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19 September 2008

Chairman of the Board of Directors of the South African Chapter of the Association of Certified Fraud Examiners, Mr Rajainlall Dhanlall
Members of the Association of Certified Fraud Examiners
Chairperson, Gill Bolton
Ladies and gentlemen
All protocol observed

Firstly, I would like to thank the Association of Certified Fraud Examiners for affording me, for the second time this year, the privilege and the opportunity of addressing you today. This invitation follows a joint invitation with the Institute of Internal Auditors, South Africa where I was requested to talk about our role in the Organisation for Economic Co-operation and Development (OECD) Working Group on Bribery in International Business Transactions in May. I would also like to wish the association a happy and prosperous tenth anniversary.

Corruption in both the public and the private sectors poses important socio-economic, governance and values and ethics challenges in contemporary South Africa. Corruption is detrimental to the soul of the nation, the institutions of democracy and the values and ethos of a young democracy like ours, the corruption of the individual.

Corruption is much more than the relationship between the bribe giver and the bribe taker. It has historical roots; it is systemic and goes beyond the individual to the structural and the institutional levels. By asserting that corruption is rooted in the forces of the market and in the pursuit of profitability, corruption often seen as "the price of doing business" must not be viewed as an intrinsic element of the value system of democratic capitalism. It is in fact anti-democratic and it undermines the legitimacy and credibility of democratically elected governments and of responsible and accountable civil servants and it undermines good governance practices in the private sector.

It is an abuse of trust – both the public trust and shareholder trust. It encourages bribe giving rather than improved service delivery. It is antithetical to the operations of a healthy market – in reality it distorts the marketplace and inhibits healthy competition.

Corruption is a direct impediment to Africa's development; it hurts the many and benefits the few. It inhibits the ability of government to respond to citizens' needs and to utilise scarce resources in the most efficient and effective manner. It takes away resources from priority areas such as health, social development and education. It also hampers the continent's efforts to instil sound political, socio-economic and corporate governance.

The economic costs of pervasive corruption, and recent trends towards democratisation, have increased the pressure for accountability and transparency from those in public office as well as those in decision making structures in the private sector. Certainly there are no easy solutions or models that can be applied in the fight against corruption. I have repeatedly argued that corruption engenders perverse political dependencies, lost political opportunities to improve the general well being of the citizenry and fosters a climate of mistrust particularly of public officials. The losses that accrue from a culture of permissiveness with respect to corruption include a loss of revenue, loss of trust, loss of values, loss of credibility and legitimacy and a loss of the democratic ethos and impulse within institutions and organisations. A 2002 World Bank report on corruption puts the financial costs of corruption at 148 billion dollars a year, and increases the costs of goods by as much as 20 percent. Certainly the beneficiaries are few and the victims are the many - and the report notes that the poor at the hardest hit.

It is critical to develop a common understanding of corruption based on a conception of the "common good."

Developmental states are about the interface between the political, economic and the bureaucratic elites. Democracy keeps politicians honest and accountable while sound corporate governance and systems of accountability keep the economic and bureaucratic elites honest. Central to the developmental state is the strong interface between key state actors, institutions, business and civil society. As the developmental infrastructure is created, the interface intensifies, and there must be requisite levels of trust to ensure that public goods and resources are well managed and not squandered. The interfaces between politics, economics and the bureaucracy must be kept clean. Thus we need strong robust democracies where all sectors of society including the media and organisations of civil society, private sector, trade unions and faith based organisations have a responsibility to educate and promote the values of ubuntu and anti-corruption.

Government intervention in the economy to promote development implies extensive interaction between politicians, bureaucrats and business people. The interaction could take the form of collaboration, collusion and corruption, or all of these. The experience of developmental states across the globe has problematised the close relationship between government and business. It can be seen as benign collaboration or crony capitalism or corruption. In pursuing a development agenda the collaboration between government and business is critical, because information exchange is a prerequisite for effective policy formation and implementation. A professional, meritocratic bureaucracy is a key condition for preventing collaboration from degenerating into collusion and corruption. But the bureaucracy itself must also be steeped in a strong code of conduct and a code of ethics. These codes need to be implemented and rigorously enforced. Similar codes must be established, implemented and rigorously enforced for elected officials and for the corporate sector.

The Third National Anti-corruption Summit was convened by the National Anti-corruption Forum (NACF) in August 2008 in Gauteng. The NACF is an intersectoral co-ordinating structure established in 2001 to lead, co-ordinate, monitor and manage the National Anti-corruption Programme (NAP). The NAP comprises of joint projects emanating from summit resolutions. To date, the NACF has convened three summits, in 1999, 2005 and 2008.

The third summit focused on and stressed the importance of strengthening the national integrity system as a comprehensive approach to dealing with corruption. All of us here today have a critical role to play in strengthening the national integrity system.

The national integrity system approach was initially developed by Jeremy Pope to both understand the weaknesses of state institutions and the failings of previous reform initiatives and to promote a more integrated approach to dealing with corruption. The national integrity system encompasses key institutions, sectors or specific activities referred to as pillars that contribute to integrity, transparency and accountability in a society. These are critical elements of the national integrity system that link values and principles of good governance with the institutional structures and practices that give effect to these values. When it functions properly, the national integrity system combats corruption as part of the larger struggle against abuse of power, malfeasance and misappropriation in all its forms.

It is generally acknowledged that eight pillars comprise the national integrity system including, public awareness; anti-corruption strategies; public participation; 'watchdog' agencies; the judiciary; the media; the private sector; and international co-operation. Over time, these pillars have been expanded to include the legislature, political parties, the electoral commission, the supreme audit institution, law enforcement agencies, the public contracting system, ombudsmen, and regional and local government. A number of integrity studies have been undertaken including in Africa to assess countries national integrity systems. Integrity studies have provided both benchmarks for measuring further developments and a basis for comparison. These studies also assessed where the emphasis should be placed on improving the system and what factors would be required to support the overall development of the integrity system.

In 2005, Transparency International South Africa conducted our integrity study. The study confirmed that our national integrity system represents an advanced framework of law, strategies and institutions that have a mandate to combat corruption. Specialised anti-corruption institutions have been set up, together with state institutions, which are mandated by their constitutions to support constitutional democracy.

Strengthening the national integrity system is about promoting better governance across all sectors of society. For this reason, the summit adopted a resolution calling for the establishment of a task team to consolidate and clearly and succinctly articulate the national integrity system. The task team will assess all pillars of the national integrity system and advise us on how we consolidate all these pillars in a comprehensive integrated national integrity system.

Although not perfect the South African national integrity system has come a long way since the advent of democratic rule. It is now necessary to ensure that this system is nurtured, as the challenges it faces are many. The integrity of political, administrative and judicial systems is central in the construction of national integrity systems. Parliament has to play a meaningful role in ensuring that effect is given to political commitments to combat corruption. This is evident from the emphasis our Constitution places on institutions designed to ensure both accountability and transparency in government and from the plethora of anti corruption legislation passed by parliament. Parliament also has to play an important oversight and monitoring role, particularly with respect to the executive and the civil service.

The ultimate goal of establishing a national integrity system is to make corruption a 'high risk' and 'low return' undertaking. As such it is designed to prevent corruption from occurring in the first place. And because corruption tends to be a systemic problem, the primary emphasis is on changing systems, rather than blaming individuals.

All of us present today have a critical role to play in strengthening the national integrity system. The integrity of the business sector and professional associations is important to sustaining the national integrity system. The Third National Anti-corruption Summit adopted a resolution which urged the business community to investigate self-regulating mechanisms to improve ethical conduct and practice. The role of business in fighting corruption is particularly important as it counters the widely accepted idea that business is the first to benefit from the existence of corruption. Participation of Business Unity South African (BUSA) in the NACF confirms business willingness to assist us in fighting corruption.

The National Integrity System's values must permeate the structures, practices and principles of the state, the corporate sector and civil society. These values include accountability, transparency, equity, efficiency, developmentalism, and fundamental rights and freedoms including freedom of speech, access to information, democracy and participation.

A national integrity system must of necessity be built on the following:

1. A strong code of ethics in the workplace
2. The political will to enforce this ethos
3. Transparency and accountability
4. Rewarding exemplary conduct
5. Managers should lead by example and they must abide by the highest of ethical standards
6. Subjecting misconduct to disciplinary sanctions
7. Training in integrity, conflict of interest and a democratic ethos and
8. According a high priority to the public interest and serving the public.

These are the essential preconditions for the elimination of corruption, conflicts of interest and malpractice in the public sector.

We all agree that corruption occurs in all countries, regardless of levels of social and economic development. In general, it is most likely to occur at the interface of the public and private sectors where public officials have a direct responsibility for the provision of public service or application of specific regulations or levees. This realisation has prompted the Organisation for Economic Co-operation and Development (OECD) countries to develop and implement the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions which South Africa acceded to in 2007 and became the 37th signatory and first African country to join the working group on Bribery in International Transactions.

The OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions

Following the accession to the convention, the challenge for South Africa was to implement and comply with the convention requirements. Many of you are aware of the scope and application of the convention. In March this year, South Africa submitted its national inputs to the OECD Working Group on the Consultation Paper which reviewed the OECD anti-bribery instrument ten years after adoption. Thanks to all of you who participated in the consultation process, your comments and inputs are highly appreciated.

Also in June this year, we submitted the OECD Phase I self assessment report to the anti-bribery working group and it pleases me to announce here today that South Africa received a positive report from the working group. The Phase 1 entailed an initial assessment to determine conformity with the convention. This was done through assessing our national legislation to determine its conformity with the convention.

We are now preparing for the submission of the Phase II report due in 2009. Phase 2 of the monitoring process examines the structures in place to enforce these laws, assesses countries' application and implementation of the convention and the revised recommendation, and recommends concrete actions for improvement. This phase also involves one week of intensive meetings (in the country being examined) with key actors from government, law enforcement authorities, business, trade unions and civil society.

This monitoring process seeks to gain an overall impression of the functional equivalence of efforts, taking into account that parties may use various approaches to fulfil their obligations.

The working group is giving careful consideration to how monitoring beyond Phase 2 will be carried out. The careful design of an efficient and effective assessment mechanism to monitor countries' implementation of the convention beyond Phase 2 is a major priority for the working group.

I would like to use this opportunity to extend an invitation to all of you to participate in the Phase II assessment and to urge you to liaise with the Department of Public Service and Administration (DPSA) for any questions you may have regarding the assessment.

In the fourteen years of our democracy we have experienced a number of challenges and our fight against corruption is one such challenge. South Africa has continued to strive towards promoting its national interest and values and consolidating the African agenda through its participation in the African Union (AU) and its structures. As part of our commitment to complying with global anti-corruption standards and playing a prominent role in regional and international anti-corruption processes, we ratified the Southern African Development Community's (SADC) Protocol against corruption in 2003 and we adopted the AU Convention on Preventing and Combating Corruption in 2005.

South Africa is the current chair of SACD and we will use this opportunity to promote the implementation of and compliance with the protocol. In 2004 we ratified the UN Convention against Corruption. We were one of the first countries to ratify the UN Convention and comply with its mandatory requirements. All three instruments contain many provisions that are similar or have similar objectives. The differences that do exist are not substantive and in fact add to the overall range of measures that should be adopted to combat corruption. In short, the three legal instruments broadly complement each other. The legal opinion South Africa received from Independent Council in 2005 confirmed that our domestic legislation is consistent with international instruments for combating and preventing corruption. Our participation in these instruments has provided a tremendous boost to our anti-corruption efforts and underscores the importance of a co-operative effort at arsenal and we all have a role to play in increasing awareness of these instruments.

Fraud and corruption continue to damage our values and the ethical foundation of our democracy and professional bodies and associations are crucial in nurturing and maintaining this foundation. You should therefore endeavour to create an environment that is inimical to fraud and corruption. You are champions of the anti-corruption and anti-fraud movement and if any one of you is not an active participant in this vital movement you should be.

A feature characteristic of most serious frauds is the use of various commercial and legal devices designed to conceal the perpetration of fraud. Invariably this is accomplished under a veneer of respectability and legality. Without the participation of some professionals serious fraud can not succeed and they should be duly and publicly held accountable for their involvement in such activities. Professionals and professional associations should assist in the prevention and detection of fraud and corruption. In fact, professionals are a readily accessible source of information about current trends in fraudulent behaviour.

Article 8 of the OECD Convention states that "each party shall take such measures as may be necessary within the framework of its laws and regulations regarding the maintenance of books and records, financial statement disclosures, and accounting and auditing standards to prohibit the establishment of the off-the-books accounts, the making of off-the-books or inadequately identified transactions, the recording of non-existent expenditures, the entry of liabilities with incorrect identification of their object, as well as the use of false documents by companies subject to those laws and regulations for the purpose of bribing foreign public officials or hiding such bribery."

In addition, the SADC Protocol, the AU Convention and the UN Convention require that member states adopt legislation to establish criminal offences under its domestic law in respect of certain acts of corruption as described in the respective instruments. Paragraphs (a) to (j) of Article 4 of the SADC Protocol propose the adoption of various measures, which will create, maintain and strengthen systems, mechanisms and institutions in order to fight corrupt and related activities. Furthermore, Articles 5 to 12 of the AU Convention and Chapter 2 of the UN Convention propose various legislative and other measures to prevent and combat corrupt and related activities.

Recently, fraud has emerged as a critical area of concern. As a country we have been plagued by our share of corporate scandals. These scandals have highlighted the role of fraud examiners and internal governance arrangements. Ordinary citizens are now being exposed to these scandals and their distemper and disquiet begs an important question: As these fraudulent practices were unfolding "where were the auditors and fraud examiners?"

Clearly not all of the private sector can be tarred with the same brush just as we cannot make sweeping generalisations about the public sector. Generally the governance arrangements of big business is solid, the systems are in place. But how do you account for a breakdown in ethics? If these scandals occur in spite of the governance arrangements then it means we have a breakdown in ethics. In the public service we have good management systems and controls but still we have cases of corruption. And where this occurs it must be dealt with within the law. But the question still remains, what is being done to instil and support integrity in organisations? What ethics management systems exist, do private sector organisations subscribe to and actively promote ethics?

Fraud examiners are an important tool in fraud detection, the more fraud is detected and discouraged, the stronger is and becomes the organisations' ethics infrastructure. A well-designed and implemented fraud detection system, based on transactional analysis of operational systems, can significantly reduce the chances of frauds occurring and remaining undetected. Such a detection system with clear indicators of fraud is indispensable to recover losses and in addressing any control weaknesses. The timely detection of fraud directly impacts on the bottom line, reducing losses for an organisation. And effective detection techniques serve as a deterrent to potential fraudsters. Fraudulent financial reporting and misappropriation of assets only serves to undermine investors' confidence in audited financial statements.

Many of the inputs we received regarding the OECD consultation paper spoke of the importance of adequate internal and external controls in detecting and preventing corruption, fraud and bribery. You've argued that no bribery, fraud and corruption can occur if an organisation's internal control systems are in place and are functioning adequately. Internal audit acts as an important preventative measure against fraud. South Africa has realised the value and importance of internal audits and this is evident in our legislation particularly the Public Finance Management Act (PFMA), the Municipal Finance Management Act (MFMA), JSE listing requirements and the KING II report on corporate governance. I am sure that you are all eagerly waiting for the release of the KING III report.

Likewise, internal auditors play a pivotal role in fraud and corruption prevention. These auditors are closer to the day to day operations of the business and do have a greater opportunity to detect any fraud. Because they monitor the effectiveness of control systems, they are more likely to become aware of potential areas of breach of ethical behaviour. Independent monitoring by audit committees enhances the process of governance. The reporting of irregularities to the Independent Regulatory Board for Auditors supports whistle blowing as a mechanism to discourage unacceptable unethical behaviour.

Equally important is the role of financial institutions in fraud and corruption prevention. Financial institutions should be more accountable. Essential to any serious fraud is the ability to transfer large sums of monies internationally which cannot be achieved without utilising financial institutions. There must be greater accountability and recording of financial transactions. Financial institutions should immediately report suspicious financial activities.

The Third National Anti-corruption Summit acknowledged the importance of transparency and accountability in the business, civil society and public sectors. And following the summit, sector representatives convened working group meetings to review the resolutions and identify joints projects which would form the basis for the new NAP. The new NAP together with all resolutions is to be implemented in a period of two years leading to the next summit. Government, civil society and business represented by Business Unity South Africa (BUSA) are currently working on the new NAP. You will be informed of the new NAP and I would like to urge all of you to take part in ensuring that the NAP together with the resolutions of the summit are fully implemented.

The NACF is for the people of South Africa and it will continue to account to them through parliamentary processes and through feedback from the representatives of the sectors. I want to emphasise that government, business and civil society depend on each other to combat and prevent corruption for the benefit of the entire nation. I can proudly say that the NACF is offering a very strong and effective partnership in its quest to protect the people of South Africa from the evils of corruption.

In conclusion, let me reiterate the deepening of democracy and the strengthening of governance institutions are likely to reduce corruption because of enhanced transparency, monitoring and accountability mechanisms. The role of the private sector and of professional bodies and associations is integral to the success of a national integrity system, and should contribute to mobilising and raising awareness about the impact of corruption on democracy, ethics and development. The private sector and of professional bodies and associations must in all respects be part of designing the anti-corruption measures that we put in place. The leadership that a national integrity system requires puts the responsibility on this sector to function according to the highest standards of integrity. Support from representatives of the private sector is particularly important as corruption occurs at the interface of the public and the private sectors. Corruption is often difficult to detect, costly to investigate and requires great skills to investigate. Our primary objective should be to tackle the problem of corruption in its entirety, recognising it as a social problem. We should aim to respond to corruption with the same sophistication and agility with which it operates. Simply put, the participation by the private sector and by professional bodies and associations is critical in the fight against corruption and to ensure the highest standards of probity and of ethical and responsible business practices.

I would like to thank you once more for the opportunity granted to me to speak about our work.

I thank you.

Issued by: Department of Public Service and Administration
19 September 2008