Wed, Sep 2, 2020

A Sub-Saharan Africa Focus - Fraud and Financial Crime Amidst the Pandemic

Sub-Saharan Africa (SSA), a region housing several of the world's fastest growing economies, is experiencing a rapid slowdown in economic activity and is predicted to be amongst the worst-affected regions economically during the looming global economic downturn and in its aftermath. It is expected that the economic impact of COVID-19 will be more significantly felt in emerging markets due to inherent economic vulnerabilities. Emerging markets are, for example, more likely to be affected by factors such as capital outflows, rapid currency devaluations, sovereign debt burdens, revenue loss linked to lower commodity prices and limited capacity for fiscal support.

Kroll’s history of casework demonstrates that in an environment where capital is scarce and economic opportunity narrows, the pressure to operate outside the norms of governance best practice increases. Africa-based law firm Cliffe Dekker Hofmeyr (CDH) predicts that as business leaders and employees face the threat of unemployment or experience reduced income, they may feel pressured to engage in unlawful activity, and are also more likely to ignore that activity rather than to report it.

As the pressure mounts it is possible that businesses in SSA will experience an increase in the motive for fraud and financial crime. As economists forecast the economic slowdown extending into the post-pandemic era, businesses and regulators in SSA must be alert to employees resorting to fraud, corruption and asset misappropriation to remain financially viable and take advantage of a less regulated environment. According to CDH, businesses should focus on reinforcing existing controls and adopting proactive measures to deter and prevent fraud and financial crime before the economic impact of COVID-19 intensifies in SSA.

How Can Companies in SSA Mitigate Heightened Fraud Risk in the Current Climate?

During Kroll’s 45-year history of conducting corporate investigations, the firm has worked with clients through periods of acute financial crises. The scale and pace of the impact of COVID-19 is unprecedented. The economies of SSA are varied but all will feel the consequences. Below are some observations Kroll has made from the field on fraud and beyond.

It’s Time to Rethink Your Fraud Risk Assessment

To manage risk, an organisation must proactively identify the specific fraud risks that could threaten its financial, operational and brand stability. A structured fraud risk assessment aids management in understanding its particular fraud risks, allowing the risks to be effectively managed. In the early stages of the crisis regulators in the UK and elsewhere suggested that there would be a degree of forbearance and that the pandemic could prevent full adherence to best practice in terms of oversight and controls. As the scale of the impact has widened, the tolerance appears to have dissipated.

Unless your organisation is one of the rare companies set up in such a way that the shelter-in-place and stay-at-home guidance had no impact, you likely had to immediately rethink how your organisation would operate. If left unaddressed in your fraud risk assessment, the significant shift in how your organisation does business as well as the change in behaviour of your organisation’s stakeholders (including employees, customer and vendors), could result in unusual activity—indicative of fraud—going undetected.

Despite the changes in how organisations operate in response to not only COVID-19 but to economic downturns in general, one thing is and will always remain constant—the ultimate responsibility for preventing and detecting fraud rests with an organisation’s management and staff. It is therefore vital that, despite all other pressures, organisations take a proactive approach to mitigating fraud risk. In short, organisations should review their fraud risk assessments if they have one or create one if they do not. 

Keep Abreast of Forecasted Economic Impacts of and Trends in the Pandemic for Long-term Business Planning

The unprecedented nature of COVID-19 increases the need for up-to-date information for decision makers. One resource designed to address this information gap is Kroll’s COVID-19 Heat Map, a snapshot of forecasted economic impacts of the pandemic and related government restrictions across multiple geographies and sectors, including several countries in Africa. The Heat Map is regularly updated with the latest insights from our analysts.  

In SSA, we expect the Heat Map to begin to pick up on issues of fraud and financial crime as the pandemic’s impact puts unprecedented pressure on already stretched governance and regulatory oversight structures.  

Debt Distress and Non-performing Loans Looming on the Horizon

Besides the headline-grabbing sovereign debt issues, at Kroll we are used to seeing the effects of financial distress on private debt. They manifest themselves in a range of situations: from companies struggling to collect receivables from business partners to banks holding increasing amounts of non-performing loans on their books. While these issues are not specific to financial crises, there are features which have become more pertinent in the current climate.

The sudden and concentrated impact of COVID-19 is already seen in the market. For example, our clients are increasingly concerned about issues such as personal guarantees provided for loans, which under normal circumstances may not have raised as much alarm. This has been compounded by the uncertainty and lack of visibility into any possible rapid deterioration in an individual’s financial situation and assets used as collateral. Where possible, we would recommend a proactive approach. For instance, analysing loan books, reviewing guarantees and verifying assets used as collateral ahead of the expected worsening of debt distress is one way to identify, and where required, take steps to guard against likely higher rates of non-recovery in the future. 

As debt is renegotiated and assets trade hands rapidly, there are ample opportunities for fraud and embezzlement. Economic slowdowns have not historically resulted in a slowdown in requests for asset search and recovery investigations at Kroll and we do not expect the current crisis to be any different. The extent of government injections of capital via recovery packages in OECD markets is also likely to create opportunities for foul play that will require investigation when the immediate impact of the crisis passes.

Out of Sight, Out of Mind?

Although many countries have imposed travel restrictions and closed their borders, we have seen no slowing down in the global dimension of white-collar crime. Even in non-contentious situations and when conducting routine business operations, the current crisis has resulted in reduced capacity for executives to maintain contact and oversight of overseas business operations. The use of technology is important, but cannot always replace ‘eyes and ears’ on the ground. Whether choosing new business partners or addressing concerns about the true state of local operations and supply chains, we have assisted clients to gather information and intelligence in locations that they cannot reach.

The current crisis has also created unexpected situations for Kroll and Duff & Phelps’ client base. For example, we have had enquiries from clients who are concerned that the living arrangements of their employees may make it impossible for them to work from home and maintain best practice when it comes to minimising the risk of insider trading and market manipulation. In several cases it became apparent that traders in competitor investment banks were living together and sharing a working space where market sensitive information was accessible. 

Despite the flexibility and high functionality associated with homeworking, it is challenging to maintain the advisory function and responsiveness of a compliance department when it is physically distant from the organisation. It is likely that the all-important cultural element of being able to quickly speak to a compliance colleague will be under strain in a socially distant environment.

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