Corporate Sleaze

To understand the challenge faced by South Africa as it struggles to shake off culture of corruption, one should start by tallying the number of successful convictions.

The country is one of the bad students in the class when it comes to enforcement. Successfully prosecuted corruption cases are few and far between, illustrating the big problem plaguing the justice system. Prosecutors and investigators are inexperienced and have no chance pitted against rich defense teams comprised of top attorneys and advocates.

To really win against corruption, there is urgent need for strict enforcement and a wholesale change in attitudes, according Steven Powell, managing director of ENS Forensics, a subsidiary of the South African law firm, ENSafrica.

Having been a state advocate specialising on prosecuting commercial crimes, Powell’s knowledge of white-collar crime is extensive. He attests that there is as much bribery and corruption in corporate South Africa, yet shaming and punishing of sleazy companies and their directors appears low-keyed, if any.

“To make a dent in corruption you have to neutralise the bribe payer, and that’s where I think South Africa must get strict,” says Powell.

As a signatory to the Anti-Bribery Convention of the Organisation for Economic Cooperation and Development (OECD), a UN Convention against corruption and the AU Convention on Preventing and Combating Corruption, South Africa has to act on corruption.

Since 1996 a slew of laws have been enacted to combat corruption and bribery, including the Companies Act and the Prevention of Combating of Corrupt Activities Act. Section 43 of the Companies Act requires establishment of a social and ethics committee to among other objectives, monitor a company’s progress and standing regarding the implementation of the OECD recommendations on preventing corruption. The committee must ensure the company adheres to UN Global Compact Principles – the tenth principle demands of businesses to work against corruption in all forms, including extortion and bribery.

But when it comes to putting words into action, South Africa is lagging behind countries like Rwanda and some of its BRICS partners. China, for instance, has started imposing massive penalties on companies that pay bribes perhaps following the example of the US, which rigorously pursues and fines corrupt American and foreign companies around the world.

Steven Powell, managing director of ENS Forensics

China’s government last year fined British drug maker GlaxoSmithKline US$489 million for paying bribes to doctors to use its drugs. Foreign companies in China are now scrambling to ensure they have strong anti-corruption policies to avoid the same fate as GSK. 

Likewise, the reality of a big stick needs to be felt by big business in South Africa. According to the Institute of Internal Auditors, R700 billion has been lost to corruption over the last 20 years.

The Prevention and Combating of Corruption Act addresses the issue of kickbacks and bribery and acknowledges that it can take many forms. Yet some big companies have reportedly offered kickbacks to fixers and government officials to win business.

“If the South African government gets really serious about nailing companies that pay bribes and impose heavy fines against such companies, it will drive corporate behavior. Nobody (corporates) is scared of our government the way companies fear the US and UK governments,” says Powell.

The role of whistleblowers is important in exposing corrupt practices. However, there is no motivation for people to come forward. The Whistleblowers Act provides ‘paper protection’ for employees.

“Whistleblowers in South Africa have a very rough ride and particularly those in government. When you blow the whistle on a director general or head of department, the law says you shall not be subject to an occupational detriment and that you can’t be fired or transferred or demoted. In reality, an employee is frustrated until they have no option but to resign.

“We have to find a way of protecting whistleblowers. My way as a forensic practitioner is we keep our whistleblowers anonymous. They can’t be victimised if the crooks don’t know who blew the whistle. Also, we need to incentivise whistleblowing.”

The impact of corruption on society is well recorded in many studies. Economically it interrupts investment, trade and economic growth. In countries where corruption is rife, wealth is diverted into the pockets of a few people and puts an imbalance in the way business is done, enabling bribe givers to win.

At risk for South Africa is the loss of reputation as a preferred investment destination in Africa. Foreign companies that now have to factor the cost of putting procedures to deter corruption might one day find it inconveniencing. Corrupt firms must now consider the likelihood of the US Department of Justice going after them (under Foreign Corrupt Practices Act) if they pay bribes in dollars or route communication via US-based Internet servers.

But the most alarming are the studies that directly link corruption to increasing levels of poverty and income inequality. When second-rate companies win contracts and deliver sub-standard services and incomplete or totally inappropriate projects, the poor suffer the most.

So, how is SA Inc performing on good governance and integrity indicators? Not so well, it seems the good rules are still on paper, according to Powell.

“There is massive business apathy. Companies don’t even know what they need to do because it is hidden away in the regulations. I would say only about 10% of companies have done something about reducing the corruption risk, and these are typically those that have to comply with the American Foreign Corrupt Practices Act out of fear that the big stick comes from the Americans and not the SA government.”  

Most methods used to measure corruption rely on tracking perceptions, and the two widely followed - Transparency International’s corruption index and the world governance indicators from the World Bank - paint a consistent picture of increasing incidence of economic crime. Recent country surveys by professional services firms EY and PriceWaterHouseCoopers both noted fraud and corruption are growing fast.

But according to Powell, most fraud and corruption is undetected, and therefore hard to know its magnitude.

“Since 2008 (the beginning of the economic meltdown), we have seen a spike in white collar crime, fraud and corruption cases. People are experiencing difficult times and therefore getting creative in the search for additional avenues of revenue. If the opportunity exists in companies with weak controls and corporate governance and lack of oversight, then they (white-collar criminals) are very quick to exploit those gaps.”

Worrying patterns for Powell include the culture of ‘it’s out time to eat’ and the entrenchment of ‘tenderprenuers’.

“One of the biggest problems we have in government is officials awarding lucrative contracts to themselves through interests in service companies or to family members. 

“The majority of State Owned Enterprises are now in chaos and facing leadership crises. Most have very strong BEE procurement requirements, which are not applied appropriately. In some instances they use the same service providers, but go through a black intermediary to make it look like an empowered transaction. And so you have the emergence of a new very wealthy class of middlemen who are just that. The entity could have gone directly to the service provider.”

There’s positive news, though. The number of convictions for white-collar crimes in the regional specialised commercial courts is encouraging. “The problem is they cherry pick their cases. They have great strike rates because they don’t take difficult cases. But their success has been phenomenal, indeed,” Powell says.

Investment in the rest of Africa by South African companies has increased significantly, diversifying from the traditional contracts in construction, mining and machinery into a variety of businesses. Spurred on by the ‘rising African consumer’ story and the rapid development of shopping malls in key cities, big retailers have been quick to grasp the opportunity. But the sojourns can be costly.

In countries where enforcement is lax, bribery is inevitable and seen as simply a cost of doing business. Be it paying to win a contract or to avoid red tape, corruption is real and endemic. To avoid the pitfall, Powell offers a four-step guide on managing corruption risks in Africa.

Do not ever pay a bribe

Once your company pays a bribe, it’s on a slippery road because there will be an expectation to receive before a service is provided. As you expand into Africa, make sure you have the right rules in place, the right policies and procedures, and zero-tolerance to bribery. If you maintain this, people will respect that and allow your company to operate without the bribery. Rather than fight with someone who says ‘no’ to paying a bribe, the perpetrators usually pick on other easy prey.

Perform thorough due diligence on third parties

Third parties are most involved in bribery. You want to expand your SME to a neighbouring country and you get a lawyer to secure relevant permits and rights. You might not even know it, but he is paying someone to get everything quickly. You are responsible for whomever you appoint, so vet the people who are going to be your business partners, agents or intermediaries. 

South African retailers are expanding into the rest of Africa like there is a race to see who can open the most stores the quickest. To move products through border posts, these companies appoint logistics companies, custom clearance agents and freight forwarders. Borders are bribery hotspots.

When you appoint service providers who are going to move your goods, you have to make sure you have an anti-bribery clause in a contract with them, where contractually you say ‘if you do work for my company, you must never pay bribes’.

Communicate your bribery policy and procedures

Make sure you give your partners your bribery prevention policy.  Explain your process and have them sign to certify that they will adhere to your process. Contractually you have bound them, professionally you have trained them and told them your expectations.

Monitoring and review

Monitor the procedures designed to prevent bribery by third-party and other partners and review accordingly. If a partner misbehaves, fire them, distance yourself and show that you don’t condone corruption.

The key is to do your homework upfront to ensure you are not appointing bad apples. Under the Foreign Corrupt Practices Act, for instance, the US government has a view that if you appoint a bad service provider you must also be bad. If you fail to do proper due diligence they will say you chose to be blind, looked the other way while your partner paid the bribes. Doing your homework is part of your evidence that you didn’t want the bribe to be paid.