Corporate law firm Bowman Gilfillan Attorneys partner Matthew Purchase says that the first phase of the cash threshold reporting (CTR) process has started for accountable institutions, and will continue in stages throughout 2010 as the enforcement of domestic fraud and corruption legislation develops.

The roll-out process conforms to the terms of Section 28 of the Financial Intelligence Centre Act No 38 of 2001, which was established to tackle money-laundering activities and the financing of terrorists and related activities. The CTR aims to create a system to effectively monitor and report on cash transactions that may be linked to money- laundering activities. This ensures that the potential proceeds of crime are identified and investigated efficiently.

“The law regulating white-collar crime, both domestically and internationally, is not static and the manner in which existing laws are implemented, as well as the introduction of new laws, makes the white-collar crime environment dynamic,” says Purchase.

He reports that the past few months have seen heightened enforcement of corruption legislation globally.

As an example, he points to the Foreign Corrupt Practices Act (FCPA), American legislation that was enacted over 30 years ago, but which has only now become the focus of high-profile corporate prosecutions. The FCPA has extraterritorial jurisdiction (ETJ), which gives it application beyond a country’s boundaries and is applicable to American companies undertaking business elsewhere in the world, as well as to certain foreign companies that undertake business in the US.

“Examples of high-profile prosecutions include electrical engineering giant Siemens, which had criminal fines and civil repayments of $1,6-billion levied against it in the US and in Germany for corruption; global defence group BAE Systems, which paid $400-million in criminal fines for FCPA-related offences; and technology group Alcatel-Lucent, which paid $137-million in fines and civil repayments for corrupt bribes in Kenya, Costa Rica and Taiwan,” he says.

Purchase also points to the UK Bribery Act, which will come into effect in October. This Act contains terms similar to the FCPA and also has ETJ. It will be applicable to companies outside the UK that undertake any part of their business in the UK.

South Africa’s legislative structure for dealing with white-collar crime also includes the Prevention and Combating of Corrupt Activities Act (PACCA) No 12 of 2004, the Prevention of Organised Crime Act No 121 of 1998 and the Protected Disclosures Act No 26 of 2000.

Purchase explains that much of the training that he is currently working on deals with the increased criminal exposure of South African companies arising from possible contraventions of corruption legislation, including the PACCA, the FCPA and the new UK Bribery Act.

He adds that, while all training is important and is part of a broader fraud prevention strategy that has been implemented by different enterprises, it is also recommended that the training be designed specifically for each enterprise, catering for dealing with the unique fraud risks that arise in entities of different sizes, industries and management structures. It also helps in dealing with the psychological aspects underpinning fraud, he adds.

Fraud includes all aspects of economic crime, such as corruption, computer crimes, industrial espionage, forgery and theft. When the impact of fraud is considered, it is mostly in regard to the financial consequences and statistical prevalence. The fact that fraud is a human endeavour is often overlooked, he explains.

A principle known as the ‘10-80-10’ suggests that 10% of people will not be tempted to commit fraud, regardless of the pressures, opportunities and justifications that exist. Another 10% of people are dishonest and will attempt to commit fraud in almost any given situation. The remaining 80% of people are the so-called swing group. Criminology tells us that a person’s perception of the risks and rewards associated with fraud determine the likelihood of that person committing the fraud. Purchase adds that the swing group will benefit most from fraud prevention training.

Some argue that more fraud is uncovered during economic recessions compared with fraud prevalence in other periods, because enterprises are more cost conscious and scrutinise their income and expenses closely. Purchase says that a more widely accepted view is that economic recessions result in an increase in fraud because individuals are under financial pressure and look for additional (and often unlawful ways) of supplementing their income. “This is worsened by increased opportunities to commit fraud where enterprises take cost-cutting steps and scale back their internal audit and fraud prevention initiatives,” he adds.

Further to the financial losses, businesses can also suffer reputation damage, loss of key employees, suppliers, clients and management time, Purchase says.

“Fraud committed against an enterprise has criminal, civil and administrative consequences for the perpetrator and the enterprise,” he adds. The most difficult element for the prosecution is to prove, in a criminal context, that the perpetrator had the necessary criminal intention to commit the crime. In criminal proceedings, all of the elements of the crime must be proved beyond a reasonable doubt, he adds. In civil proceedings, the elements of the claim need only be proved on a balance of probabilities.

While it may encounter the same or similar schemes yearly, Bowman Gilfillan Attorneys focuses on corporate fraud impacting on enterprises rather than the consumer fraud schemes. Some of the corporate fraud schemes that are encountered are asset misappro- priation, phantom vendors, ghost employees, corrupt payments, tender fraud and conflict of interest.

Purchase says that statistics reveal that fraud is prevalent and that the majority of cases are committed by employees and persons in positions of trust. Financial audits are not an effective tool for discovering or preventing fraud.

Fraud prevention initiatives, as with training, must be correctly tailored to the risk profile of the enterprise to be effective. A comprehensive fraud prevention plan may include elements such as hot lines for reporting fraud, training and awareness programmes, the establishment and review of internal controls, the establishment and review of appropriate policies and proactive fraud monitoring, besides other elements.

“It is important that fraud prevention initiatives are scalable and should be adapted to suit the budget, risk profile and business needs of the enterprise,” says Purchase.