8 September 2020 by and Dispute Resolution Alert

A Sub-Saharan Africa focus: Fraud and financial crime amidst the pandemic

Sub-Saharan Africa (SSA) boasts some of the world’s fastest growing economies. While emerging markets hold huge untapped potential, these economies also come with inherent vulnerabilities. In the wake of COVID-19, 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. In short, the global pandemic will hit these economies the hardest.

In an environment where capital is scarce and economic opportunity narrows, the pressure to operate outside the norms of governance best practice increases. One of the leading global providers of risk solutions, UK-based outfit, Kroll has a history of casework that confirms this. Having worked closely with clients to fulfil their regulatory reporting obligations in the SSA region, CDH’s Corporate Investigation experts predict that as the threat of unemployment or reduced income increases, business leaders and employees may feel pressured to engage in unlawful activity or, at the very least, turn a blind eye to it.

Business and regulators in SSA must be alert to employees looking to take advantage of a less regulated environment, resorting to fraud, corruption and asset misappropriation to remain financially viable.

CDH is regularly called upon to lead clients through complex legally privileged forensic investigations. Our experts also have extensive expertise in preventative measures, working closely with public and private sector clients in the SSA region to implement internal anti-corruption frameworks, policies and protocols. CDH recommends that businesses 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. We discuss a number of such measures below.

Perform a fraud risk assessment

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 vulnerabilities, allowing for effective management of those risks. In the early stages of the crisis, regulators in the UK and SSA suggested that the pandemic could prevent full adherence to best practice in terms of oversight and controls. A fraud risk assessment would identify and address any such exposure.

Despite organisations’ different responses 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 senior management and staff. It is therefore vital that, despite all other pressures, organisations take a proactive approach to mitigating fraud risk. Organisations should review their existing fraud risk management protocols or adopt one if they do not already have one in place.

Keep abreast of forecasted economic impacts

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.

Implement proactive measures

Besides the headline-grabbing sovereign debt issues, the effects of financial distress on private debt is evident too. This manifests in a range of situations such as 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, these are features which have become more pertinent in the current climate.

The sudden and concentrated impact of COVID-19 is already evident in the market. An indicator of this is companies’ increasing concern about issues such as personal guarantees provided for loans, which under normal circumstances may not have raised much alarm. To mitigate the risk of high rates of non-recovery, proactive steps such as analysing loan books, reviewing guarantees and verifying assets used as collateral ahead of the expected worsening of debt distress is recommended.

As debt is renegotiated and assets trade hands rapidly, there are ample opportunities for fraud and embezzlement. Government injections of capital via recovery and stimulus packages are also likely to create opportunities for foul play that will require investigation. In South Africa, for instance, several allegations of fraud and procurement irregularities in regard to the award of lucrative personal protective equipment State contracts have already surfaced.

Conclusion

Grappling with the acute affects of the COVID-19 pandemic in SSA, organisations are encouraged to follow the tried-and-tested recipe to mitigate their exposure to fraud and financial crime by regularly performing fraud risk assessments, reinforcing existing controls - such as the investigation of whistleblower complaints - and adopting policies and protocols to detect and prevent fraud during the pandemic and beyond.

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