Category Fraud/Crime

SA companies fall prey to world’s biggest illegal money-spinner

09 June 2009 AIG

·   Nearly three-quarters of SA companies are victims of business crime

·   Only 20% of commercial crimes are reported to the police

·    55% of fraud involves managers

Fraud is the leading illegal money-spinner in the world, exceeding drug running. According to AIG South Africa, which insures many of the largest companies in SA, it is South Africa’s number one financial crime and employee fraud accounts for about three-quarters of this figure.

The latest survey by the Association of Certified Fraud Examiners (ACFE) indicates that a staggering 7% of company revenue is lost to fraud worldwide. 

Philip Hobson, Financial Lines Manager at AIG South Africa, says employee fraud in the country is on the increase.

“In South Africa the criminal justice system is still evolving, lenient penalties are not acting as an appropriate deterrent, and criminals are getting more sophisticated. Add to this current economic pressures and the climate is ripe for fraud perpetrators.”

The Global Economic Crime Survey, conducted by PriceWaterHouse Coopers in 2007 revealed that in South Africa, commercial crime is more prolific than in most parts of the world with 72% of companies falling prey to business crime as opposed to the global average of 43%.

Because organisations prefer internally orientated actions, such as internal investigations and disciplinary proceedings, as little as 20% of commercial crimes are actually reported to the police. This means the figures cited above are likely to be a great deal higher.

Hobson warns that business leaders who think they are immune from fraud should think again. Often it is easier to commit fraud within a smaller company as there are less internal controls in place to combat this type of crime.

 “Executives are often unwilling to accept that fraud will happen in their company,” says Hobson “but no company is completely immune to fraud.

“Generally, weaknesses in internal controls are the main contributing factor to crime in the workplace.”

Managers are the most likely perpetrators of company fraud, with those recently promoted posing the greatest risk. In a 2003 survey involving 400 international companies, 55% of fraud involved managers - 85% of whom had held their position for less than a year.

As it is difficult to legislate against employee fraud or pursue redress through the criminal justice system, it is imperative that businesses protect themselves through stringent internal controls.

AIG SA offers the following tips for companies to help limit their fraud exposure:

- Directors and officers remain ultimately responsible for the well-being of the company and should place a strong emphasis on fraud prevention and deterrence.
- Internal control systems and internal audit are identified as the two major tools to prevent and to fight fraud.
- Companies should implement a fraud prevention policy, aimed at managing and reducing the risk of fraud, as well as a fraud response plan. 
- A confidential reporting process should be in place to encourage employees to come forward with information on potential or possible fraud.
- Businesses with robust internal controls and good management practices can help limit their exposure to fraud, but it is difficult to eliminate the risk completely. It is therefore also important that companies cover themselves for this risk with an appropriate insurance policy

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