WHERE DID MY COMPANY GO?
BUSINESS HIJACKING ON THE RISE IN SA
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