be the source of incidents at 29% in the region, compared with 24% globally.

Specifically in South Africa, PricewaterhouseCoopers’ (PwC's) ‘Global Economic Crime and Fraud Survey for 2018’ found that local organisations that had experienced economic crime was at 77%, while 19% of organisations have had to spend between twice and ten times as much on investigations as the original amount lost to economic crime. The global average of organisations that experienced economic crime in 2018 was 49%.

“The sub-Saharan African region reported a greater percentage of incidents caused by politically motivated actors, including government officials, at 10%, compared with 6% globally,” explained Kroll business investigations officer Ina Sondermann.

This region was also more affected by leaks of internal information, with 46% of respondents citing it as prevalent, compared with the global rate of 39%. Fraud by internal parties affected 44% of the region’s respondents, and 35% were affected by adversarial social media activity.

To meet these challenges, organisations in the area would have to realign their risk priorities.

The 67% of the region’s respondents combating fraud by internal parties was not materially higher than the global average of 66%. Fighting bribery and corruption was at the bottom of the mitigation list, with 56% of this region’s respondents making it a priority, compared with 62% of global respondents making it a priority.

Globally, 73% of respondents were prioritising mitigation action against data theft, 71% against intellectual property theft and 67% against fraud by internal parties.

Further, Kroll reported that organisations in sub-Saharan Africa placed their greatest priority on mitigating disruption owing to sanctions, tariffs and changes in trade agreements, despite their lower overall likelihood of being affected by geopolitical risks.

Many organisations in the region had recently placed greater emphasis on establishing a culture of transparency and accountability as part of their ongoing integration into global trade and investment. For example, 87% of the region’s respondents agreed that there were clear messages from the top of their organisations that integrity was important, compared with 78% of global respondents.

Organisations in the region were found practicing reputational due diligence with an above-average frequency for third parties, including investors, with 93% of respondents conducting due diligence on this group, compared with 84% globally.

However, the region lagged in performing reputational due diligence on customers, at 75%, compared with 88% of global respondents performing reputational due diligence on customers.

PwC, in its fraud report, said companies ought to move away from silo views of functions such as compliance, ethics, risk management and legal, and enabling a culture that is more positive, cohesive and coherent.

“The value proposition of an up-to-date fraud programme may be hard to quantify, which can make it difficult to secure the needed investments. But consider the opportunity cost – financial, legal, regulatory and reputational – of not setting up a culture of compliance and transparency.

“Not only has the threat of economic crime continued to intensify; the rules and expectations of all stakeholders – from regulators and the public to social media and employees – have changed, irrevocably. Today, transparency and adherence to the rule of law are more critical than they have ever been,” the consultancy reported.