In a perfect world, the relationship between client and supplier should fundamentally be based on mutual trust. Legally speaking, the relationship is formally guided by King III and protected by legislation such as the Public Finance Management Act, specifically Section 16A, which compels companies to build an environment where business can be conducted with integrity, respect and mutual trust.
Other pertinent legislation that may affect the client-supplier relationship includes the Municipal Finance Management Act, which promotes sound and sustainable management of the financial affairs of municipalities and other institutions in the local sphere of government, as well as the Prevention and Combating of Corruption Act (PCCA) which criminalises corruption in public and private sectors. 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.
However, trust and the need to comply with the law do not necessarily guarantee that suppliers will remain above board.
Tenderpreneurship is prevalent in South Africa and involves the manipulation of supply chain management procedures in order to win tenders from the state. It is often characterised by grossly inflated prices, low quality products and services, or complete non-delivery. According to South African chief procurement officer, Kenneth Brown, as much as 40% of the country’s R600 billion budget for goods and services is being eaten up by inflated prices from suppliers and fraud, or around R233 billion of misspending.
The food sector has been rocked by high profile cases demonstrating the ripple effects of supplier bad practice, such as the 2013 South African meat scandal centred around incorrectly labelled meat products that implicated popular retail giants. In other separate cases, the National Consumer Commission has also revealed widespread altering, replacement and removal of food labels. In another high profile case in 2014, a meat scandal rocked an international food market and several leading fast food outlets were left with empty stores and damaged reputations after it was found they had been serving expired meat to customers - all sourced from the same supplier.
These and other international cases of client-supplier relationships-gone-wrong hold lessons to be learned and prove that supply chains can never be too sure of their suppliers, no matter how long they have been in association. Supply chain officials are vulnerable to a host of potential threats that can emerge from their relationship with suppliers. Some of the more prominent threats include:
· - Pass-through schemes, where an employee or contractor sets up a business which supplies goods or services to client.
· - Conflict of Interest, which occurs when an individual or organisation is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other.
· - Shell company schemes, which enables an entity that has no active business and usually exists only in name as a vehicle for another company’s business operations.
· - Tender fraud, where the manipulation of the bidding/tendering process between employees of the issuer of the bid and the bidding company leading to bribes and kickbacks.
· - BEE fronting
As we have already witnessed several incidents, particularly in the public sector, these activities will always serve as prominent threats to any organisations operating in South Africa. The risk of reputational damage, legal non-compliance and potential financial losses due to fraud calls for strict vendor vetting and employee screening is an essential exercise.
Every business must ensure that its supply chain management system is well equipped to identify and eliminate fraudulent activities and in turn, promote strong ethical standards and good business practice.
Use tools are available in the marketplace to practically assist with procurement vetting and vendor management. These are effective in discovering potential connections, ownership of property, connections or unscrupulous behaviour between staff and vendors and can be achieved through regular vendor and staff vetting, as well as detailed conflict of interest reports. These tools can also run ongoing monitoring, provide automated irregularity alert reports.
Contributed by: Rudi Kruger, General Manager of LexisNexis Risk Solutions