Fraud and Corruption in the Workplace

Statutory Framework

After 1990, international conventions caused member countries to adopt and enforce laws aimed at preventing and combating fraud and corruption. In South Africa, the Prevention of Organised Crime Act, Act 121 of 1998 (POCA) was promulgated. Further pieces of legislation soon followed, deploying elements of the originating legislation in specific application, such as the Prevention and Combating of Corrupt Activities Act, Act12 of 2004 (PCCAA).

Fraud vs Corruption

Corruption is the giving or receiving by any person (private or entity) of gratification (which does not have to be cash) in order to induce another person to act in a way that is improper in the performance of his/her duty. In short, corruption is constituted by an abuse of power for private gain.

Fraud may be defined as an intentional and unlawful misrepresentation to a third party, which may cause real or potential prejudice to such third party.

Enforcement

POCA provides the involved authorities with certain remedies such as asset forfeiture, which allow for the seizure of the proceeds of crime. PCCAA created categories of corrupt activities and also imposed a positive reporting obligation on anyone who suspects that fraud or corruption may be taking place. It also enables the blacklisting of any company or person found guilty of corruption.

By virtue of Section 34 of PCCAA, any person who knew or ought reasonably to have known of any fraudulent or corrupt activity involving an amount of more than R100 000.00, has an obligation to report this to the authorities. Failure to do so is a criminal offence and sanctions are quite severe. For example, the minimum sentence for any act as listed in the PCCAA where the value of the fraudulent or corrupt activity exceeds R500 000.00 is 15 years in prison.

Spotting the Crime

Often, corruption occurs when clearances of some kind are required from appointed officials. Whilst examples are too numerous to list here, so-called facilitation payments is a common version of the crime. Facilitation payments are relatively small payments made to officials intended as an inducement to exercise their powers in a beneficial way. Some examples are:

• Contractors and/or Subcontractors obtaining approvals in record times from authorities;
• Unexplained clearances at borders; and
• Political sponsorships.

Fraud can take on many and varied forms, both internal and external to the activities of a business and often occur in financial departments. A classic example is where an employee creates “ghost accounts” purporting to be for vendor payments, whilst being for their own benefit or the benefit of third parties. Discovery of such fraudulent transactions may be difficult indeed, unless effective payment procedures are deployed.

Similarly, external fraud takes on many forms, including the interception of real invoices and fraudulent changing of the banking details, thereby ultimately leading to the vendor payment being received by a third party. In this instance, clear and unambiguous policies on changing of banking details may go a long way to limit exposure to this form of fraud.

What to do?

On 18 February 2010, the OECD adopted the Good Practice Guidance on Internal Controls, Ethics and Compliance, which lists recommendations companies may adopt in the combating of corrupt activities. The adoption of a corruption and fraud policy should, ideally, enjoy the commitment of senior management and must be clearly communicated to the employees to ensure overall awareness of the policy and effective implementation thereof. Section 43 of the Companies Act provides for a Social and Ethics Committee to be established and if the company adopts a zero tolerance to corrupt and fraudulent activities, it should be clearly communicated through all levels of the organization.

Fraud may be combated by appropriate training of management and personnel aimed at empowering them to firstly be able to identify the crime. Establishing appropriately rigorous financial controls may be necessary, including transparent vendor application processes and effective payment policies. In general, a sound knowledge of the business and an acute awareness of the different forms in which these crimes may manifest, assist greatly in spotting anything untoward. In short, it is good policy to investigate if something seems odd or out of place. To create a safe environment for whistle blowing to occur, may also encourage employees to do the right thing.