Companies in East Africa could save more if they invested in systems that detect fraud along their supply chains, rather than relying on voluntary whistleblowers.

Latest research findings published by PriceWaterhouseCoopers Eastern Africa show 54 percent of local respondents reported a higher incident rate of supply chain fraud over the past two years compared with 44 percent across the globe.

It could be an indicator of strong procurement fraud risks affecting several businesses operating in Uganda, Kenya, Tanzania, Rwanda and Ethiopia.

Common forms of supply chain fraud include procurement malpractices, theft of goods, falsification of transactions and manipulation of processes by third parties, bribery and extortion committed by suppliers. It also includes abuse of logistics processes for private benefit.

Read: Airtel Kenya lost $6.7 million via inside job

Yet the savings for investing in counter systems are massive. One multinational, for instance, recorded savings of more than $20 million per year from its supply chain operations, the audit firm reports. This followed a strategic review that exposed fraud opportunities in its freight management, warehousing, transport, clearing and forwarding services, PWC’s Global Economic Crime and Survey for 2022 shows.

Fraud accounts for about 25 percent of economic crimes previously reported in Eastern Africa. Bribery and corruption and asset misappropriation account for 19 percent and 39 percent of economic crimes, respectively.

Low investment in anti-fraud controls is partly blamed for higher fraud reporting among internal whistleblowers compared to traditional surveillance systems. Some 17 percent of fraud detection efforts in the region are attributed to whistleblowers compared with five percent globally, the report said.

“Most organisations in eastern Africa depend more on tip-offs than internal controls to detect fraud. They rely on people’s courage to report fraud incidents and that might not be very forthcoming on some occasions,” said Muniu Thoithi, Advisory and Forensics Leader at PWC Eastern Africa division.

Also, respondents that reported increased cybercrime risks in their organisations rose from 22 percent in 2020 to 28 percent in 2022, according to the findings.

Read: Cyber threats risks could undermine financial sector

"Some organisations lack internal compliance departments while fraud keeps evolving and management is usually forced to play catch up in this context,” said Muniu Thoithi, Advisory and Forensics Leader at PWC Eastern Africa division.

Loopholes noticed in third party service providers’ internal controls are equally blamed for significant fraud risks faced by several organisations across the region.

"Alongside these organisations, the proportion of organisations with no risk management/compliance function is at an eye-popping 18 percent in Eastern Africa compared with just 9 percent globally. This may be indicative of risk exposure to entities, likely SMEs, that are yet to implement any dedicated compliance/risk management function. This should be addressed as a matter of urgency to guard against the threats of economic crime in today’s environment..." the report reads.

Some 63 percent of respondents in Eastern Africa reported incidents of fraud experienced in their organisations compared to 46 percent of respondents that reported incidents of fraud in their operations at a global level - a consequence of massive technological disruption brought about by the Covid-19 lockdown period and cost cutting initiatives witnessed during the same period.

“The economy is struggling; many people are struggling and there is a lot of uncertainty out there. There is a connection between a struggling person, a bad economy and a psychological temptation to commit fraud on the job.

"Members of board audit and risk committees ought to wake up to this new risk factor in their organisations before it is too late,” said Gertrude Wamala Karugaba, a Senior Executive at the League of East African Directors during a webinar presentation that took place last month.

“Lifestyle audits are a sure way of tackling financial fraud in the workplace particularly in cases where people own assets that are far above their means and may also claim that they belong to their spouses.

"However, various multinationals have chosen to centralise critical business operations like procurement, finance, planning, fleet management and advertising in order to cut fraud risks within African operations,” explained Paul Sine, a former Finance Director at British American Tobacco Uganda and a business owner.

Read: IGG, security reports put BoU on the spot

The number of respondents that reported increased cybercrime risks in their organisations rose from 22 percent in 2020 to 28 percent in 2022, according to the findings.

Whereas many cybercriminals are usually involved in numerous cyberattacks targeted at different victims for purposes of maximising financial gains, a reported shift to fewer but more lethal cyberattacks might weigh heavily on organisations’ cyberprotection systems in the near future.

For instance, a cyberattack last year that targeted at Ugandan mobile wallet to bank transaction clients led to penetration of a third-party service provider’s security firewalls and caused a massive fraud loss of roughly Ush11 billion ($3 million) in just two hours, according to sources at Uganda Communications Commission.

This suggests reliance on disgruntled parties in fraud detection alongside exposure to common human weaknesses manifested in fear, favour and anxiety.