THE IMPACT OF GOVERNMENT FRAUD
Ubuhlebezwe Risk Management Newsletter Q1 22/23
To understand the impact of fraud in government, we first must understand what the purpose of government is. Government should reflect the public will. Simply put, the government is responsible for the safety and security of its citizens, the growth of the economy, the equitable distribution of the country’s resources, and the promotion of justice and liberties.
~ Contrary to the fraudster’s rationalization in perpetuating the act, fraud is not a victimless crime. ~
Black’s Law Dictionary defines fraud as a knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment. Unlike other acts of fraud, government fraud has multiple negative effects on the core purpose of governments. Let us consider the following examples.
Scenario 1
In line with the government’s key performance area of providing an enabling environment for thriving economic activity, it is decided that the R56 between Pietermaritzburg and Umzimkhulu is to be extended to a two-lane expressway. A project of this magnitude is subject to multiple acts of fraud executed on its roll-out. From the contractors preparing fraudulent bids (falsifying experience and cash reserves) to the fraudulent awarding of contracts and the on-site misappropriation of construction materials by laborers. All of these elements contribute to the compromised quality of the road that will be constructed.
It is known that poor-quality roads contribute 50% to fatal road accidents globally. Motorists will avoid this dangerous route and thus affecting the economic output of the region. So, it is contrary to the fraudster’s rationalization in perpetuating the act, fraud is not a victimless crime. Lives will be lost, economic growth opportunities will be missed, and poverty will remain unabated.
Scenario 2
It is rightfully so for us to focus on and criticize corrupt decisions that are continuously made by today’s government which undermine the very same government’s ability to render its services to us as citizens. But what about historic actions taken by the apartheid government that haunts us today?
The economic sabotage of the state at the end of the apartheid era with some deals only finalized well into democracy. These actions included the relocation of the De Beers headquarters to London, the withdrawal of Old Mutual from Safmarine resulting in its sale to the AP Moller-Maersk Group, the sabotage of Spoornet by increasing freight tonnage permissible on roads, and countless other sales of key economic revenue sources for the South African economy.
As a result of these actions; firstly, the National Treasury has no reserves and in an event of a crisis like the Covid-19 pandemic, the government is forced to borrow money which must be paid at interest and creates debts for future generations, secondly, the state has no meaningful revenue sources and must rely on taxes for sustainability (this means it is not practical for South Africa to model Singapore on wealth creation), thirdly, the government cannot fulfill its purpose.
On consideration of the actions in this scenario, do you think they are fraudulent actions? Do they meet the elements of fraud in that they were deliberate, misrepresentations that were and continue to be detrimental to the government? These actions were committed by public officers as defined by the Prevention & Combating of Corrupt Activities Act which the act requires that those who are expected to have reasonable knowledge of these unethical activities happening (through the offices they hold) ought to report to the justice system.
Scenario 3
There are other far-reaching fraudulent activities perpetrated by ordinary citizens against institutions of the state. These include the bridging of electricity, bypassing of water meters and other forms of illegal connections, illegal waste dumping, land invasions, and other disreputable acts.
Again, it takes us back to the foolish idea that says, ‘I’m not hurting anyone, it’s the government’s money.’ At this stage in our democracy, all citizens ought to know that when the government collects money in whatever form, particularly through levies and taxes, that is the government’s process of redistributing wealth to meet the basic living standards of the poor. So, when you steal from the government, you ultimately steal from the poor.
THE IMPACT OF GOVERNMENT FRAUD
Government fraud, unlike the Steinhoff, Enron, and Bernie Madoff frauds where the affected parties were investors and employees who made a choice to invest in these companies; South African citizens, predominantly the poor and marginalized can’t really say ‘Oh, well since I’m not getting basic services from the government, I’ll just hire a private service provider to render them.’
From the above scenarios, we have seen that an act of fraud in government will have a ripple effect on a number of other service delivery objectives of the government. As a result of the Spoornet scandals, there is a flood of trucks on the roads which increases road carnage and destroys road infrastructure. The high theft of energy by citizens has crippled municipalities and to a large degree Eskom itself. The trillions lost to fraud through state capture throttled economic growth and created a significant opportunity cost for poverty alleviation efforts.
