PRECCA Section 34A Decoded: The Case For Dedicated Anti-fraud Programmes

Fraud and corruption levels have reached alarming levels in South Africa. No industry is immune to the scourge of fraud and corruption. In some sectors fraud and corruption pose significant threats to business integrity and sustainability. As we mark International Fraud Awareness Week (16 – 22 November ), we felt it fitting to highlight the benefits that companies derive from having a dedicated anti-fraud & anti-corruption compliance programme.

Preventing fraud and corruption makes good business sense. Almost many organisations face the risk of dishonest employees exploiting trust and opportunities to these acts. In many cases, companies place blind trust in employees rather than enforcing robust governance and controls. This often results in undetected fraud and corruption, causing significant financial losses. When it comes to fraud and corruption, prevention is most certainly a lot less expensive, and significantly better than cure.

There is however another reason why companies need to ensure that they have a dedicated anti-fraud & anti-corruption compliance programme. This caution is derived from the fact that in April 2024, President Ramaphosa signed into law, a significant recommendation of the State Capture Commission in the form of the introduction of Section 34A of the Prevention and Combating of Corrupt Activities Act. "PRECCA" which introduced a new offense in South Africa called "the failure to prevent corrupt activity".

The reporting obligation inherent in terms of section 34 remains unchanged. In terms of the PRECCA reporting obligation, any person in a position of authority who knows, or reasonably ought to have known, or suspects that an act of corruption, fraud, theft, extortion, and/or forgery and uttering shall report such knowledge or suspicion to the DPCI, where the value exceeds ZAR100,000.00.

The recently introduced section 34A, provides a radical extension to South African Law in that a "member of the private sector or incorporated state owned entity" will be guilty of an offence if a person associated with that member gives or agrees, or offers to give any gratification to another person, (as currently prohibited in terms of Chapter 2 of PRECCA) intending to obtain or retain business or an advantage for that member.

In simple terms, what this means is that in order for a (public or private) organisation to have a defence against being held accountable for "failing to prevent corrupt activities" when an employee, or person associated with that organisation gives or agrees, or offers to give gratification to another person ("a kickback"), such organisation will need to be able to demonstrate, that it has "adequate procedures" to prevent corrupt activity.

The new offense introduced by section 34A of PRECCA is a carbon copy of section 7 of the United Kingdom Bribery Act. Unlike the Bribery Act, the South African government has introduced this legislation without publishing an accompanying guidance clarifying what will constitute "adequate procedures".

Many organisations have expressed uncertainty to what is meant by the term "adequate procedures". ENS has recommended to the National Prosecuting Authority that they should follow the example set by the British government and introduce clear and simple guidelines to advise companies on what is required in terms of "adequate procedures".

The UK Guidance sets out six non-prescriptive fundamental principles that commercial organisations should consider when adopting "adequate procedures" to prevent bribery being committed on their behalf, commonly referred to as the "Six Principles". In the absence of a clear guideline from the South African authorities, the guidance that we recommend is that the term adequate procedures refers to a robust Anti-Fraud & Anti-Corruption Compliance Programme. We further encourage South African entities to adopt the "Six Principles" approach that require procedures which are proportionate to the extent of the corruption risks facing the organisation.

The UK Guidance sets out the following six principles that companies need to consider:

1. Proportionate Procedures
2. Risk Assessment
3. Top-Level Commitment
4. Due Diligence
5. Communication (including training)
6. Monitoring and Review

Principle 1: Proportionate procedures

The commercial organisation's procedures to prevent bribery by persons associated with it should be proportionate to the bribery risks it faces having due regard to the nature, scale and complexity of the commercial organisation's activities. This principle requires the organisation to have a robust anti-bribery policy in place with procedures designed to foster compliance by employees, business partners as well as agents and intermediaries;

Principle 2: Top-level commitment

Top-level management of a commercial organisation must be committed to preventing bribery and set the appropriate ethical tone from the top. The establishment of the ethical tone would include:

• Make a statement of commitment to combat corruption in all parts of the organisation's operations
• Develop a code of conduct that communicates to employees what is expected of them
• Lead by example
• Provide a safe mechanism for reporting violations
• Reward integrity

Principle 3: Risk assessment

Organisations should conduct a risk assessment addressing the nature and extent of the risks relating to bribery and corruption to which it is exposed. The risk assessment should focus on identifying and

addressing an organisation's vulnerabilities to internal and external corruption.

Principle 4: Due diligence

Organisations must practice due diligence to know who they are doing business with and to identify bribery risks associated with a particular business relationship. Management should exercise due diligence in seeking to prevent and detect criminal conduct by its employees and other associates. The benefit of the due diligence is that it will inform the application of proportionate measures designed to prevent persons associated with them from bribing on their behalf. Due diligences requires careful screening of prospective employees and third parties through background checks and effective monitoring of their performance:

• Due Diligence for Employees - organisations must use due diligence to refrain from delegating considerable discretionary authority to any individuals who have a propensity to engage in illegal activities; and
• Due Diligence for Third Parties – organisation must use due diligence to ensure that it forms business relationships with reputable third parties.

Principle 5: Communication

Organisations must "ensure that its bribery prevention policies and procedures are embedded and understood throughout the organisation". Management must implement measures to ensure that its anticorruption policies, standards, and procedures are communicated effectively to all employees and, where appropriate, agents and business partners. The communication should include:

• Periodic training for appropriate employees and third parties;
• Certifications from associated persons to ensure that they understand the company's anti-corruption policies, standards, and procedures; and
• A confidential system that provides parties a means to raise concerns about bribery, to provide suggestions for improving the company's anti-bribery procedures, and to seek advice.

Principle 6: Monitoring and review

Organisations must institute monitoring and review mechanisms to ensure compliance with anti-bribery and corruption policies and procedures, to identify any issues as they arise, and to make improvements where necessary. The monitoring and review should consist of four mechanisms:

• Internal controls – implement controls to monitor and review anti-bribery policies and programmes;
• Periodic reviews – conduct periodic reviews and reports for top-level management;
• Identify triggers – identify triggers for mandatory risk assessment and anti-corruption compliance programme review; and
• External verification – use external specialists/verification entities to independently evaluate the effectiveness of anti-corruption compliance programmes.

The introduction of the new failure to prevent corrupt activities offence constitutes a significant change to South Africa's anti-corruption legal landscape and will require organisations to reexamine their compliance programmes to ensure they align with the Six Principles approach.

In light of current developments, it is crucial for organisations to establish strong anti-corruption compliance programmes. ENS' Forensics team provides support to enhance these programmes and to align them with the Six Principles approach to "adequate procedures" from the Bribery Act guidance. This positions us well to assist organisations in responding to the introduction of section 34A of PRECCA

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.