South Africa: Barometer Reports Continuous Decrease Of Fraud Risk When Investing In Africa

Last Updated: 13 May 2013
Article by Petrus Marais, William Oelofse and Joe Winful

KPMG has released its findings of the third Africa Fraud Barometer.

According to the third Africa Fraud Barometer, the occurrence of reported fraud has decreased from 503 in the first half of 2012 to 348 cases in the second half of 2012. It is the third consecutive period where a decrease in reported fraud and corruption related cases can be recorded.

In the same period, however, the value of fraud increased from US$2 billion to US$4 billion. About three quarters of all fraud cases in Africa are reported in Nigeria, Kenya, Zimbabwe and South Africa. Nigeria is still the country with the highest value of reported fraud cases with US$3 billion, an increase of 50%. The KPMG Africa Fraud Barometer is an initiative that was launched in April 2012 and is aimed at measuring fraud on the African continent. It exposes the risk of fraud companies face in their day-to-day operations. The latest findings of decreasing fraud were confirmed by the Transparency International Corruption Perception Index, which measures perceived levels of public sector corruption in 176 countries and territories around the world.

Monitoring fraud in Africa

The KPMG Africa Fraud Barometer has been developed to provide a bigger picture of fraud prevalence on the African continent. The data is compiled by accessing all available news articles on Africa and fraud from designated databases. The term 'fraud' is used generically to describe all offences of dishonesty.

"The number of incidences has again shown a marginal decline," says Petrus Marais, KPMG's Global Leader of Forensics, who developed the barometer. "I believe it is a positive sign and I am certain that it will be welcomed by businesses operating in Africa. With the recent BRICS summit, risks related to investment in Africa enjoy a lot of space on the global corporate agenda. At the same time, Africa's image in the world is increasingly improving. Investors have started to believe that the risk of investing in Africa has become more manageable. We are helping potential investors to assess the risks of doing business in individual African countries."

The Barometer distinguishes between the number of reported fraud cases, type of perpetrators, victims of fraud, type of fraud, countries and targeted industries. Data currently available captures the entire year of 2011 and 2012. Findings are compared to those of the previous six months to map trends.

Fraud risk areas

The latest KPMG Africa Fraud Barometer shows that most of the reported cases relate to general fraud and misrepresentation at 45%, an increase of 7% from the previous reporting period. Most fraud is committed by employees (22%), replacing government officials (14%) previously topping the list. These results suggest that there is a high level of internal dishonesty. As in the previous reporting period, government remains hardest hit by fraud and corruption at 30%, a decrease of 8% from the previous reporting period.

"I think that we can already pick up various trends. Certain types of offences of dishonesty remain dominant, such as general fraud and misrepresentation. We have noted the same in the category of offenders, where employees and government officials are dominant," says Marais.

"In Africa, an increasing number of countries have been introducing anti-corruption legislation. While it is too early to predict the long-term impact of this, we also see multinational corporations taking corruption a lot more seriously, which may also be contributing to the positive results we are seeing. International donors such as the World Bank or the European Union are also increasingly demanding adherence to anti-corruption standards before disbursing funds to countries."

Most fraud occurs in the public sector with 20%, down by 5% from the previous reporting period. An increased number of cases were reported in consumer markets, financial services and the oil & gas industries.

South Africa

With the size of its economy, South Africa has the highest number of reported fraud cases on the African continent. The latest findings indicate that slightly more fraud cases are reported (1.46%) compared to the previous reporting period. This may be due to the vigilant media in South Africa significantly contributes to this.

"In South Africa, foreign investors and South African companies investing on the African continent are increasingly conscious of multinational and national anti-fraud legislation. They understand that not playing by the rules can have a significant impact on market capitalization and are therefore more accountable when it comes to fraud and corruption," says Petrus Marais. "We also see a number of enforcement agencies, such as the National Prosecuting Authority of South Africa, working hard to bring perpetrators to justice. Prosecution is increasing but still remains low compared to reported cases. We do note improvement, but also understand that it may take more time."

Kenya/East Africa

In East Africa, most cases of reported fraud come from Kenya, as during the previous reporting period. There, a slight increase of fraud cases of 2.88% was noted. In all other East African countries, including Ethiopia, Rwanda, Somalia, Sudan, Tanzania, and Uganda, the reported fraud cases have decreased. "In Kenya, we saw a general increase in the number of fraud cases," says William Oelofse, KPMG's East Africa Director responsible for Forensic Services. "We are very active in the financial sector, both banking and insurance, and there is certainly increased activity. The perpetrators are normally employees with assistance from third parties. We also noted that IT departments are more often involved, with some input from operational people."
At the same time, there are clear indications that both banks and insurance companies are taking fraud risk management more seriously. "They are not only talking about it but there are actual steps taken to implement some of the fraud risk management controls," says Oelofse.

Ghana/West Africa

Most cases of fraud on the African continent outside South Africa are reported in Nigeria, with its legacy of the military era which lasted until the 1999 elections. Reported cases have slightly decreased since the last reporting period. Nigeria is still the country with the highest value of reported fraud cases, amounting to more than $3 billion.

In Ghana, which is hailed for its economic success in the region, reported cases have increased. "Most cases have been misappropriation of public funds during the procurement and diversion of funds," says Joseph Winful, Senior Partner at KPMG Ghana. "There seems to be a general increase of fraud in the public sector as well as the financial sector. Private sector fraud occurs mostly in financial institutions perpetuated by employees in collaboration with clients. However, we believe that fraud cases have little impact on investment though we are in the process of investigating this further." Fraud cases appear regularly in the print media and findings are also published in the Auditor General reports on public sector entities.

Elsewhere in the region, reported cases were slightly increasing in Sierra Leone and Liberia while reported cases in Gambia have decreases.

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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