Finweek English Edition - - Cover Story - By Ruan Jooste

Busi­ness hi­jack­ings – where whole com­pa­nies, as a go­ing con­cern, are stolen lock, stock and bar­rel from right un­der the noses of their own­ers – ap­pear to be on the in­crease in South Africa. This new phe­nom­e­non in white-col­lar crime is way more so­phis­ti­cated and much more lu­cra­tive than a cou­ple of gun­men en­ter­ing busi­ness premises to steal elec­tronic equip­ment and even com­pany se­crets.

Though the ob­vi­ous short-term con­se­quences are a loss of jobs and rev­enue, it also cre­ates a cli­mate that doesn’t en­cour­age much-needed di­rect for­eign in­vest­ment.

“The au­dac­ity of the per­pe­tra­tors is as­ton­ish­ing. It’s the kind of thing you see in movies – but it’s very real,” says Dave Lox­ton, head of the new foren­sics prac­tice at law firm Werks­mans In­cor­po­rat­ing Jan S de Vil­liers. “What’s more, since the first case came to my at­ten­tion in 2008 the phe­nom­e­non ap­pears to be be­com­ing more com­mon­place.”

Lox­ton says he first en­coun­tered the un­law­ful takeover of a busi­ness two years ago when he was ap­proached for help by a group of Euro­pean in­vestors. A hold- ing com­pany in Europe had set up an op­er­a­tion in SA and em­ployed only lo­cal peo­ple. The own­ers had a very hands-off ap­proach, leav­ing the ex­ec­u­tive re­spon­si­bil­i­ties to the busi­ness head in SA. It was only on an an­nual visit that the in­vestors dis­cov­ered the com­pany’s of­fices had been aban­doned. All that was left was one se­cu­rity guard and some prod­uct re­jects.

The mas­ter­minds had sim­ply moved the op­er­a­tions to other premises a kilo­me­tre away. “They took ev­ery­thing: sup­pli­ers, clients, staff, price lists and prod­ucts,” says Lox­ton.

For the hi­jack­ers it was a case of all sys­tems go, with in­fra­struc­ture, sup­ply chains, a client data­base and brand recog­ni­tion in place with­out the cost of div­i­dends or roy­al­ties to the hold­ing com­pany.

Un­for­tu­nately, the case went nowhere and the per­pe­tra­tors walked away af­ter oblit­er­at­ing the orig­i­nal com­pany’s sys­tems and shred­ding all records. Since the real own­ers were very poor record-keep­ers there was noth­ing for in­ves­ti­ga­tors to work with,” Lox­ton says.

In ad­di­tion, the cost to undo the dam­age way ex­ceeded the money lost and the for­eign in­vestors just walked away, aban­don­ing any fu­ture thought of in­vest­ing in SA.

“The prob­lem is that the costs to pur­sue such mat­ters in­clude ap­pli­ca­tions to court, time and money to prove the theft and cost in build­ing ev­i­dence, to name but a few, can be­come pricey and pro­vides no guar­an­tee funds will be re­cov­ered,” says Lox­ton. “Why throw good money af­ter bad?” The over­seas com­pany had to write off be­tween R15m and R20m.

In a sec­ond case that Lox­ton in­ves­ti­gated last year, a highly suc­cess­ful South African en­tre­pre­neur al­most lost 14 com­pa­nies in an at­tempted busi­ness hi­jack­ing. “This time around it was his mother who be­came sus­pi­cious,” says Lox­ton, who ad­mits to be­ing a great be­liever in a woman’s in­tu­ition.

The en­tre­pre­neur had hired a GM to run his group of com­pa­nies. This per­son was rec­om­mended to him by an ac­quain­tance and the owner em­ployed him with­out con­duct­ing back­ground checks. The owner’s mother didn’t like the GM and, be­cause of her sus­pi­cions, en­gaged an in­ves­ti­ga­tor. It was found the per­son concerned had three

iden­tity doc­u­ments and three pass­ports and had been pre­vi­ously se­ques­trated for in­sol­vency.

Lox­ton was called in and, within 24 hours, the GM had been fired. “If it had been two weeks later the owner would have lost his com­pa­nies – worth around R700m,” he says. “The would-be busi­ness hi­jacker was al­ready si­phon­ing off the com­pa­nies’ as­sets.”

Even more alarm­ing is those usurpers can get away with it if the right­ful own­ers haven’t taken cer­tain ba­sic pre­cau­tions to pro­tect them­selves. Lox­ton ad­vises com­pa­nies want­ing to strengthen their busi­ness de­fences against po­ten­tial hi­jack­ings to prop­erly screen all new staff. “Never em­ploy a per­son just be­cause some­one you know rec­om­mended him. Word of mouth re­fer­rals aren’t good enough. Only a proper foren­sic check will re­veal se­crets, such as in­sol­vency or fal­si­fied qualifications.

“Fol­low up on CV claims. Prospec­tive em­ploy­ers need to make di­rect con­tact with peo­ple listed as ref­er­ences. How­ever, even that may not be enough. Some white-col­lar crim­i­nals will go to ex­tra­or­di­nary lengths to give cre­dence to their claims.”

Lox­ton says one of the most ef­fec­tive ways to pro­tect a busi­ness against white-col­lar crim­i­nals is to stay close to em­ploy­ees and clients. “Be­ing vis­i­ble and get­ting to know staff is im­por­tant, be­cause peo­ple will then in­tu­itively ques­tion anom­alies that, left unat­tended, could cre­ate loop­holes for white-col­lar crime.

“Also in­struct attorneys and ac­count­ing firms to keep an eye on the com­pany if share­hold­ers are un­able to. It’s also ad­vis­able the board of di­rec­tors ap­point a lo­cal rep­re­sen­ta­tive if a sub­sidiary or share­hold­ing is in an­other city or coun­try.”

White-col­lar crime costs SA’s econ­omy an es­ti­mated R150bn/ year, says Steven Pow­ell, di­rec­tor at Ed­ward Nathan Son­nen­bergs Foren­sics. And cor­po­rate fraud in­creased while SA’s econ­omy wors­ened dur­ing the re­ces­sion. Says Pow­ell: “While com­pa­nies were mak­ing lu­cra­tive prof­its, a lot of fraud and cor­rup­tion went un­de­tected. But be­cause com­pa­nies are post­ing losses and are more sen­si­tive to costs there’s a greater aware­ness of what’s go­ing on, which cre­ates a bet­ter cli­mate of de­tec­tion.”

How­ever, such the­o­ries fail to ex­plain the preva­lence of white-col­lar crimes com­mit­ted when times are good. Claims that more em­ploy­ment op­por­tu­ni­ties or more lu­cra­tive re­mu­ner­a­tion pack­ages will au­to­mat­i­cally di­min­ish SA’s crime prob­lems fail to ac­knowl­edge it’s sel­dom the un­em­ployed who com­mit white-col­lar crimes.

Pow­ell says in the re­ces­sion com­pany hi­jack­ings took on many forms. He dealt with a case where a French multi­na­tional set up an en­tity in the Western Cape. The lo­cal CE was con­duct­ing merg­ers and ac­qui­si­tion deals with­out au­tho­ri­sa­tion from the hold­ing com­pany, and even set up busi­nesses in his per­sonal ca­pac­ity to pro­vide sup­port ser­vices to the South African com­pany. He in­formed the hold­ing com­pany those deals were at arm’s length.

Even though those ser­vices could have been dealt with in­ter­nally, the CE awarded ten­ders to the new “ser­vice providers” – pock­et­ing the prof­its while his em­ployer car­ried the ad­di­tional costs. That went on for two years, un­til the fi­nan­cial con­troller be­came sus­pi­cious when the CE in­sisted on sign­ing off on all in­voices, giv­ing

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