The hidden cost of white-collar crime

April 2003 Security Services & Risk Management

South Africans are acutely aware of the terrible cost of crime on human lives, personal suffering and directly quantifiable financial losses – but few realise the indirect cost of white-collar crime upon our society, which now runs at over R40 billion per year, says Howard Griffiths, managing director of GriffithsReid, this country’s oldest corporate security management company.

White-collar crime consists of consumer fraud, tax swindles, insider trading, securities violations, corruption, bribery and kickback schemes, computer fraud, or corporate misconduct such as occupational health and safety offences. Business Against Crime, founded in South Africa in 1996 in response to an appeal by then president Nelson Mandela to business to help government in the fight against crime, estimates that white-collar crime costs approximately R40 billion per year.

"The problem in determining a final figure for the cost of crime is that police statistics are claimed to represent less than 10% of actual crimes, with a staggering 51% of all crimes never being reported at all," Griffiths says. White-collar crime is no exception - in fact, very often because of their secretive nature, with victims often unaware that they are being victimised - commercial crimes are open to even wider discrepancies in reporting and recording.

"According to the KPMG fraud awareness survey, only 20% of respondents reported detected fraud to the police, meaning that 80% of detected fraudulent activity went unrecorded," Griffiths says.

According to the SAPS, there were just over 46 000 reported serious commercial crimes in 2001 - which, when extrapolated against the KPMG finding, means that there were in fact 230 000 serious commercial offences committed in South Africa in one year alone - an average of 631 per day.

Reasons for non-reporting may include embarrassment and possible damage to a company's reputation, or simply that the expense of prosecution, when added up in court time and likelihood of conviction, makes reporting unpalatable. "This R40 billion figure is merely the direct losses sustained - unquantifiable is the effect on reduced business confidence, loss of investment, emigration and the steady erosion of the economy," Griffiths adds. When totalled up, the cost of white-collar crime in fact far exceeds the physical cost of street crime.

"Each time a car is stolen, the cost of insurance is affected (it is estimated that some 30% of South Africa's R5 billion annual insurance claims are fraudulent or grossly inflated); each time a carton of milk is shoplifted, the retail price index goes up. Each time a tourist is attacked, fewer foreigners come to visit the country, which in turn means less foreign income," Griffiths says.

Just as worrying is South African's rating according to Transparency International's Corruption Index, which is compiled to reflect the perception of 'improper practices' in 41 countries, he says. Its findings are based on a scale of 1 to 10, where 10 denotes the total absence of corruption and the entire penetration of business transactions by corruption, involving kickbacks, fraud and extortion.

"South Africa scores 5,62, in contrast to New Zealand at 9,55." What this means is that South Africa is perceived as only being more or less half honest, which has unfortunate implications for business confidence.

"The perception therefore exists that South Africa is not only prone to violent crime, but also has a disturbing white-collar crime rate, rife in both private and public institutions," he says.

"Significantly, KPMG's fraud awareness survey revealed that fraud occurred mostly because of poor internal controls, as well as collusion between employees and a third party," Griffiths said. "Furthermore, KPMG's South African fraud survey indicated that a significant proportion of perpetrators were in management, compared to the UK where results indicated that 71% of perpetrators were company employees."

Companies therefore have to start taking proactive steps to counter this disturbing trend. There are a number of steps companies can take to protect themselves," Griffiths says.

These include:

* Introducing a corporate code of conduct.

* Increasing management focus on fraud.

* Instituting a fraud prevention and detection plan.

"These steps are quite often best left to a professional security management company," Griffiths adds, as outsiders are most likely to be able to see company weak spots quicker than those fettered by internal office politics.

"All criminal behaviour requires both motive and opportunity before a crime can be committed," he says. "A pro-active security management policy will therefore be focused on pre-empting both of these aspects before they occur by addressing corporate culture and by lowering the possibilities for crime to occur.

"It is also important that a company does not leave the impression that crime goes unpunished, as very often a crime culture will develop if people see their colleagues getting away with brazen theft or fraud."

In addition, an established policy of personnel screening, entry controls, conduct monitoring of employees while at work; and, more controversially, lifestyle evaluations while not at work, combined with a fair and inclusive HR policy, can go a long way to addressing immediate problems," says Griffiths.

"Only by combining pro-active steps with reactive enforcement, can companies hope to combat the rampant white-collar crime wave which impacts upon South Africa just as significantly as the more media focused violent crime," he concludes.

For more information contact Howard Griffiths, GriffithsReid, 011 786 8556.





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