Category Fraud/Crime

SA’s growing incidence of white collar fraud demands insurance solutions

11 May 2015 Alicia Goosen, Aon
Alicia Goosen, Business Unit Head: Financial Services Group at Aon South Africa.

Alicia Goosen, Business Unit Head: Financial Services Group at Aon South Africa.

PWC report shows that senior management is main perpetrator of economic crimes.

South Africa’s rating of 44 out of 100 in the 2014 Corruption Perceptions Index by Transparency International has raised serious and valid concerns about the country’s standing, with some key South African institutions already showing characteristics of endemic corruption, which means that little can be done to turn around the rot.

It’s a situation which demands a response from the insurance industry to safeguard corporate reputation, financial stability and business continuity, according to risk advisors and insurance brokerage, Aon South Africa.

South Africa scored 44 out of 100 in the latest Corruption Perceptions Index, where 0 indicates a perception that a country is highly corrupt. Of the 175 countries scored, South Africa ranked 67th. Moreover, according to the PricewaterhouseCoopers (PWC) Global Economic Crime Survey of 2014, 69% of South African respondents indicated that they had experienced economic crime, which is nine percentage points higher than in 2011. The PWC report also shows that senior management is now the main perpetrator of economic crimes committed by insiders. The typical perpetrator of insider fraud in South Africa is male, aged between 31 and 40, has obtained a university degree and has been with his employer for more than 10 years.

The PWC survey also goes on to report that South African organisations suffer significantly more procurement fraud, human resources fraud, bribery and financial statement fraud than organisations globally. Furthermore, competition law infringement is poorly understood by South African organisations with a significant percentage of respondents unsure whether their organisations had experienced such a contravention and did not know what the potential consequences of an infringement would be. Formal fraud risk management programmes have become the most effective fraud detection method and despite this, a significant portion of South African organisations do not carry out fraud risk assessments.

”All business is at risk, regardless of organisation size, industry sector or risk controls and significant losses can lead to complete business failure, or at the very least, serious impact on the bottom line. Yet surprisingly, it is conservatively estimated that about 40% of all SA businesses do not have adequate insurance in place” says Alicia Goosen, Business Unit Head: Financial Services Group at Aon South Africa.

“Although white-collar crimes do not receive the focus accorded to other crimes for various reasons, these crimes are believed to be costing the country billions and they are on the increase as the PWC report clearly shows,” she adds.
“In the current tough economic environment, fraudsters are becoming ever more creative and syndicates are also at play, which means companies are facing ever increasing risk from white collar crimes in areas such as credit payments, EFT transfers, debtors, petty cash abuse, cash theft, international transfers, payroll fraud (ghost employees) and stock theft,” says Alicia.

There have been various responses to the situation and various controls have been implemented to combat crime, but reliance on these controls alone is not sufficient. Companies should facilitate the correct culture which encourages employees to do the right thing and thorough risk assessments and ongoing audits need to be in place.

“Under Section 34 of the Prevention and Combating of Corrupt Activities Act of 2004, it’s obligatory to report crimes related to fraud and corruption, thereby placing the onus squarely on those not only in a position of authority in business but on anybody who may have knowledge of a crime. The Act defines fraud as theft, extortion, forgery or uttering, involving amounts greater than R100 000. It even spells out who may be reasonably deemed to have known or suspected that corrupt transactions are taking place, so apart from the direct loss suffered, legislation could rub salt into the wound in no uncertain terms.

“Moreover, fraud can cripple an organization and therein lies the challenge for the broker community in that broad based, but correctly scoped, well communicated fraud covers and risk management needs to be provided for South African business.
“This is true whether or not an organisation has an effective fraud risk control and minimisation process in place, for the reality is that the majority of corporate fraudsters are not held criminally liable and even when they are prosecuted, the ability to recover the financial loss is unlikely.

“The fundamental solution is a commercial crime framework, incorporating indemnity for losses resulting from employee dishonesty, forgery or alternation, fraudulent transfer instructions and third party computer crime. Brokers have to assess each client’s needs and tailor covers accordingly. This includes structuring primary and if necessary excess of loss layers of cover providing limits of indemnity varied enough to appeal to businesses.

“Significantly, the PWC survey also shows that putting more anti-fraud controls in place pays off and in our view, an audit of these risk control aspects as insisted upon by underwriters must form the basis of an initial risk control process, followed by on-going monitoring of weak areas of the business.

“A rising claims experience can also see the increase in self-insurance retention, a degree of Alternative Risk Transfer (ART) could be called for in the case of larger companies with well-established risk transfer programmes.


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