NATIONAL ANTI CORRUPTION PRESENTATION
CORPORATE GOVERNANCE
The corporate scandals abroad as well as in South Africa have led to the doyens of corporate governance casting the spotlight on the legal requirements of those appointed to Boards. The King Committee on Corporate Governance was established by The Institute of Directors in Southern Africa in July 1993. The King Committee produced the first King Report on Corporate Governance that was published on 29 November 1994 and was recognised internationally as the most comprehensive publication on the subject embracing the inclusive approach to corporate governance. Incidentally today is the anniversary of the launching of the King II Report, which was launched on May 26 2002 at an Institute of Directors (IoD) Conference.
As we speak, the IOD is at a Corporate Governance conference titled 365 days of impact. It is with pride that I remind you all, that the King 11 report is now recognised as the benchmark of corporate governance worldwide. The Derrick Hicks Review on English corporate governance, the Robert Smith Report on auditing in England, the Australian stock exchange listing Report and the American corporate governance reviews all recognise the King 11 report as sound authority and have used it to enhance their positions. The Government has also now issued its corporate governance protocol for the public sector and this together with the establishment of the commercial courts augurs well for the future of corporate accountability. However, as has been seen with recent cases in the commercial courts due process therein is slow.
Schedule 21 of the JSE‘s listing requirements states that all prospective directors have to make a declaration regarding their fitness or properness (to use the term loosely) to be a director. However all the JSE can do is to force the company to disclose this information to their shareholders. The JSE does not have the authority to prohibit anyone from becoming company director. Moreover these declarations are not retrospective. They were introduced in October 2000, therefore directors who were voted into office prior to October 2000 are exempt.
This oversight does not extend to public companies that are under the ambit of the Banks Act, the Long-Term Insurance Act and the Short-Term Insurance Act. These pieces of legislation give the Reserve Bank, and the Financial Services Board a certain amount of authority. The King II Report has recommended the establishment of a register of delinquent directors, overseen by the FSB. This database will contain the complete history of all directors who have fallen foul of the law.
In the current corporate climate, Directors face more stringent tests than prior to the King 2 report. Directors now find themselves being pushed to comply with the new regulatory framework while at the same time being pulled to attempt to please shareholders in this current turbulent economic environment. Historically many boards have had an arms length relationship with shareholders and in some cases a dismissive attitude. However Boards are increasingly being taken to task especially when share prices drop unexpectedly. Shareholders will be watching carefully that Directors do not remunerate themselves or the executively excessively and that insider trading and misuse of company assets is not tolerated. The directors also have to deal with the increasing requirement of information disclosure. Disclosure has to be a culture and the King 2 report states that ‘apart from JSE listed companies, financial institutions and public sector enterprises falling under the PFMA, All companies should give due consideration to the application of the code of corporate practices and conduct
FRAUD
One of the major impediments to combating fraud since the Anti-corruption summit in 1999 has been the inability or reluctance by some sectors of business to share fraud data thus reducing the risk of exposure. Business has now realised that fraud is a non-competitive issue and cannot be treated as such. The other impediment since the summit in 1999 has been the reluctance to acknowledge the magnitude of the fraud and corruption problem in South Africa and the practice of hiding fraud problems in bad debt provisions for fear of shareholder backlash. But it has now become clear to business that fraud and corruption must be tackled at all levels.
Despite the challenges that are still facing business with regards to fraud and corruption such as lack of investment to execute some of the anti-corruption measures, many sectors of business have contributed immensely to alleviating the problem. Without dismissing the prevalence of corruption within our society, it must be mentioned that the perception of corruption within business is greater than the reality and it is certainly not debatable that the business sector has been an unsung hero in the fight against fraud and corruption.
I will now illustrate some of the challenges that business is facing and the progress that has been made in some of the sectors. The business report will be presented by relaying the responses to a BSA questionnaire by the banking sector, the retail industry, the mining industry, the short-term insurers, the long-term insurers and the Road Freight Association. The BSA questionnaire elicited information by asking three basic questions and based on the answers to those questions we gleaned what anti-corruption measures have taken place thus far.
THE SHORT TERM INSURANCE INDUSTRY
Areas within sector you believe corruption needs to be targeted
Areas outside sector you believe need to be targeted?
Licensing and Registration Department -54% of all stolen vehicles are re-registered through corrupt officials at the licensing department
54% of all stolen vehicles are re-registered through corrupt officials at the licensing department
Anti Corruption Initiatives introduced in sector to date?
THE LIFE OFFICES ASSOCIATION
Areas within sector where corruption needs to be targeted
We are specifically interested in fraudulent disability claims. i.e. people who are in receipt of a disability benefit but have returned to some form of employment without informing us.
Fake "dead" people are costing the South African life insurance industry
R3-billion a year in false claims.
This was revealed during the bail application of five people, one of whom
worked at Durban's Gale Street mortuary, who were arrested two weeks ago for
a macabre fraud scam in which unidentified bodies were allegedly being used
to claim against
insurance policies on the lives of living people.
The scam, unearthed by members of the elite Scorpions after a year-long
investigation, is suspected of running into hundreds of thousands of rand
and is believed to involve doctors, police, funeral parlour employees and
home affairs officials. Scams like this occur throughout South Africa, say
investigators from the Scorpions.
Explaining how the "dealing in death" scam worked, investigators said
unidentified bodies, which had not been claimed for some months, were
falsely identified by "relatives" with the help of mortuary attendants.
Areas outside sector where corruption needs to be targeted?
Anti Corruption Initiatives that have been introduced in sector to date
This is a system of self- regulation within the long term insurance industry and is operated by the LOA. It is an attempt to ensure that the public are protected from persons who are not fit and proper to be engaged in the business of marketing the products of the industry. Participants in the S reference system employ, accept new business will not
THE BANKING INSTITUTIONS
Areas within sector where corruption needs to be targeted
Areas outside sector where corruption needs to be targeted
Anti Corruption Initiatives that have been introduced in sector to date
BLACK MANAGEMENT FORUM
Areas within sector where corruption needs to be targeted
Areas outside sector where corruption needs to be targeted
Anti Corruption Initiatives that have been introduced in sector to date
B.M.F.
Private Sector
CHAMBER OF MINES
Areas within sector where corruption need to be targeted
Gold, platinum and diamonds are stolen from mines in South Africa, principally by employees to whom such product necessarily becomes exposed during the production processes. The precious product is then moved out of the country along a conduit which traverses the illicit market for these products. A study by Peter Gastrow, director of the institute of security studies in Cape Town, for the chamber of mines, estimates that around 35 tons of gold a year is stolen from SA mines. i.e. US$ 400 million a year, the equivalent of a fair sized gold mine. Moreover arrest rates have declined since 1995, police departments devoted to tackling gold and diamond crimes are under-funded.
The illegal gold market into which stolen gold product is fed, is relatively highly organised within progressive tiers of criminal syndicates. The illicit gold market and its organised crime players create the demand for illicit gold that fuels gold theft. It is in this area of gold theft that corruption must be targeted. Within this domain of syndicated product theft, the efforts of private security and State law enforcement agencies are undermined by the lack of application, of resources, and by corruption within State departments which have involvement in controlling the movement of goods and materials across SA’s borders. Attempts have been made to involve such departments more dynamically and thoughtfully in gold theft counter measures, but such efforts have not as yet elicited significant involvement.
The mining industry engages in massive trade for goods and services with large and small business enterprises. The industry suffers major actual and potential losses arising out of its business interactions with such suppliers through theft, the supply of substandard goods and services and unethical business practices in general.
The industry endeavours to mitigate its exposure by way of rigorous ethics policies and tendering procedures, strong internal controls and the deployment of security and forensic investigators. However, through criminal creativity and a material degree of collusion between mine employees and suppliers, countermeasures are frequently evaded.
Unique challenges are presented in successfully bringing criminal and civil cases to Court. The under-staffing of the Courts, and the high levels of corruption amongst Court administrative personnel exacerbates this situation, and a relatively low incidence of successful prosecutions is experienced. There is also an observed lenient criminal justice system approach to cases involving this largely non-violent crime category.
The mining industry at large makes extensive use of copper wiring and cabling in the operation of its equipment and the reticulation of electrical power within mines. Mining houses are heavily impacted by copper theft carried out by opportunistic criminals and organised criminal syndicates. The situation has deteriorated to the extent that gold production is at times disrupted, and serious safety hazards are posed in respect of underground mining employees. Most industries, which produce goods and service providers such as ESKOM, Telkom and the railway services are likewise severely impacted. Stolen copper material is easily traded on a cash-on-presentation basis, in the many scrap metal dealerships, which operate in the mining regions.
Anti-corruption initiatives that have been introduced in sector to date
Mining houses deploy an extraordinary level of high technology security operated by skilled personnel to mitigate attempts to remove products from the mines. At the new Western Areas Dome South Deep twin shaft complex for example, a "hands free" sludge reactor was installed and this reduced theft incredibly. Rand refinery and others also backing the development of similar equipment whereby small gold bars can be produced untouched by human hands. Many metallurgical process innovations have also been brought about which reduce the complexity of securing the product. These measures contribute significantly to the costs of producing gold, and are not incurred to the same extent by competitors outside South Africa.
Goldfields, for example and its larger SA peer companies have substantially reduced the incidence of gold theft over recent years, and the focus must shift to the illicit gold market. Major industry companies have formal corporate governance structures and practices in place which include comprehensive internal security services, ethics policies, internal financial and administrative control measures, the deployment of independent investigative and auditing capacity, whistle blower arrangements and the like.
The Chamber of Mines of SA has a Standing Committee on Security, within which Chamber member mines interact, and which Committee in turn interacts with the State criminal justice system and State departments such as the Department of Minerals and Energy, Custom and Excise, Civil Aviation, SARS and the like.
The South African Police Service / Industry National Precious Metals and Diamonds Forum (NF) is a strategic industry security structure, chaired by the National Organised Crime Division of the SAPS, on which industry companies serve, which coordinates the combined State and industry operational response against organised crime in precious metals and diamonds. The National Investigative Task Team (NIT) is the striking force of the NF, comprising SAPS led SAPS – industry teams who investigate and act against syndicated criminals.
The NIT as reported above has reached a point where it has moved against identified criminal targets on a prioritised basis, and will continue to do so.
Mining Houses collaborate on a formal and structured and informal basis with its industry peers, by way of exchanges of information and joint action regarding unethical and criminal suppliers of goods and services.
Attempts are made by the industry and business peers, to network with the criminal justice system locally, in order to improve their insight into the aggravated nature of this crime domain, in order to secure a more aggressive State posture.
Mining Houses feed substantial manpower, financial and other resources into industry forums and task teams, led by the Organised Crime Division of the SAPS, which investigate and act against syndicate groups and individuals. Specialised law enforcement agencies such as the Asset Forfeiture Unit and the Scorpions, and government agencies such as SARS are also drawn into such actions as required and appropriate. Recently, the type of efforts stated above has been successful, and it is hoped that momentum can be maintained.
It is suggested that the best way to stem the crime is for governments across the world to work together to attack the illegal gold market rather than rely on police to catch the criminals.
RETAIL INDUSTRY
Areas within sector where corruption to be targeted?
Areas outside sector where corruption needs to be targeted
Anti-Corruption Initiatives introduced in sector to
date
THE SOUTH AFRICAN FRAUD PREVENTION SERVICE
In order to reduce the incidence of fraud in South Africa, and at the instance of the major financial institutions, The Banking Council and major credit grantors, The South African Fraud Prevention Service (SAFPS) has been established to prevent fraud by allowing members to exchange details of alleged wrongdoers (who may have fraudulently applied for financial loans) when they are discovered. The service is a non-profit association registered in terms of Section 21 of the Companies Act.
The service is based on the highly successful UK CIFAS model which has been operating for 10 years and has yielded fraud prevention savings in excess of £650 million Sterling.
It allows member organisations to exchange details of applications for products or services, which are believed to be fraudulent, because the information provided by the applicant fails verification checks. Members can also exchange information about accounts, which are suspected of being fraudulently misused.
The information is kept by Credit Bureaux, on an SAFPS database and it is to these companies and from these companies members supply and obtain information regarding possible wrongdoers.
When an SAFPS member organisation identifies a suspected fraud, a warning is placed on the SAFPS database. The warning does not mean that the person or persons indicated have committed fraud. It means extra precautions should be taken to ensure the application or account that has prompted the check of the person, identity number or other details is genuine.
Only SAFPS member organisations are able to see SAFPS warnings and they are very careful to establish the identity of any applicant applying for a product or service. This may lead to a delay when applications from are being processed, as an identity will need to be confirmed.
SAFPS is able to offer the public a special Protective Registration. Should an identity document or other personal documents such as cheque books, credit cards, or passports that could be used for fraudulent purposes be lost or stolen this can be registered with SAFPS after reporting the matter to the Police. This information will then be made available to SAFPS members should the stolen or lost documents be used in any attempted frauds with such members.
This valuable free public service will help to protect innocent members of the public from having their personal details used fraudulently.
SAFPS also offers certain categories of members a daily fraud alert, which is transmitted by e-mail. The alert is compiled utilising state of the art data analysis software and is drawn from the SAFPS databases at the credit bureaux, the Protective Registration database and data supplied by members’
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