White Collar Crimes: a menace to South African businesses

The slow rot of the private and public sector

Since the early 2000s, there have been numerous news reports in South Africa indicating that white collar crime is on the rise. From 2014, despite police statistic reports indicating an 11% decrease in economic crimes, independent studies conducted by PwC indicate a burgeoning increase in fraud, money laundering, corruption, collusion and bribery by senior management in companies and by politicians in high ranking government positions.[1]

South Africa has the potential to increase the number of its successful prosecutions if a greater emphasis is placed on the importance of prosecuting white collar crimes.

Economic crime is constantly evolving and becoming a more complex issue for organisations and economies.  In South Africa, more than two thirds of South African organisations have experienced economic crime.[2] The overwhelming cause of the increase in white collar crimes is that detection methods are not keeping pace, local law enforcement agencies place little to no emphasis on white collar crime, bundling together a broad range of illicit activity, including insider trading and credit card fraud together with public procurement fraud and private sector corruption, and there is a general failure to prosecute and punish these crimes effectively. Further, many individuals facing charges of fraud, corruption, money-laundering or insider-trading have the ability to delay prosecution by launching numerous appeals and other actions.[3]  This accompanied by South Africa’s back-logged High Court system, the inability of the National Prosecuting Authority (The NPA) to prosecute economic crimes and the poor levels of investigation by police services, in no way serves to deter individuals from committing such crimes.

The PwC Global Economic Crime Survey of 2016 indicates that the level of white collar crime in South Africa has reached pandemic status, with 70% of South African respondents stipulating that local law enforcement agencies are inadequately resourced and trained to handle incidences of these crimes. As a result, the public and private sectors rarely report these crimes to the police.[4] Consequently, it appears that despite South Africa’s well-developed legal framework for combating corruption, regulated by the Prevention & Combating of Corrupt Activities Act[5], South Africa lacks the capacity to enforce it.[6]

There are a number of practical examples indicating the failure of the NPA and South Africa’s prosecuting frameworks to establish effective deterrents to the commission of white collar crimes, lack of conviction being a substantial reason why the number of such crimes has increased by approximately 50% in the past ten years.[7] There is a general belief that one will never be punished for them. An additional concern is that those who are charged with white collar crimes have the ability to delay legal repercussions for a long time.[8]

In the case of Peter Gardner and Rodney Mitchell, the join Chief-Executive Officers of LeisureNet, the accused were arrested in 2002 but they remained on R500 000 bail until 2011, when they had exhausted all their options. They were eventually jailed for 12 years, some of which was suspended. The men were convicted of fraud for using money from the company to fund their expensive lifestyle, purchase unauthorised shares in a German company and value-added tax fraud amounting to R12 million rand.[9]

Gary Porritt, Tigon’s former chief executive officer and his business partner Sue Bennett have kept were charged with a total of 3160 charges including tax fraud, Company Act infringements and contravening exchange control regulations after encouraging investors to take their money offshore via ‘dodgy schemes’.[10] Between January 2006 and May 2007, the business partners spent R23 million attempting to stall their prosecuting. Their case has been pending for nearly 12 years.[11]

Finally, despite two court rulings finding the directors of Aurora Mining Company personally liable for the losses, damages and costs sustained by the company due to a breach of their fiduciary duties (Amounting to R35 million), it has been argued that it will take years for the former mine workers to be paid the money owed to them after the company was liquidated.[12] The directors have, subsequently, indicated they will appeal the judgment. In this case, the directors include Solly and Fazel Bhana, Nelson Mandela’s grandson, Zondwa Mandela and President Jacob Zuma’s nephew, Khulubuse Zuma. For those who are politically affiliated, it appears as if ‘the wheels of justice turn much more slowly’.[13]

The commission of economic crimes extends far beyond the private sector. In South Africa, it is extremely prevalent even in the highest echelons of government, spreading as far as the President of the Republic, Jacob Zuma. Government corruption is now perceived as ‘the biggest threat to business and investment’ over taking unemployment, the infrastructure backlog and labour instability.[14] A serious weakness in South Africa’s investment profile is the likelihood of dishonest dealings by public servants which are at an all-time high. Transparency International’s corruption perceptions index stipulates that South Africa’s public sector is perceived to be the 72nd most corrupt country out of 177 and the Special Investigating Unit indicates that approximately R180 billion is lost each year to corruption. Corruption Watch has stated that there is evidence showing that “kickbacks and bribery are already prevalent in the management of private sector supply chains” due to the high levels of corruption in the public sector.[15]

The increasing disarray in both the National Prosecution Authority and in the police services and their general inability to prosecute economic crime[16] is highlighted by the NPA’s decision to participate in Jacob Zuma’s appeal of the High Court judgment ordering that the 783 charges of corruption, fraud and racketeering against him, dropped in 2009 by the then Acting National Director of Public Prosecutions Mokotedi Mpshe, be re-instated.[17] The High Court reviewed and set aside the 2009 decision on a finding that it was irrational.[18] These charges, coupled with other recent scandals surrounding Jacob Zuma, such as the Nkandla scandal where it was found that President Jacob Zuma mismanaged public funds to renovate his private home in Nkandla well beyond the approved security upgrades, have received wide spread publicity.

That the NPA is reluctant to re-instate the charges against the President Jacob Zuma emphasises that it is unable to implement the legal frameworks that are in place to prevent and combat white collar crimes. Politicians or those closely affiliated with them, seem to have the ability to conduct illicit affairs free from prosecution. It appears as if South Africa really is suffering from a white collar crime pandemic as these crimes ranges from the private sector to the highest levels of the public sector. Corruption of such a magnitude at a public sector level not only “undermines state legitimacy and service delivery, it distorts market competition and increases the cost of doing business in the country”.[19]  The cycle is also circular because once corruption in the public sector becomes the norm, it will infect private sector supply chains.[20]

South Africa has the potential to increase the number of its successful prosecutions if a greater emphasis is placed on the importance of prosecuting white collar crimes. Successful prosecutions include the Fidentia CE accused of misappropriating the funds of widows and orphans, Mr J Arthur Brown. Mr Brown spent eight years fighting his charges and subsequent R150 000 fine. On appeal, the Supreme Court overturned the High Court judgment and sentenced Brown to 15 years’ jail for two counts of fraud. The sentences would run concurrently.[21] The court stated that the penalties for economic crime must be sufficient to act as a deterrent: “We must guard against creating the impression that there are two streams of justice, one for the rich and one for the poor.”[22] Brown is currently serving his time at the Goodwood Prison. Additionally, there have been a number of plea agreements entered into which avoid cases being dragged out for years and allow some of the victims to get their money back.[23] Importantly, South Africa is not alone in struggling to convict white collar crime but it can learn from the steps taken by other countries to ensure that it is no longer knows as the “White Collar Capital”.[24]

 

[1] PwC Global Economic Crime Survey 2016 (March 2016) Economic Crime: A South African Pandemic 5th (ed.)

[2] Ibid

[3] Financial Mail (October 2015) White Collar Crime Stealing at the Top [online: http://www.financialmail.co.za/coverstory/2015/10/08/white-collar-crime-stealing-at-the-top]

[4] PwC Global Economic Crime Survey 2016 (March 2016) Economic Crime: A South African Pandemic 5th ed. at page 2.

[5] Act 12 of 2005

[6] Financial Mail (October 2015) White Collar Crime Stealing at the Top [online: http://www.financialmail.co.za/coverstory/2015/10/08/white-collar-crime-stealing-at-the-top]

[7] Mail & Guardian (January 2015) Poor Conviction Rate Results in 50% Rise in White-Collar Crime [online: http://mg.co.za/article/2015-01-13-poor-conviction-rate-results-in-50-rise-in-white-collar-crime]

[8] Financial Mail (October 2015) White Collar Crime Stealing at the Top [online: http://www.financialmail.co.za/coverstory/2015/10/08/white-collar-crime-stealing-at-the-top]

[9] Mail & Guardian (January 2015) Poor Conviction Rate Results in 50% Rise in White-Collar Crime [online: http://mg.co.za/article/2015-01-13-poor-conviction-rate-results-in-50-rise-in-white-collar-crime]

[10]Financial Mail (October 2015) White Collar Crime Stealing at the Top [online: http://www.financialmail.co.za/coverstory/2015/10/08/white-collar-crime-stealing-at-the-top]

[11] Mail & Guardian (January 2015) Poor Conviction Rate Results in 50% Rise in White-Collar Crime [online: http://mg.co.za/article/2015-01-13-poor-conviction-rate-results-in-50-rise-in-white-collar-crime]

[12] Financial Mail (October 2015) White Collar Crime Stealing at the Top [online: http://www.financialmail.co.za/coverstory/2015/10/08/white-collar-crime-stealing-at-the-top]

[13] Ibid.

[14] Financial Mail (October 2015) White Collar Crime Stealing at the Top [online: http://www.financialmail.co.za/coverstory/2015/10/08/white-collar-crime-stealing-at-the-top]

[15] Ibid.

[16] CNBC Africa (January 2014) White Collar Crime is on the Rise [Online: http://www.cnbcafrica.com/news/southern-africa/2014/01/28/white-collar-crime-in-safrica-on-the-rise/]

[17] Eyewitness News (June 2016) NPA Joins Zuma in Appeals Case [online: http://ewn.co.za/2016/06/10/NPA-joins-Zuma-in-appeal-bid-today]

[18] Democratic Alliance v Acting National Director of Public Prosecutions and Others [2016] 3 All SA 78 (GP)

[19] Financial Mail (October 2015) White Collar Crime Stealing at the Top [online: http://www.financialmail.co.za/coverstory/2015/10/08/white-collar-crime-stealing-at-the-top]

[20] Ibid.

[21] Mail & Guardian (January 2015) Poor Conviction Rate Results in 50% Rise in White-Collar Crime [online: http://mg.co.za/article/2015-01-13-poor-conviction-rate-results-in-50-rise-in-white-collar-crime]

Financial Mail (October 2015) White Collar Crime Stealing at the Top [online: http://www.financialmail.co.za/coverstory/2015/10/08/white-collar-crime-stealing-at-the-top]

[22] S v Brown [2015] 1 All SA 452 (SCA)

[23] Mail & Guardian (January 2015) Poor Conviction Rate Results in 50% Rise in White-Collar Crime [online: http://mg.co.za/article/2015-01-13-poor-conviction-rate-results-in-50-rise-in-white-collar-crime]

[24] Mail & Guardian (October 2007) SA: Capital of White-Collar Crime [online: http://mg.co.za/article/2007-10-16-sa-capital-of-whitecollar-crime.html]

Nic Roodt

Nic Roodt