Procurement officers and supply chain managers with exposure to Africa have their work cut out for themselves more than ever before. For one, they need to navigate the operational complexities typical to the continent, such as bottlenecks at ports and border crossings as well as ever-changing local regulations and political instability. There are also the new global compliance rules, such as the Foreign Corrupt Practices Act and the UK Bribery Act to consider, as well as evolving local content requirements.
Added to these woes is a much tougher macroeconomic environment. According to Fair Observer, a US based non-profit, the two largest African economies, South Africa and Nigeria, are in dire straits financially, with both currencies recently plummeting against the dollar. And countries such as Ghana, Angola and Mozambique are also stretched as commodity prices crash.
WHAT THIS MEANS FOR SUPPLY CHAIN GOVERNANCE.
Even before the current economic slowdown, corporate investigations and risk consulting firm Kroll, reported in late 2015 that 22% of companies operating in Africa were falling prey to vendor, supplier or procurement fraud. And in 2014, when the African economic growth story was still strong, professional services firm PWC found that procurement fraud was the single biggest type of crime among the 69% of companies affected by economic crimes in South Africa.
Now, with the decline in growth rates we are likely to see contraction across many sectors with the result that investments will be curtailed, budgets slashed and projects put on hold. The result being that companies and individuals will feel increased pressure to stay profitable. It is in exactly this kind of context that procurement fraud can thrive.
THE FRAUD TRIANGLE AND ITS RELEVANCE TO SUPPLY CHAIN GOVERNANCE.
As far back as the 1970s respected American criminologist Donald R Cressey developed the “fraud triangle” which retains its relevance in our current economic context. Cressey hypothesised that fraud takes place when certain social and economic factors come together to create an environment “ripe” for crime. These are:
- A perceived financial need (“pressure”).
- A perceived opportunity to serve this need, which can remain undetected by exploiting a position of financial trust (“opportunity”).
- A line of reason that aligns the transgression with the personal values of the individual considering the action (“rationalisation”).
If any of these elements fall away, the attempt at procurement fraud does not take place.
WHERE WE STAND AT THE MOMENT.
Right now we are experiencing the pressure side of the triangle mounting as a result of external economic events, so we should expect a rise in procurement fraud cases. This will obviously have an effect on procurement as one of most affected functions in supply chain governance.
VENDOR FRAUD IN AFRICA OFTEN TAKES THE FOLLOWING FORMS:
- BEE fronting
- Bribery and corruption
- The creation of ghost companies
- The creation and exploitation of conflicts of interest
- Document forgery
OTHER NON-MALEVOLENT DISRUPTIVE EVENTS THAT ARE MORE LIKELY IN THIS ENVIRONMENT COULD BE:
- Suppliers go out of business
- Suppliers are unable to perform
- Quality issues arise with regard to deliverables
SO WHAT CAN BE DONE?
Assuming, on a global level the rationalisation element will not change in the short term — and cannot be influenced by supply chain governance or procurement officers — the opportunity element is the only area that can be examined to put measure in place to counter the rising likelihood of fraud. In our next blog we look at seven ways to reduce the likelihood of undetected vendor and supplier fraud.