Companies at risk as white collar fraud escalates

Insurance brokers Aon Risk Services say on average South African businesses loose 6% of their gross revenue to employee fraud and other ‘white collar’ crime each year. There is a clear need for corporations to take action...

The incidence of white collar fraud in South Africa remains among the highest in the world – and it’s getting progressively worse. Government – under continued scrutiny by the press and opposition – is exposed daily for tender-rigging and unauthorised or wasteful expenditure. Private companies are just as much at risk of third party fraud due to their reliance on computer technology and electronic fund transfers in their day to day business.

“Although white-collar crimes do not receive the focus accorded to other crimes, for various and well-documented reasons, these crimes are believed to be costing the country billions of rand,” says Principal Broker, Kerry Curtin.

Endemic corruption

These comments are substantiated by international organisations such as Transparency International. The organisation’s latest “Global Corruption Barometer” confirms that white-collar crime and corruption is endemic in many parts of Africa. And it’s not just the business pioneers into Africa who have to worry…

Indeed, South Africa has the worst white-collar crime rate in the world, according to PricewaterhouseCoopers (PWC) most recent Global Economic Crime Survey, conducted in November 2009. A frightening 62% of local respondents indicated that they had fallen victim to economic crime within the past 12 months, compared with 30% globally.

“The survey also found that 54% of South African respondents reported an increase in the number of fraud cases, with fraud committed by people at every level and in practically every department,” notes Curtin. Local firms are taking steps to “cure” the problem, with 64% of the affected companies in the survey proceeding with criminal charges against internal perpetrators, compared to 36% worldwide.

Respondents indicated that asset misappropriation and bribery and corruption are the two forms of economic crime they believe their organisations will most likely experience going forward.

Everyone at risk

All business is at risk regardless of size, industry sector or the risk controls already implemented at the firm. It is common knowledge that only 40% of local businesses have adequate fraud risk insurance in place, despite such losses having the potential to bankrupt a business or seriously impact on the bottom line.

“Therein the challenge for the broker community,” says Curtin. “There are numerous opportunities to ‘sell’ broad-based, correctly scoped and well-communicated fraud cover solutions to local business. This is true whether or not the organisation has an effective fraud risk control and minimisation process in place, because 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 risk transfer within a Fidelity Guarantee framework, incorporating indemnity for losses resulting from employee dishonesty, forgery or alternation, fraudulent transfer instructions and third party computer crime.

A tailored solution

A broker has 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 both commercial and corporate business.

Curtin concludes: “The PWC survey showed that putting more anti-fraud controls in place paid off – and in our view an ‘audit’ of this nature must form part of the overall risk control process.”