As of May 2016 Mossack Fonseca are probably one of the most well-known law firms in the world - albeit for all the wrong reasons. Following the largest known data leak in history, journalists around the world had a field day sifting through troves of attorney-client information. In its essence, the scandal concerns the firms practice of setting up and operating shell companies and the stories surrounding their ultimate beneficial owners.
Whether South African suppliers are fully aware of it or not, the landscape in which they operate is drastically changing since the revised BBBEE codes came into effect, on 1 May 2015. The revised codes will change the way companies select and develop their suppliers. Most importantly, under the revised BBBEE Codes, companies are obliged to buy 30% of total Measured Procurement Spend from EMEs and QSE’s each year. In addition, a company’s spend with Black Owned and Black Woman Owned Enterprises will also have to increase for it to maintain a favorable BBBEE rating under the revised codes. These measures are intended to generate entrepreneurship and build skills in the previously disadvantaged class. However, the unintended consequences of forcing companies to spend more with certain types of suppliers poses enormous challenges to supply chain managers and procurement officers in South Africa as a result of increased supplier risks and increased management complexity.
The year 2016 brings about significant change for the South African Broad Based Black Economic Empowerment (BBBEE) scorecard, with revised, much stricter codes that came into effect on 1 May 2015. Although, ensuring that your organisation is BBBEE compliant remains voluntary in the private sector, it is increasingly important for any business that wishes to be successful in the current South African landscape. In this perspective, one of the most important changes is the recognition of BBBEE fronting as a criminal act.
Many international companies have started to put Africa on their growth agenda in the recent decade. Most have, at some stage, experienced the challenges around engaging with African service providers and local partners. Some of them to the extent that they had to shut down their operations entirely in certain countries. The cases of Woolworths in Nigeria or Nando’s in Mozambique are but two examples in this regard – others, like some international banks, have decided to pull back completely from Africa to terminate the risks posed by global compliance requirements.
In our previous blog we looked at the changing economic conditions in Africa and discussed how, considering the current economic slowdown, social and economic conditions are now ripe for vendor fraud to take place. These conditions according to Donald R Cressey’s “fraud triangle” are: a perceived financial need (pressure), coupled with a perceived opportunity to get away with the crime; and a line of reasoning that aligns with the values of the person considering the action (rationalisation).
In 2007 the South African Public Service Commission (PSC) found that, after implementing a conflict of interest reporting procedure, almost 52% of the submitted forms and in some departments as many as 90% indicated conflicts of interest. Subsequent years showed a decline in the figures but the overall level still remains a concern. In 2013 the same commission stated in an update related to conflicts of interest: “The findings of the study show that there is poor rate of compliance (...) with the recommendations of the PSC for the three financial years.”
In our previous blog we explain the importance of corporate reputation and how your suppliers may cause reputational damage to your organisation. In the second part of this series we look at instances of reputational damage that were linked back to suppliers and what you can do to protect your corporate reputation .
As the old adage says, you can judge a man by the company he keeps. This is no different in the corporate landscape where your supplier network and those who you associate your organisation with can either make or break your company’s reputation. Corporate reputation accounts for 33% of the market value of the FTSE 100, proving that a good reputation assists in growing corporate value.
In our previous blog we discussed conflict of interest and how it appears in the supply chain. Simply put, a Conflict of Interest exists in a situation in which a person in an official position has a private interest which influences an official decision. As a result, the potential for fraudulent behavior exists.
Conflict of interest can be defined as a situation where a person in a position of power or influence can gain financially, or derive personal benefit, from decisions they make in their official capacity. It is a legitimate concern for companies that wish to avoid fraudulent activity affecting their procurement process.
It stands to reason that you cannot defeat an enemy you cannot see. These days, suppliers are not the enemy but partners, particularly for companies operating in a frontier market landscape where good supply chain governance is the key to identifying fraudulent, wasteful or criminal activity early on.
Expanding your company’s footprint into Africa can prove to be a risky business, says Gordon Institute of Business Science lecturer, Marius Oosthuizen, in a recent interview with Talk Radio 702. Not only will you have to deal with an unfamiliar legal and business system, but many countries on the continent are also marred by unstable politics and economies as indicated by the latest Ibrahim Index of African Governance (IIAG).
Supply chain governance is the linchpin that brings transparency to your procurement and supplier management functions to help companies avoid fraud, waste and disruptions. It governs these business functions through policies, metrics and enforcement mechanisms. Its function is of particular importance in unstable political and economic environments, such as those found in many emerging economies – the aspiring “lion” countries in Africa, for example.
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.
With the increasing complexities of the global business environment, procurement managers face enormous challenges in streamlining their supply chains. This is particularly true for companies with a footprint in developing world regions, where networks and relationships are less formalised and transparent. While traditional supply chain management is an effective model in a well regulated environment it has its shortcomings in emerging markets where the risk of fraud and abuse is far higher.