Burdening costs of SA’s crime ridden activities
Myra Rego, FAnews Journalist
FAnews chatted to Anton Meyer, Executive Head at SHA Specialist Underwriters, who said that employee fraud has become a national epidemic. Meyer believes businesses must take heed and ensure that they have the necessary risk transfer programs in place to adequately protect themselves from financial losses.
Text book examples
White collar crime is estimated to cost the South African economy billions per annum and no industry or business sector can claim to be immune to it. It has, therefore, never been more important than now for companies to be vigilant in preventing fraud.
There are a number of fraudulent cases to say the least, which present text book examples of fraud committed in companies. For starters, is the J Arthur Brown case in which the former Fidentia Chief Executive was accused of misappropriating funds belonging to widows and orphans. This was considered one of the biggest corporate crimes in South Africa.
Brown was convicted on two fraud charges relating to his handling of investments for the Transport Education and Training Authority and the Mantadia Asset Trust Company between 2002 and 2006.He was sentenced to 15 years' imprisonment on each of two fraud charges in the Supreme Court of Appeal in December. The sentences would run concurrently.
Another case is that of former Tigon Chief Executive, Gary Porritt and his business partner Sue Bennett who have kept their case in courts for nearly 12 years. PSC Guaranteed Growth Fund, formed in 2002, managed to solicit R160 million from 2 500 investors before being liquidated in 2003. The money was funneled into related companies. The alleged masterminds, Porritt and Bennett, funneled the money into their other companies. The two are accused of tax fraud and Companies Act infringements, after encouraging investors to take their money offshore.
Others include that of Peter Gardner and Rodney Mitchell, Joint Chief Executives of LeisureNet, who were arrested in 2002 for fraud amounting to R12 million, but remained on R500 000 bail until they had exhausted their resources. In 2011, they were jailed for 12 years, some of which was suspended.
Barry Tannenbaum, a South African businessman, swindled the rich by getting them to invest in his venture to import pharmaceutical ingredients for generic HIV drugs. It seems R10 billion to R15 billion disappeared via a Hong Kong bank account. Tannenbaum himself disappeared to Australia when the scheme was exposed in 2009. He has since been sequestrated, but an investigation by the National Prosecuting Authority (NPA) led to a dead end.
A crippling effect
The proof is in the pudding as the statistics by Norton Inc clearly state that white collar crime has rapidly increased by about 50% in the past 10 years.
Meyer explained that internal fraud perpetrated by employees poses a big risk for a business, not only due to the direct financial losses suffered by the business but also, due to the organisation’s vicarious liability to their own clients, as well as huge reputational risks following the dishonest actions of its employees.
In addition to these vicarious liability risks, Meyer mentioned that there is a national movement towards consumer protectionism, especially following the implementation of the Consumer Protection Act (CPA) in 2010. “We are experiencing an increasing trend in litigation with increased awards for damages even where the facts do not support the awards completely,” he said.
Implementing protective measures
According to Meyer, businesses need to have the necessary risk transfer programs in place to avoid any dangerous circumstances.He explained that previously a standard Fidelity Guarantee (FG) policy would have protected a company against losses suffered as a result of staff stealing from the company.
“Now given the material changes to the liability landscape of directors following the implementation of the new Companies Act, coupled with the material increase in both frequency and severity of staff fraud losses, a simple FG policy may no longer suffice,” he said.
He suggested the objective approach is a combination of risk management and mitigation strategies, as well as risk transfer policies, which include crime cover together with an element of liability cover for vicarious liability for the actions of employees.
“Managements should have partnerships with reputable insurance brokers and underwriters to make sure that they are protected in all important areas and thereby comply with their fiduciary duties towards the companies and other stakeholders,” concluded Meyer.
Editor’s Thoughts:
It is evident that preventative measures need to be applied and implemented for businesses to adequately protect themselves from financial losses incurred by dishonest employees who are out to commit fraudulent activities. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
