How does a person fake empowerment credentials? In the case of the fallen First Strut – and a number of other companies now facing criminal investigation – the answer appears to be: very easily.
First Strut, a collection of companies involved in various parts of the building and construction industry, collapsed in June after founder Jeff Wiggill was murdered near Soweto.
Evidence collected by the Mail & Guardian shows that the company was rife with fraud, theft and corruption. In some instances, the fraud was exceedingly complex, in others, barely concealed. But in the case of a handful of empowerment certificates, there was no attempt at any baroque sleight-of-hand. The company, it seems, simply issued itself with the necessary paperwork.
First Strut and its newly acquired subsidiary, Cosira, held important contracts with Sasol and in the building of the Medupi power station between its more than two dozen divisions when it was placed into liquidation last month.
"Veri-Com did not issue this certificate," said Deon Oberholzer of his registered empowerment verification agency's apparent glowing endorsement of First Strut. "The certificate issued to First Strut is fraudulent in its entirety."
Yet First Strut's apparent Veri-Com certificate listed its ownership as 50% black (it was entirely owned by white men) and its management control as 60% black (the group had almost no black managers).
Though it is not known whether the company won any tenders based on that certificate, it did extensive work on a variety of government contracts during the period it was supposedly valid. Nor was that the only fake certificate in the name of the company – and there is clear evidence that its management knew as much. In an internal email seen by the M&G, dating from April this year, managers discuss "a fraudulent certificate" the company had sent to customers that at least one of them had queried. It classified the multibillion-rand company as an emerging enterprise. First Strut appeared unconcerned.
Veri-Com had contacted the company after it learnt of the certificate bearing its name, Oberholzer said, but "First Strut did not respond".
How such certificates were obtained is not known, but former insiders point to a shadowy fixer they say was paid millions to "make paperwork happen".
First Strut apparently was not the only beneficiary of such paperwork. "In recent months, we have learned of a number of similar fraudulent black economic empowerment certificates," said Oberholzer. "We are compiling evidence, which will be handed over to the police for criminal investigation."
Racial side to white-collar crime
The collapse of private manufacturing empire First Strut may have uncovered billions of rands worth of fraud, much of it at the expense of banks and bondholders, but in terms of total white-collar crime in South Africa, it hardly moves the needle.
Conservative estimates put annual losses due to commercial crime – which includes everything from corruption to insurance fraud – at more than R100-billion. How much more is the realm of pure speculation, because even instances that are detected are not always reported.
"Both the public and private sectors are notoriously bad at reporting these crimes to the police and the actual incidence of fraud is understood to be far greater than that recorded in the official crime statistics," said Johan Burger of the Institute for Security Studies in Pretoria in an analysis of crimes against business.
Companies have been known to hide losses to save face or protect those responsible; some have even argued that disclosing their losses and the methods by which they were defrauded could encourage future occurrences.
For the past available year, the South African Police Service (SAPS) reported just more than 88 000 cases of what it classifies as commercial crimes, which covers money laundering and the pilfering of online accounts as well as the type of mega-fraud allegedly perpetrated by murdered businessman Jeff Wiggill and his business partner, Andy Bertulis, through First Strut. That represents an increase of well over 60% in the past decade.
A geographic mapping illustrates how widespread the problem is: besides the commercial centres such as Johannesburg and Cape Town, almost every larger town from Musina to Newcastle had high reported rates of commercial crime.
Part of the problem is that offenders, even those reported, tend to get away with their crimes for years, if not indefinitely. Although the rate of conviction for commercial crimes is high, the number of cases finalised run at less than 1000 a year, which puts the odds of prosecution at around 0.01%.
Although deterrence is low, pressure to commit crime is high. In its latest survey of fraud covering Africa, EY (previously Ernst & Young) reported that, "executives are under pressure to produce profit and growth, in an environment where that is difficult". In 2011, the SAPS put it more simply still: "It seems as if there is at least some truth in the old saying that, 'when economic hardship enters through the front door, love flies out at the back door' ", linking higher rates of commercial crime to an economic downturn.
Although the motives for such crimes (greed and need), and many of the rationalisations cited (a victimless crime, tempting loopholes) seem universal, South Africa appears to have one peculiarity that could make white people more prone to such crimes in future, even as their numbers among financial officers dwindle due to empowerment hiring.
"It was generally accepted by respondents that justifying fraudulent activities on historical, race-related [grounds] was conventional and a satisfactory validation," wrote Luigi Muto in a MBA dissertation published in 2011. "Where a widely held company was in question, respondents assumed the company was owned by the 'opposite' race."
Muto interviewed 29 white-collar offenders imprisoned in Johannesburg to determine the reasons for their crimes. By a curious coincidence, he was employed at that time by Cosira, the steelmaker acquired by First Strut shortly before the death of its chairperson, Jeff Wiggill, and the subsequent implosion of the group.
That rationalisation was particularly prevalent among black fraudsters, Muto said. "One guy was working for a company that moved home appliances, and he started stealing," he said. "He said he was underpaid, his parents had worked there and had also been underpaid, and when they [had] asked for increases, they didn't get them. It was as if he felt his parents had been stolen from and he was avenging them."
But Muto believes that could reverse over the next five or 10 years. "There is this creeping sense of reverse apartheid," said Muto. "When the owners start to be seen as being black, I think we'll see white people cite race as a justification after they are caught."