Beneath the benign facade of white-collar crime, lurks an industry worth R40bn a year

The term white-collar crime creates such a benign impression and yet, it hardly tells of the devastation it causes to companies.

Fraud on companies and corporate corruption are so pervasive in South Africa that it is only by luck that forensic investigators find proof.

Last week, Geoff Midlane, the managing director of Stallion Investigations, a division of Stallion Security, said white-collar crime was currently costing the economy over R40 billion a year, dwarfing the R32 billion brought in by foreign tourists.

This, in the words of the late Judge Harold Berman, "is thievery and roguery on a grand scale".

It is not as if South Africa has sat back in the battle against white-collar crime. It has enacted a raft of legislation in the ongoing fight, according to Steven Powell, the head of the forensics division of the law firm Sonnenberg, Hoffmann and Galombik.

First, it was the establishment of the Office for Serious Economic Offences, which became the forerunner to the well-resourced, FBI-like multidisciplinary unit, the Scorpions.

This was followed by the Prevention of Organised Crime Act; the Financial Intelligence Centre Act, which stops South Africa from being a haven for drug dealers and gangsters; and the Protected Disclosures Act (the whistle-blowers' act).

Two years ago, the government introduced plea bargaining into the criminal justice system to address the backlog of cases, particularly in white-collar crime that usually took years to complete and dedicated commercial crime courts.

The latest piece of legislation was the Prevention and Combating of Corrupt Activities Act, which was designed to make sure the corporate sector become a partner with the government in the battle against crime by forcing them to report corruption, Powell said.

But who and what is a white-collar criminal?

Midlane said the typical white-collar criminal was between 26 and 40 years old, had a tertiary qualification and was hard working. They were generally egocentric, were big spenders and worked for their employers for longer than five years before they started embezzling money.

"It has been our experience that drugs or alcohol often played a role and fraudsters were often involved in extra-marital affairs," Midlane said.

Alice Maree, of Unisa's department of criminology, agreed and said unpaid debts were often the catalyst that led to corporate fraud. Typical white-collar criminals had no previous criminal record and were seemingly stable individuals. They craved recognition and were emotionally unsure of themselves.

Midlane said one particular trait that corporate criminals had in common was that they seldom took leave.

"While there is, of course, the possibility that it is merely a hardworking individual who is trying to get ahead of the game, more often than not it is a sure-fire sign of a white-collar criminal at work.

"By always being at the office, they are able to pick up any signs of an impending investigation or to rapidly cover their tracks when signs of their embezzling begin to emerge," Midlane said.

Research and experience showed that management, and not necessarily employees, was the single greatest source of white-collar fraud, accounting for about 50 percent of such offences.

"Simple things make the difference: a proper staff vetting policy and physical security procedures, which are far more than just signing in at the front door," Midlane said.

Powel said, as a state prosecutor, he had prosecuted lawyers, accountants, clergymen, doctors, engineers and builders, and no business or industry was immune to fraud and corruption.

"Procurement fraud costs our economy millions of rands a year. Unscrupulous suppliers are targeting buyers and decision makers in organisations and identify not only their hobbies and interests, but also their vices in order to bribe them and get lucrative orders. *1"

As a forensic investigator, he and his team, on average, find three to four ghost companies per year and by the time it is uncovered, it has been in existence from 12 to 18 months at huge cost to the organisation, which ranges from R100 000 to several million.

Another example, which was difficult to detect, was genuine suppliers, who, in place of invoices, slip in one or two false ones with the assistance of colluding employees.

"All they have to do is add fictitious items, the supplier gets paid and splits the illicit gain with corrupt employees.

"We also have overbilling, where a staff member agrees to pay more for an item, 'cover quoting' where different divisions in the same company gives different quotes or business re-direction, where a manager gets kick-backs and bid-rigging *2, and tender abuses where corrupt staff members give inside information to tenderers *3."

Powell said the unfolding Schabir Shaik trial in the Durban high court is a microcosm of what is happening in corporate South Africa. "These schemes are commonplace and it is happening all over the country," he said.

A recent KMPG fraud survey, which for the first time included the public sector, detected a 13 percent increase in employee fraud reported since the last survey in 1999, Midlane said.

Experience had shown that as much as 70 percent of employees in some businesses acted dishonestly. This often led to the demise of their companies, he said.

This is the first of two parts

With acknowledgement to Ronnie Morris and Business Report.

*1 Like many wives, some ex wives and many children

*2 An ADS speciality in the Arms Deal.

*3 A DoD and/or Armscor speciality in the Arms Deal.