African corruption prevalent, but we see rays of hope

In this new column, subject matter experts analyze fraud causes and remedies in regions and countries around the globe. — ed.

Och-Ziff Capital Management, an American hedge fund, had high aspirations to invest heavily throughout Africa. Apparently, it tried to accelerate its natural resources’ deals and other investments by paying more than $100 million in bribes to government officials throughout Africa. However, the U.S. Department of Justice slammed the door on the hedge fund’s African goals. On Sept. 29, 2016, Och-Ziff admitted to its role in several Africa bribery conspiracies and agreed to pay a $213 million criminal fine.

“Och-Ziff, one of the largest hedge funds, positioned itself to profit from the corruption that is sadly endemic in certain parts of Africa, including in Libya, the Democratic Republic of the Congo, Chad and Niger,” said U.S. Attorney Robert L. Capers at the time of the verdict. “Despite knowing that bribes were being paid to senior government officials, Och-Ziff repeatedly funded corrupt transactions.”

Africa’s environment promotes corruption because of its reliance on skimming, bribes and asset misappropriation within governments that are ineffective and can’t provide services and resources to their populations.

Some countries in Africa have the highest levels of corruption in the world according to the Transparency International’s Corruption Index of 2016. (See People and Corruption: Africa Survey 2015 — Global Corruption Barometer.)

The countries that have the highest amount of corruption on Transparency International’s Corruption Index (ranked 1-176, with 176 the most corrupt) include Somalia at number 176, Sudan at 175, Guinea-Bissau at 168 and several African nations ranking at the bottom with the highest amount of corruption. (See Sub Saharan Africa: Corruption is a Big Issue in 2016 African Election, Transparency International, Paul Banoba, Jan. 25, 2017.)

Although perpetrators commit numerous frauds in Africa, the ACFE 2016 Report to the Nations shows that corruption was more than twice as common as any other sub-scheme type among the Sub-Saharan African fraud cases studied.

Recent allegations of electoral corruption in presidential elections in Kenya and corruption within South African President Jacob Zuma’s administration are examples of the repeated instances of fraud on the continent.

Corruption background

What makes corruption so prevalent in Africa? Some scholars and political scientists opine that the way European colonists drew African borders significantly led to ineffective governments and eventual corruption.

The colonialists’ borders partitioned tribes, which possessed disparate languages, ideologies and cultures, on expansive geographical areas that some governments couldn’t physically reach. This created ungoverned areas that lacked services and security because roads and transportation to reach the outermost-lying areas often didn’t exist. Similar conditions persist.

Some countries in the region possess mineral wealth. But most rely significantly on agriculture for their income. Environmental conditions such as droughts create competition for resources. The results are governmental institutions that many deem ineffective, as defined by Western standards. So, people have to devise ways to govern themselves, acquire services and security, and engage in profit-seeking enterprises to survive.

Pressure

Africa possesses some of the highest rates of poverty in the world. The lack of economic opportunities, scarcity of food and governments’ ineffectiveness significantly pressures the population. When an individual or population faces pressure, especially one that encompasses the immediacy of eating and a focus on day-to-day survival, the potential for engagement in corruption increases. (See Africa: Unity, Sovereignty, and Sorrow, by Pierre Englebert, Lynne Rienner Publishers, 2009.)

Distressed self-reliant populations in Africa, as they do in other societies, devise methods to extract profit so they can survive. Some provide security for fees (demanding money for protection), others engage in economic predation such as rent-seeking behavior (requiring populations to pay tax-like fees) or demanding bribes. Elites who want to ensure their positions of power and profits commit various fraud schemes from stealing natural resources to paying bribes to voters for support to maintain power, according to Englebert.

Opportunity

While corruption exists in all regions and industries and “touches all social strata,” the opportunity for corruption exists because of lack of internal controls, separation of duties and/or balance of powers. (See Africa Works: Disorder as Political Instrument, by Patrick Chabal and Jean-Pascal Daloz, International African Institute, 1999, page 98.)

According to Englebert in “Africa: Unity, Sovereignty, and Sorrow,” the arbitrariness of African countries creates opportunities for individuals to profit from lack of effective government oversight, which allows some individuals to demand bribes from populations or tourists to cross land checkpoints, retrieve their identity documents or merely be able to obtain their luggage from airports.

Some researchers conclude that African countries’ dependence on their natural resources have negative impacts on democratic transition and consolidation...

These types of intermediary (or “protocol”) businesses that demand bribes for access to services or goods take advantage of opportunities and a lack of government oversight, Englebert writes. Interestingly, some theorize that weak nations in Africa endure because populations and elites benefit from the government’s shortcomings, he says. Generally speaking, populations and elites don’t seek to reform systems or reduce corruption when they benefit from bribery and corruption. Hence, this is why corruption continues to exist in Africa, according to Englebert.

Rationalization

Many of Africa’s top leaders’ tolerance of corruption projects a negative tone at the top for their countries, which can fuel fraud’s propulsion. A prime example: South African President Jacob Zuma has battled for years to avoid going on trial for 783 counts of corruption associated with political bribery. (See SA President Zuma must face corruption charges, court rules, BBC News, Oct. 13, 2017.)

The role of foreign aid and the ‘resource curse’

Many organizations have conducted substantial research on the impact that natural resources and foreign aid have played in promoting corruption in Africa. The World Bank and some researchers believe that foreign aid can be a detriment to African country recipients because it prolongs internal corruption and establishes a sense of security. (See Foreign Aid and Statehood in Africa, by Arthur A. Goldsmith, International Organization, Winter 2001, IO Foundation and the Massachusetts Institute of Technology.)

Of course, foreign aid doesn’t always meet its intended recipients. Many corrupt parties in distribution chains have opportunities for fraud and resource predation.

Also, some researchers conclude that African countries’ dependence on their natural resources have negative impacts on democratic transition and consolidation — the “resource curse” — also known as the “paradox of plenty.” Elites and rulers can fraudulently divert resources to benefit themselves.

Successful use of effective anti-corruption models

Though the situation seems dire, we see several rays of hope. Some African nations — Botswana, Lesotho, Senegal, Burkina Faso and Tanzania — have reduced their corruption.

Botswana: Botswana has gained international recognition for its innovative, preventive anti-corruption efforts, investigations and education. The country has created an independent anti-corruption agency that investigates incidents of fraud and corruption. It uses a “risk weighted” corruption strategy to review governmental departments with the highest risk for corruption first. (See Managing Corruption Risks: Botswana Builds an Anti-Graft Agency, 1994-2012, by Gabriel Kuris, Innovation for Successful Societies, Princeton University, 2013.)

Botswana has also established a well-developed anti-corruption strategy comprised of strict laws that specifically spell out what constitutes corruption and prohibits commissions; non-disclosure of private interests; and the soliciting, receipt or agreement to receive or provide a bribe. (See Overview of Corruption and Anti-corruption in Botswana, by Michael Badham-Jones, Transparency International, Dec. 15, 2014.)

Components of the strategy include methods for reporting fraud; whistleblower protections; prosecution of corruption at all levels; and projecting a positive, national tone at the top with an intolerance of corruption.

Botswana has strong, governmental institutions that pay high salaries to officials, employ standards of accountability and proactively sets aside financial reserves to plan for droughts and debts. (See Corruption and Mismanagement in Botswana: A Best-Case Example? by Kenneth Good, The Journal of Modern African Studies, Cambridge University Press, September 1994.)

According to Badham-Jones at TI, Botswana, which is the world’s largest producer of diamonds, has used revenues from diamond extraction to reduce poverty from 50 percent to 19 percent. The country seems to be reversing the “resource curse.” Badham-Jones also writes that Botswana has one of the highest levels of governmental expenditures on education — approximately 8 percent of its global domestic product — and has a literacy rate of 85 percent.

Tanzania: In 2014, international donors froze nearly $500 million in foreign aid destined for Tanzania after claims that senior government officials had paid $112 million to corrupt businessmen for fake energy contracts. (See UK and international donors suspend Tanzania aid after corruption claims, by Mark Anderson, The Guardian, Oct. 13, 2014.)

Following this scandal, Tanzania elected Dr. John Pombe Magufuli president in 2015. Magufuli ran on a strong anti-corruption platform, which included conducting audits of public payrolls, and discovery and dissolution of “ghost employees.”

In 2017, Magufuli fired 10,000 civil servants in Tanzania for possessing fraudulent education certificates. His efforts to combat corruption have gained him worldwide acclaim, despite his recent questionable tactics that include cracking down on political opponents and stifling freedom of the press. (See Tanzania’s anti-corruption crusader cracks down on opponents, by Dan Paget, CNN, Nov. 7, 2017.)

These anti-corruption achievements illustrate the potential for curbing the corruption problem in Africa. The basic ingredient for fighting corruption on the continent — and anywhere in the world — is a leader who exhibits positive tone at the top and then backs it up with actions to build strong economic and governmental fitness. CFEs in Africa can help teach organizations basic fraud examination principles that will foster anti-fraud behavior.

Liseli Pennings, CFE, is the ACFE’s training director. Before working for the ACFE, she was special agent with the U.S. Treasury Inspector General’s Office for Tax Administration and career special agent and diplomat with the U.S. Department of State Diplomatic Security Service. Her email address is: lpennings@ACFE.com.