Fraud costs SA bil­lions of rand

In these dif­fi­cult eco­nomic times, com­pa­nies need to be even more vig­i­lant in pre­vent­ing white col­lar crime

Business Day - Business Law and Tax Review - - FRONT PAGE - STEVEN POW­ELL

WHITE col­lar crime is es­ti­mated to cost the South African econ­omy bil­lions of rand an­nu­ally. No in­dus­try or busi­ness sec­tor can claim to be im­mune and it has never been more im­por­tant than now for com­pa­nies to be vig­i­lant in pre­vent­ing fraud.

With the re­ces­sion felt by many, fraud­sters are more com­pelled than ever to find ways to hold onto their as­sets and main­tain their life­styles.

There are three fac­tors that usu­ally con­verge be­fore a fraud takes place:

Firstly, the pres­sure to com­mit the crime. The pres­sure on in­di­vid­u­als to sup­ple­ment in­come streams is de­rived from a va­ri­ety of sources, the most preva­lent be­ing a ten­dency of many in­di­vid­u­als to live be­yond their means. Fraud­sters love ex­pen­sive lux­ury cars. The em­ployee is then in­duced to steal in or­der to main­tain a life­style that is more ex­trav­a­gant than his or her in­come stream al­lows. Some­times fraud is com­mit­ted out of a de­sire to look af­ter the best in­ter­ests of the fam­ily, for ex­am­ple, pay­ing pri­vate school or uni­ver­sity fees. Ex­tra-mar­i­tal af­fairs are of­ten a po­ten­tial in­duce­ment to com­mit fraud as per­pe­tra­tors of­ten need to fund their mis­tresses and il­licit ac­tiv­i­ties. They then need to look for an in­come stream which is out of reach of the pry­ing eyes of their part­ner.

Fraud is also mo­ti­vated by habits such as gam­bling and abuse of drugs or al­co­hol depen­dency where the ad­dict be­comes pres­sured to find al­ter­na­tive sources of money to feed the habit. Some­times gam­blers ad­ver­tise their reg­u­lar vis­its to the casino to col­leagues at the of­fice in or­der to con­ceal the pro­ceeds of a crime. They know that if they sud­denly dis­play signs of wealth, peo­ple — no­tably their em­ploy­ers — may be­come sus­pi­cious. By let­ting col­leagues know that they are big win­ners at casi­nos, no­body will think twice about the new house, car or the build­ing al­ter­ations.

The most tragic as­pect to fraud­sters who gam­ble heav­ily is that there is of­ten a gen­uine hope on their part to make good. They be­lieve that they will even­tu­ally win big at the casino and be able to en­joy a fairy­tale end­ing by se­cretly re­plac­ing stolen funds prior to be­ing found out — while still, of course, hav­ing suf­fi­cient funds to live com­fort­ably and hon­estly in the fu­ture.

Once a fraud­ster is fi­nan­cially stressed, the next step in the fraud equa­tion is to find an op­por­tu­nity to com­mit the crime. If the need is great and the con­trols are weak or non-ex­is­tent, it be­comes dif­fi­cult for the em­ployee to re­sist the temp­ta­tion to help him or her­self to com­pany money. Once they re­alise that they are not sub­ject to over­sight, or there is a gap, this is the first step down the prover­bial slip­pery slope. Fi­nan­cial man­agers, ac­coun­tants, clerks, man­agers and di­rec­tors com­mit a large per­cent­age of the white col­lar crime in SA be­cause these are the in­di­vid­u­als who have ac­cess to ei­ther the phys­i­cal cash or the pay­ment pro­cesses, and some­times they have the fi­nal con­trol to pre­vent abuses by oth­ers. Pro­vided that they al­most never take leave or re­sign, they are in­vari­ably in the per­fect po­si­tion to cover up their il­licit trans­ac­tions. Usu­ally when au­dits take place, they are the very in­di­vid­u­als re­quested to sup­ply the au­di­tors with in­for­ma­tion and doc­u­men­ta­tion. Cov­er­ing up be­comes a way of life.

But what moves in­di­vid­u­als to com­mit acts of dis­hon­esty when there are so many hon­est peo­ple out there who are able to re­sist temp­ta­tion?

This is where an in­ter­est­ing psy­chol­ogy comes into play. The fraud­ster who has suc­cumbed to pres­sure and ex­ploited an op­por­tu­nity to steal will, in the nor­mal course of events, be plagued by a guilty con­science. This can be a source of con­sid­er­able ir­ri­ta­tion. The way white col­lar crim­i­nals al­le­vi­ate a guilty con­science is through ra­tio­nal­i­sa­tion. They re-la­bel their il­licit con­duct in their own minds in a des­per­ate at­tempt to wa­ter down the moral rep­re­hen­si­bil­ity of it.

A com­mon ra­tio­nal­i­sa­tion is the em­ployee who steals from his or her

em­ployer but con­sid­ers the mis­ap­pro­pri­a­tion as unau­tho­rised bor­row­ing. An­other equally com­mon ra­tio­nal­i­sa­tion is where a de­ci­sion maker in a com­pany ac­cepts a kick­back in ex­change for giv­ing a large or­der to a par­tic­u­lar sup­plier. In or­der to sleep bet­ter at night, he or she clas­si­fies the pay­ment as a “loan” or ”com­mis­sion” in his or her mind. The “loan” ex­cuse is fre­quently used, but with one so-called “loan” lead­ing to an­other and an­other, it soon be­comes im­pos­si­ble to ever re­pay — even if this was the orig­i­nal in­ten­tion, which is ques­tion­able.

When foren­sic in­ves­ti­ga­tors drill down to the de­tail of the “loan”, they usu­ally find that there is no for­mal con­tract and re­pay­ment has not yet com­menced. Other equally in­sid­i­ous forms of ra­tio­nal­i­sa­tion in­clude cre­at­ing a frame­work of en­ti­tle­ment in terms of which they con­vince them­selves that they are un­der-val­ued and un­der-re­warded, which in due course al­lows them to feel en­ti­tled to take some­thing back from the or­gan­i­sa­tion. These em­ploy­ees feel they have been un­fairly treated and de­serve more money.

A fur­ther com­pli­ca­tion is re­cidi­vism. Once the white col­lar crim­i­nal be­comes ac­cus­tomed to en­joy­ing the pro­ceeds of il­licit ac­tiv­ity, it be­comes dif­fi­cult to vol­un­tar­ily de­sist. On oc­ca­sion, when fi­nally ap­pre­hended, some of­fend­ers ex­press re­lief. They declare that a huge weight has been lifted off their shoul­ders and ex­press that they felt a de­sire to be caught as the fraud it­self had be­come an un­con­trol­lable ad­dic­tion.

Psy­chi­atric ev­i­dence re­cently led in the trial of a fi­nan­cial man­ager con­victed of ir­reg­u­lar elec­tronic funds trans­fers likened the mis­ap­pro­pri­a­tion to an over-eat­ing dis­or­der in that once the ac­cused had started steal­ing, he sim­ply could not stop him­self.

In this in­ves­ti­ga­tion, foren­sic in­ves­ti­ga­tors noted an in­ter­est­ing choice of bed­side lit­er­a­ture when ex­e­cut­ing a search war­rant — a book on how to sur­vive the prison en­vi­ron­ment.

To pre­vent the neg­a­tive ef­fects of this crime, com­pa­nies are ad­vised to be proac­tive, con­stantly re­view their anti-fraud con­trols, speak to foren­sic ex­perts and make sure they are as fraud-proof as pos­si­ble.

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