Using Forensic Due Diligence as an effective tool to combat fraud and corruption in your organisation

During the past decade, the South African public has witnessed an unprecedented enquiry (facilitated by the Commission of Inquiry into State Capture (the Zondo Commission)) into how certain key decision and policy makers had been compromised, to serve the personal financial interests of a select few role players, at the expense of the interests of an entire country. 

Through the perpetration of procurement fraud and solicitation payments (amongst other methods), even the most reputable local and multi-national private sector institutions (knowingly or unknowingly) became complicit in advancing various fraudulent and corrupt schemes (developed in partnership with state officials and public sector representatives) all of which garnered the attention of the international community. With over 1,400 entities and persons implicated by the Zondo Commission’s report, and a rough estimate of R1.5 Trillion lost to corruption and fraudulent activities in the years preceding the establishment of the Zondo Commission, the financial, legal and reputational risks occasioned by the findings set out in the Zondo Commission’s report have had a significant impact on the ability of entities implicated in such findings to regain the confidence of industry role players/key stakeholders , and in some cases, even their ability to operate as a going concern. 

Despite the Zondo Commission’s work and the findings set out in its report, the risks occasioned by fraudulent schemes remain a prevalent risk factor for both public and private sector organisations. In this respect, the Southern African Fraud Prevention Service recorded an increase of 600% in fraud incidents reported by its members between 2018 and 2022.  It, accordingly, does not appear that the perpetrators of such schemes have been deterred in seeking the advancement of their fraudulent schemes. 

In order to mitigate the risk factors set out above, organisations have to reconsider their stance in relation to the importance of establishing effective corporate governance structures, robust compliance programmes and stringent audit protocols. Of particular importance, is the need for organisations to use Forensic Due Diligence measures as a means to curtail the risks occasioned by the rapidly increasing risk of fraud and corruption. 

Forensic Due Diligence procedures play an integral role in assisting organisations with mitigating commercial crime risks in order to mitigate the risk of conduct which may result in, amongst others, reduced revenues, increased costs, reputational damage, competitor or shareholder litigation or even regulatory sanctions (including criminal prosecution). Such procedures can be undertaken in various circumstances, whether it be (i) part of an organisation’s pre-acquisition or pre-investment process and/or (ii) a procedure carried out on an organisation’s existing suppliers or potential vendors to identify and assess the existence of any commercial crime risk and/or conduct that does not accord with a given organisation’s compliance and policy framework. 

The said procedures are carried out to identify and evaluate the risk arising from illegal, unethical and/or inappropriate business practices. Practically speaking, Forensic Due diligence investigations are carried out to obtain pertinent information in relation to a given target company or vendor’s business practices. These procedures include (but are not limited to) conducting an investigation into, amongst others:

1. information relating to an entity’s corporate information and status; 
2. the directors of a given entity; 
3. whether an entity may be exposed to any politically exposed persons; 
4. whether a given entity, its directors and/or shareholders are referenced in any adverse or negative media reports; 
5. whether a given entity is involved in any litigation and/or previous litigation which may have a potentially adverse effect on a particular transaction and/or business arrangement; and
6. whether the relevant entity, its directors and/or shareholders are listed on any sanctions and watchlists.

The abovementioned risk factors and procedures will continue to be a prevalent theme in the coming years in South Africa, as identifying, managing and/or resolving the growing existence of fraudulent and corrupt schemes in South Africa is imperative for promoting South Africa’s status as a leading market for foreign investment, with measures and controls capable of encouraging meaningful, ethical and transparent economic engagement in South Africa. 

For organisations operating locally, recent legislative reform with respect to (i) Ultimate Beneficial Ownership; (ii) the risk control structures applicable to private firms and organisations (iii) and the increased risk of regulator sanctions (eg. a fine or imprisonment arising out of non-compliance with the Financial Intelligence Centre Act No.38 of 2001), mean that the promotion of effective corporate governance structures is fast becoming a critical component of conducting business in South Africa. The onus now lies with organisations to acclimate in a rapidly changing environment by equipping themselves with compliance and audit programmes that will promote and facilitate the effective discharge of their regulatory obligations and also curtail the potential losses arising from the increased risk of fraud and corruption in their organisations.