South Africa: Business hijackers exploit companies’ hands-off management style

Last Updated: 3 August 2010
Article by Dave Loxton

"Business hijackings", in which companies or their business secrets are stolen lock, stock and barrel right under the noses of their owners, appear to be on the increase in South Africa. Even more alarming is that the usurpers can get away with it if the rightful owners have not taken certain basic precautions to protect themselves.

"The audacity of the perpetrators is astonishing. It's the kind of thing you see in movies – but it's real," says Dave Loxton, head of the new Forensics practice at corporate and commercial law firm Werksmans Incorporating Jan S. de Villiers. "What's more, since the first case came to my attention in 2008, the phenomenon appears to be becoming more commonplace."

Loxton, who has coined the term "business hijacking" to describe the unlawful takeover of a business, says he first encountered this two years ago when approached for help by a group of European investors.

"Their holding company in Europe had set up an operation in South Africa and exclusively employed local people," he says. "The owners were very hands-off and only had telephonic contact – always to a cell phone - with the business head in South Africa. It was only on an annual visit that the investors discovered the company's offices had been abandoned. All that was left behind was an empty building, one security guard and some product rejects."

Loxton, who is an expert in investigating, preventing and detecting white collar crime, says that the South African masterminds of the business hijacking had simply moved the operations to other premises only one kilometre away.

"They took everything – suppliers, clients, staff, price lists and products. Unfortunately, the case went nowhere and the perpetrators walked away after obliterating the original company's entire systems and shredding all records. Since the real owners were also very poor record-keepers, there was nothing for investigators to work with."

Women's intuition not to be scoffed at

In a second case, which Loxton investigated last year, a highly successful local entrepreneur almost lost 14 companies in an attempted business hijacking. "This time, it was his mother who became suspicious," says Loxton, who claims to be a great believer in woman's intuition. "I've seen a number of cases that have been uncovered through woman's intuition."

In this particular case, the entrepreneur had hired a general manager to run his companies. "This person was recommended to him by a colleague or acquaintance, and the owner employed him without doing background checks," says Loxton. "His mother didn't like the general manager and, because of her suspicions, engaged an investigator. It was found that the person concerned had three identity documents and three passports and had been sequestrated for insolvency."

Loxton was called in and, within 24 hours, the general manager had been fired. "If it had been two weeks later, the owner would have lost his companies, worth about R700 million." This was because the would-be business hijacker was already busy siphoning off the companies' assets.

In the most recent case, currently in progress, a client of his is fighting to reclaim its greatest asset – a chemical formula which is now in the hands of a rival company. "The only employee who had the formula resigned and joined the competitor, taking the formula with him."

In this case, the client has every prospect of winning a legal battle since the common law dictates that the original employer owns the formula.

"However, this situation again illustrates the dangers of being too hands-off and trusting, which is surprisingly common in South African business, despite the increase in white collar crime," says Loxton.

His advice to companies wishing to strengthen their business defences against white collar crime, including business hijacking, is as follows:

Do proper screening of all new hires: Never employ a person just because someone you know recommends him or her. Word-of-mouth referrals are not good enough. Only a proper forensic check will reveal hidden secrets such as insolvency or falsified qualifications.

Go the extra mile to follow up CV claims: Prospective employers definitely need to follow up with previous employers and to make direct contact with people listed as references on CVs. Even this may not be enough, however. Some white collar criminals will go to extraordinary lengths to give credence to their claims. An example is the legal advisor at a South African corporate who claims to have graduated from the law school of an Ivy League university. He conspired with a genuine graduate to borrow the latter's identity. The deception is only apparent on close inspection of the class photograph.

Don't be dazzled by fame and fortune: Don't automatically believe someone just because they are well known and well-connected in business and politics. Check them out too.

Stay in touch with lower-level employees: Employees at the lower levels of an organisation tend to be extremely well-informed about the goings-on within the business. They can be especially attuned to any hint of irregularities in the higher ranks.

According to Loxton, one of the most effective ways to fortify a business against white collar criminals is to stay close to employees and customers. "Being visible and creating a good sense of your identity are important because people will then intuitively question anomalies that, left unattended, could create loopholes for white collar crime," he concludes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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