Today, the rapidly changing nature of economic crime means that businesses face a variety of threats that have the capacity to harm professional reputations and cause major financial losses. Notably, however, there is one form of economic crime that spans categories, regions and jurisdictions and still remains one of the most potentially devastating forms of economic crime to affect a business: corruption. 

The Rise of Corruption as a Form of Economic Crime 

As identified by PwC’s 2020 Global Economic Crime and Fraud Survey, corruption is one form of economic crime that has experienced an increased incidence rate and an increase in associated financial losses. When ranking the most prominent types of economic crime experienced by businesses between 2018 and 2020, “Bribery and Corruption” was 2nd with a 42% incidence rate. 

Furthermore, when respondents to PwC’s survey were asked to predict their organization’s most deeply felt economic crime over the next 24 months, 19% cited bribery and corruption (1st), 14% cited customer fraud (3rd), and 11% cited cybercrime (4th). Of the South African respondents to PwC’s survey, 1/5 cited bribery and corruption as the most disruptive type of economic crime they had experienced. 

Corruption as an External Threat – PEPs, Adverse Media and Business Partner Due Diligence 

Corruption as an external threat to a business tracks with the global economic crime landscape. Of the most serious/disruptive incidents of fraud experienced by the surveyed companies, 43% are external perpetrators (2% increase compared to 2020), 31% are internal perpetrators (7% decrease compared to 2020), and 26% are collusion between internal and external perpetrators (5% increase compared to 2020). In total, 69% of all the fraud experienced involved an external perpetrator). 

Corruption is a serious threat that can affect a company through its clients and business partners – should a company, financial institution or even an SME do business with an entity that has been embroiled in corruption scandals in the past, it risks jeopardizing the company’s reputation simply by association. 

The risks associated with a failure to conduct proper due diligence skyrocket if a client or business partner is actively engaged in corruption and/or is currently embroiled in a corruption scandal. In such instances, a company may find itself buried in adverse media and dragged into a major public scandal and legal battle even though it did nothing wrong – the company’s proximity to corruption as a result of lacklustre due diligence may be enough to cause significant and lasting damage. 

When viewed through the lens of corruption, Politically Exposed Persons (PEPs) are a unique external threat. Although the identification of a PEP does not automatically implicate them in any wrongdoing, their proximity to political power and their consequential heightened capacity to engage in corruption means that they automatically pose a higher risk to businesses and Accountable Institutions (AIs). 

Because of the risk they pose, conducting PEP checks is a legal obligation that falls under South Africa’s AML/CFT legislation; a failure to conduct a PEP check that then leads an accountable institution to engage in business with a PEP as if they were a normal client will cause severe legal penalties to be imposed on that accountable institution. Comprehensive PEP checks, therefore, are a necessity for all accountable institutions that wish to remain legally compliant and mitigate against the risk of corruption. 

Corruption as an Internal Threat – Occupational Fraud 

The threat of corruption can also come from within a business. In their 2022 publication titled the Report to the Nations, the Association of Certified Fraud Examiners (ACFE) highlighted the growing threat that corruption poses top businesses, specifically as an internal threat posed by a business’s own employees. 

In 2022, corruption was the most common occupational fraud scheme in every global region assessed by the ACFE. Of all incidents of occupational fraud recorded by the ACFE, 43% of them involved corruption. Shockingly, the median financial losses incurred from a corruption scheme was 11,000 USD per month. 

Furthermore, corruption was the most pervasive type of occupational fraud scheme across every one of the 15 industries assessed by the ACFE. The industries with the highest rates of corruption were: Energy (66%), Telecommunications (56%), Transportation and Warehousing (52%), Real Estate (48%), and Government and Public Administration (48%). 

Finally, corruption also disproportionately affected larger companies. In businesses with less than 100 employees, corruption features in 38% of all incidents of occupational fraud. In businesses with more than 100 employees, corruption features in 47% of all incidents of occupational fraud.

Why is Corruption Such as Threat to Businesses – The Value of Trust 

Corruption is a serious threat to businesses because the damage it does goes far beyond simple financial losses – loss of trust, reputational damage, public scandal and a significant loss of a business’s market capitalization are all likely consequences of corruption. 

Today, these consequences are more pronounced than ever before. Over the last several years, there has been a significant increase in public expectations for ethical conduct than ever before, while the public backlash against bad business practices is becoming increasingly severe. In their Global Economic Crime and Fraud Survey, PwC explains how…

“…A pronounced shift in the way the world looks at fraud and corruption has taken place over the past few years. And our survey data reflects this now deep-seated demand for accountability, from both the public and from regulators, across the private and public sectors. This is not a phenomenon limited to developed markets, either. Across vastly different cultures, in every region of the world, there are signs of convergence around standards of transparency and expectations of conduct.” – PwC.

Furthermore, in a survey by Deloitte, 81% of respondents noted that values such as ethics and integrity are increasingly expected of a company’s conduct and are intrinsically linked to how much consumers are willing to trust a company. When this trust is lost, consumers relate to the breach of trust in a very human way and describe it as betrayal, disappointment and anger.  

Losing this consumer trust can be a devastating blow for businesses – for some companies in the past, it has been a loss from which they have never properly recovered. A study by Deloitte analysed the cases of three companies that had been embroiled in public scandals related to incidents of economic crime. Because of their scandals, the three companies lost between 20-56% of their market cap over a period of between three months and two years. The combined total value of this loss was approximately $70 billion. The value they lost in relation to their peers was even more severe, with the three companies falling behind their respective industry indexes by 26-74%.  

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The damage suffered from incidents of economic crime such as corruption – especially reputational damage – has become so severe that businesses cannot afford to overlook corruption as a threat that can cause significant reputational damage, irreparably undermine a business’s reputation, and decay the trust it had built with its clients and the general public. 

How Identity Verification, Enhanced Due Diligence and Risk Assessment Tools Can Mitigate Against Corruption? 

Corruption – even the proximity to corruption – can pose serious threats to a business’s reputation, market capitalization, and legal standing. 

Identity verification and data validation tools empower businesses to mitigate the risk of corruption because they equip businesses with the information that is required to make informed decisions. When it comes to risk mitigation concerning high-net-worth individuals and politically exposed persons, the availability of high-quality information is crucial and grants companies the capacity to address and mitigate threats. 

PEP Checks, Due Diligence and Identity Verification Services for South Africa 

The changing threat landscape of economic crime is presenting businesses with new challenges while evolving consumer expectations for company conduct are holding businesses to higher standards. 

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 how our full suite of advanced due diligence services can protect your business while providing a world-class customer experience, book a demonstration by contacting our team here.