SA’s Alarming Rise in Customer, Vendor Fraud and Economic Crime

January 15, 2022 by Sam Strand identity

PwC’s 2020 Global Economic Crime and Fraud Survey provided valuable insight into the changing (and emerging) patterns of South Africa’s economic crime landscape.

South Africa has long been a hotspot for economic crime. Since 2009, the country’s incident rate has been, on average, 27 percentage points higher than the global average. In 2020, South Africa was tied with China for the country with the highest reported incident rate of economic crime. Interestingly, South Africa’s level of fraud awareness far outstrips the global standard: 73% of South Africans respondents indicated a high or extensive knowledge, in contrast to only 65% of global respondents.1

Less Incidents, Yet Higher Losses

Despite South African’s high awareness of economic crime, total losses have increased by 4%. Between 2018 and 2020, South Africa reported total losses from economic crime in excess of $1.7 billion (more than 25 billion South African Rand). 7% of South African incidents reported losses of between $50 million and $100 million, while 4% reported losses of more than $100 million.

Although these loses are high, such numbers are often hard to quantify and other losses such as missed opportunities, reputational damage, loss of market position, rife distrust, and impact on morale and productivity are nearly impossible to measure. 2

Customer Fraud and New Types of Financial Crime

For the first time ever, Customer Fraud was the most prominent type of economic crime listed in PwC’s report – 47% of South African respondents had experienced it in the last 24 month, compared to 34% of global respondents. Alarmingly, customer fraud was only introduced into the survey in 2018 yet is now the most common form of economic crime.

Customer fraud was also foretold to be the 3rd most disruptive economic crime for the next two years. Respondents were asked to predict the most disruptive economic crimes facing their organizations over the next 24 months and external threats were three out of the top four responses – 19% cited bribery and corruption (1st), 14% cited customer fraud (3rd), and 11% cited cybercrime (4th). Accounting/financial statement fraud placed 2nd, although this is an exclusively internal threat.

Although daunting, the issue of customer fraud is one that can be addressed. While other types of economic crime such as bribery and corruption are far harder to tackle, customer fraud is one where “dedicated resources, robust processes and technology have proven effective in prevention”.3 Customer due diligence checks such as KYC and credit reporting hold the key to trusted transactions.

Outsourcing, Vendor Fraud and Operational Risk

In efforts to cut costs, there has been a global trend towards the outsourcing of business functions to third-party contractors. Although this approach has the benefit of being cheaper, it also presents new threats.

Respondents to a PwC survey were asked to identify the external perpetrator responsible for the most disruptive economic crime incident in the last two years. 18% of respondents cited vendor/supplier, 15% cited joint venture/alliance partner, and 13% cited consultant/advisor. Combined, these three groups – all categorized as business partners of some form – were responsible for 46% of the most disruptive economic crimes against the responding businesses.

Fraud by business partners, suppliers, vendors, and consultants can be devastating. Investigations have uncovered how South African businesses have routinely been scammed out of hundreds of thousands of Rands after fraudulent suppliers secured credit by impersonating impersonated legitimate businesses and faking credit checks. Intensive due diligence measures – such as ThisIsMe’s Company Credit Check and Company Sanction Check – must form part of a larger business strategy to manage risk and ensure transactional security.

Distrust – The Damage of Economic Crime

Although the financial losses from financial crime are immediate and devastating for the affected business, economic crime has another lingering and invisible effect: distrust. 1/3 South Africans cited distrust as being the most significant emotional impact of incidents of economic crime,4 which is mirrored by the fact that we are more suspicious of businesses, government and each other than ever before.5 "The share of the global population that felt like most people could be trusted has fallen by 20% over the last 15 years.6"

This pervasive issue undermines the entire economy. A lack of trust can make some longer-term investments appear too risky as businesses become reluctant to invest their trust in project stakeholders like suppliers, consultants, and contractors. Businesses therefore default to ‘safer’ short-term investments, but such investments handicap growth by only being able to generate small and incremental gains over short timeframes. Distrust slows economic development. 7

Restoring this trust is therefore crucial if we want to foster a strong economy in which people feel empowered to transact without suspicion or the fear of debilitating losses from economic crime. Although it is essential to start rebuilding this trust, it is naïve to simply ask people to trust one another. The risk of loss is too high. Trust must be rebuilt on verifiable identities that can offer peace of mind by affirming the integrity of those we do business with.

Enhanced Due Diligence and KYC Services

The explosion of customer fraud – combined with the complex threat landscape created by the growing popularity of outsourcing – places serious emphasis on the need for proper due diligence procedures.

Shockingly, however, 24% of respondents to PwC’s report had no third-party due diligence or risk monitoring program whatsoever, even though 20% of respondents cited vendors/suppliers as the perpetrator of their most disruptive incident of financial crime. This discrepancy must be addressed if businesses wish to operate in an environment free from crippling distrust.

As South Africa’s leading provider of world-class due diligence and remote-onboarding solutions, ThisIsMe is proud to be at the forefront of a trust-based and privacy-compliant digital world. To experience our full suite of advanced due diligence services, book a demonstration by contacting our team here.

  1. PwC. Global Economic Crime and Fraud Survey. 2020.
  2. PwC. Global Economic Crime and Fraud Survey. 2020.
  3. PwC. Global Economic Crime and Fraud Survey. 2020.
  4. PwC. Global Economic Crime and Fraud Survey. 2020.
  5. Edelman Trust Barometer 2021.
  6. Deloitte. The link between trust and economic prosperity.
  7. Conal Smith. “Trust and Total Factor Productivity: What Do We Know About Effect Size and Causal Pathways?”. 2020.