Navigating the increasing risk of fraud in modern day South Africa

South Africa has over many decades grown to be an increasingly favourable hunting ground for emboldened criminals looking to capitalize on any opportunities arising out of the nuances that accompany a developing economic and financial system.

Coupled with the world’s increasing appetite for digital transformation, South Africa’s status as an emerging market has (for all its benefits) exposed market participants at various levels to a seemingly more sophisticated class of criminal, capable of orchestrating complex fraud and financial crime schemes with little to no detection.

The introduction of this new brand of financial crime into South Africa’s financial system comes at a time where the country has already had to contend with the challenges posed by a shrinking economy, and a myriad of both socio-economic and political issues. These challenges have been exacerbated by COVID-19, which necessitated a shift in the manner that both consumers and businesses transact and engage in the economy. For business and consumers alike, it quickly became apparent that digital transformation would be a fundamental tool to facilitate and encourage financial participation during the peak of the pandemic.

With this realisation came the rapid implementation and reliance on e-commerce and online payment systems, an expected by-product of a world that now encouraged remote working and the use of on-line marketplaces. For cyber criminals this presented a unique opportunity to use and capitalize on various technological advancements within the realm of e-commerce and digital payment systems to compromise digital security systems and defraud consumers and businesses alike. In addition to this, while business may have had an increased appetite for digital migration, in many instances, appropriate measures were not taken to implement and/or update the relevant risk management and cyber security controls to account for the risks occasioned by the digital migration.

It is thus more important than ever for every market participant to understand the risks posed by fraud and financial crime so that they can better understand how to navigate these risks without having to suffer significant financial loss.

Where does the risk lie?

In a publication of the South African Fraud Prevention Service (“SAFPS”) released in July 2022, it confirmed that South Africans now have to face an increased risk of exposure to the activities of highly skilled fraud syndicates, who use a variety of methods to perpetrate fraud against companies and individuals alike.

SAFPS cited three key methods that cyber criminals and/or organised fraud syndicates are using to engage in fraudulent activities, namely:

• Money Mule Scams: occurs where cyber criminals approach unsuspecting victims under the guise of a person who requires assistance transferring money to a friend/relative in a foreign country using the account of such victim. This method can be used to compromise the account security of a victim to fund various illegal activities such as money laundering, terrorism and human trafficking. While many may be able to approach such instances with the appropriate level of scrutiny to avoid falling victim to such scams, SAFPS confirmed that when it comes to the risk of misuse of accounts through fraudulent conduct, the risk of money muling has increased by 97% over instances recorded in 2021;
• Impersonation: identity theft and impersonation has for many years been a characteristic of financial crime in South Africa, however, with the rapid integration of various technologies in the manner in which individuals and organisations conduct their daily affairs, there is a risk of increased exposure to various cyber-attacks, such as phishing scams. Phishing scams involve the transmission of emails from persons purporting to be legitimate businesses in order to induce unsuspecting victims to share sensitive personal information such as passwords and credit card information. Of particular concern is that the SAFPS has reported a 264% increase in impersonation as a method to commit fraud for the first five months of 2022, compared to 2021; and
• Forged documentation: South Africa has seen a stark increase in the use of forged documentation to defraud organisations and individuals alike, specifically for purposes of creating false qualifications, certifications and credentials to either (i) increase employability or (ii) facilitate the submission of forged documentation in procurement processes. This specific methodology is designed to compromise electronic application/submission processes through the submission of documents that have been otherwise fraudulently altered or created. SAFPS has reported an increase of 158% in this methodology over the cases reported in 2021.

Risk Mitigation Measures:

Given the increase in the commission of various financial crimes through the use of technology and the rapid rate at which cyber criminals are able to develop methodologies to compromise security systems, it follows that neither individuals nor organisations can afford to treat the increasing risk of fraud in South Africa as an issue too remote to affect their own affairs. Accordingly, the integration of various preventative and mitigation measures is imperative for purposes of responding appropriately to the increasing risk of fraud/financial crime. In this regard, the following preventative and mitigation measures should be considered:

• Multi-layer security authentication: advancements in technology have seen the integration of biometric systems as a method to access accounts and transact online. Adding this extra layer of security mitigates the risk of account security breaches even in circumstances where certain sensitive personal information has been compromised;
• Effective customer verification systems: Within the context of companies/organisations, it is imperative that organisations implement effective know your client/customer verification systems to prevent the misuse of the accounts of unsuspecting victims to engage in and/or fund fraudulent activities; and
• Establishing a culture of compliance: One of the biggest challenges organisations have to face within the context of commercial and/or cybercrime is that perpetrators are developing and using technologies at a rate at which organisational security systems are unable to keep up. To address this issue, organisations must drive a culture of compliance with its security and compliance systems in so far as cyber security, anti-money laundering and anti-corruption processes are concerned. Doing this allows organisations to frequently engage in the review of its internal processes to evaluate their effectiveness, which is essential for identifying and addressing gaps in an organisations compliance and cyber security systems.

Conclusion

While many South Africans are unaware of the rapidly increasing risk of becoming a victim of fraud, the increase in instances of fraud in South Africa indicates that perpetrators of financial crime are finding greater success in carrying out and benefiting from fraudulent schemes. The losses occasioned by such fraudulent schemes can result in irreversible damage for individuals and organisations alike, as such, it is imperative to consider and take the appropriate measures navigate the increasing risk of fraud in South Africa.