Nortons Inc. June 2014 White Collar Crime eBrief

5 June 2014|In eBriefs White Collar Briefs

In this edition:

  • South Africa: Fraud in the medical schemes industry
  • South Africa: RDP housing tender fraud in eThekwini
  • South Arica: Public Protector probes fake BEE tender
  • Global: Walmart takes flak over pay, graft probes
  • United Kingdom: GlaxoSmithKline under criminal investigation
  • Nigeria: Dutch company penalised by African Development Bank for bribery in Nigeria
  • United States: Credit Suisse pleads guilty to criminal charges

South Africa: Fraud in the medical schemes industry

Discovery Health’s CEO, Dr Jonathan Broomberg, has estimated that fraud in the medical schemes industry will cost South Africa between R8.22 billion and R43.2 billion.

Various types of fraud have been flagged recently, such as “card farming”, in which medical members allowed other non-members to be treated on their card, buying general merchandise such as nappies and perfume from a pharmacy and subsequently submitting a claim to cover the cost from the medical aid.

The most recent scam to hit Discovery involves lump sums which are paid out by hospital cash plans.  Such hospital plans are sold by insurance companies and provide beneficiaries with a lump sum of money in the event that they are hospitalised.  These cash plans are intended to help cover the shortfall which a patient might experience if the hospital costs are not fully covered by their medical scheme.

Dr Broomberg said that, especially in Kwa-Zulu Natal, doctors have been admitting patients to hospital who were not ill and then submitting false claims on their behalf to both the relevant medical aid scheme, as well as their cash plan provider.  The “patient” would then split the lump sum paid out by the insurer with the doctors and the syndicate in question, which fraudulently enriches them unduly, thereby leaving both the medical scheme and the cash plan provider out of pocket.

Discovery recently bust a syndicate which involved the admission of a 12-year-old child who was admitted to hospital for six days with a “diagnosis” of haematemesis, which entails the vomiting of blood.  The child in question had been admitted to hospital six times over the past two years.  However, the child was not attended to by a doctor, but by a psychologist and was discharged without any of the usual investigations associated with haematemesis.

As a result, Discovery Health is working closely with insurance companies to crack down on this kind of fraud, by sharing data and scrutinising the claims submitted by medical scheme members who also had cash plans much more closely.

Medical schemes terminate the memberships of patients involved in this kind of scam and report doctors to the Health Professions Council of South Africa, which is the statutory body charged with overseeing doctors’ conduct and issuing their licences.


South Africa: RDP housing tender fraud in eThekwini

In order to cease complaints and reports of corruption, the eThekwini municipality will stop using section 36 of the Municipal Finance Management Act to award emergency tenders.

The municipality has tabled a budget of R35.8 billion for the new financial year, of which R3.7 billion will be used to address infrastructure backlogs and issues and R2.3 billion will be used to build to low-cost housing.

The Public Protector, Thuli Mandosela, was recently requested by the Democratic Alliance’s caucus leader, Zwakele Mncwango, to probe a R255m tender to build low-cost houses in Umlazi, Kwa-Zulu Natal. It was awarded to the politically-connected businesswoman Shauwn Mpisane’s company, Zikhulise Cleaning, Maintenance and Transport, without following proper tender procedures, given that it had allegedly become the norm within the municipality to bypass official tender procedures and approved in terms of an emergency tender process whenever Ms Mpisane’s company was involved.

The mayor, Mr Nxumalo, has indicated that they have warned their officials not to use section 36 of the Municipal Finance Management Act to award tenders, which provides that “the accounting officer of a national or provincial department and the accounting authority of a national or provincial public entity responsible for the transfer of any proposed allocations to a municipality, must by no later than 20 January of each year notify the National Treasury or the relevant provincial treasury, as may be appropriate, of all proposed allocations, and the projected amounts of those allocations, to be transferred to each municipality during each of the next three financial years.

This follows on the various protests, demonstrations and legal action against the eThekwini metropolitan municipality due to slow delivery of houses and services which led the municipality to bypass the standard tender procedures and award a R224 million tender to Durban businesswoman Shauwn Mpisane’s Zikhulise Cleaning, Maintenance and Transport company.  The R255 million housing contract in Durban’s Umlazi area in March.

Mpisane and her husband S’bu have attracted media attention over the past years due to their lavish lifestyle and numerous court appearances.  Mpisane was facing charges ranging from fraud and corruption to interfering with a witness. However, none of the cases materialised and by the end of January 2014 charges were withdrawn.


South Arica: Public Protector probes fake BEE tender 

Allegations of tender corruption have been lodged against Durban-based air logistics company Dube TradePort Corporation and a construction company for allegedly hiring BEE subcontractors who were found to be shell companies given that their directors allegedly comprised a fireman, a gardener and a housewife.

This emerged during in an investigation of the tender contract of the Air Chefs Project, which was conducted by forensic investigators Paul O’ Sullivan and Associates.  According to the O’Sullivan and Associates’ report, the hiring of the three subcontractors appeared to be fronting and that the contract escalated by R7.3 million in 10 weeks without any construction of a 3000m2 building having taken place.

The company that was awarded the tender was a joint venture between Construction ID CC and R&G Consultants, the latter being known for its work on President Zuma’s Nkandla home.


Global: Walmart takes flak over pay, graft probes

The world’s largest retailer, Walmart Stores (“Walmart”), faced criticism from advisory firms in their respective reports, especially in relation to its compensation of executives and the way it has dealt with a foreign-bribery scandal.

Institutional Shareholder Services (“ISS”) and Glass Lewis & Company (“Glass Lewis”) both took issue with the fact that Walmart has not addressed issues in relation to probes into possible violations of the United States’ Foreign Corrupt Practices Act (“FCPA”) in China and emerging markets Mexico, Brazil and India.  In November 2011, Walmart disclosed possible violations in Mexico to the Department of Justice, as well as the Securities Exchange Commission.  Subsequently, it was reported that Walmart had allegedly paid USD24 million in bribes in Mexico.  Later in 2012, Walmart announced that the investigation had expanded to other countries, such as China, India and Brazil.

In calling for the appointment of an independent chairman at Walmart, ISS States that “[t]he board failed to make progress in providing meaningful information to shareholders about any specific findings on the FCPA-related probes and whether executives will be held accountable for related compliance failures“.

In response to the criticism received, Walmart cited its recently-published global compliance report, in which Walmart discusses its efforts to combat corruption and add financial controls within the business structure.  Walmart indicated that the FCPA investigation is still an ongoing investigation and that they are co-operating with the Department of Justice.


United Kingdom: GlaxoSmithKline under criminal investigation 

Pharmaceutical company, GlaxoSmithKline, is under a formal criminal investigation from the Serious Fraud Office (“SFO”) into its commercial practices, following a string of international bribery allegations that it had allegedly funneled millions of British pounds to doctors and officials in countries on a worldwide scale in order to boost sales of its pharmaceutical drugs.

GlaxoSmithKline has been investigating the allegations in various countries of operations, especially in china where the Chinese police alleged that the company dispensed GBP285 million in bribes, which resulted in billions of pounds in “illegal revenue” for the GlaxoSmithKline.

In terms of the United Kingdom’s Bribery Act, companies can be found liable for corruption by failing to prevent corruption or if top management is found to have turned a “blind eye”, which could result in severe penalties and possible blacklisting from public contracts.

In April 2014, GlaxoSmithKline announced that it was launching its own investigations into accusations of bribery in Poland, Iraq, Jordan and Lebanon. The company has repeatedly insisted that it does not have a systemic problem with bribery and that any potential wrongdoing was likely to have been performed by rogue salesmen out of the company’s control processes.

This investigation has been launched during a period when regulatory spotlight is shone on GlaxoSmithKline following the announcement that GlaxoSmithKline and French pharmaceutical company Novartis have entered into three multi-billion dollar deals regarding the Novartis’ vaccines unit, over-the-counter painkillers and oncology unit.


Nigeria: Dutch company penalised by African Development Bank for bribery in Nigeria 

Snamprogetti Netherlands B.V. (“Snamprogetti”), a Dutch company active in liquefied natural gas production, has admitted to corrupt practices from 1995 until 2004 by affiliated companies regarding the award of services contracts for Nigeria Liquefied Natural Gas (“NNLG”), partly financed by African Development Bank, in relation to liquefied natural gas production plants in Nigeria.

Snamprogetti, owned by Italian company Eni, avoided debarment by the African Development Bank for corruption related to these contracts four years after the United States Department of Justice entered into a deferred prosecution agreement with the company for alleged violations of the Foreign Corrupt Practices Act.

Consequently, the African Development Bank and Snamprogetti concluded a Negotiated Resolution Agreement, in terms of which Snaprogetti was to accept the charge and pay a penalty of USD5.7 million Snamprogetti for its alleged involvement in bribe payments these contracts. The penalty will be used by African Development Bank for projects preventing and combating corruption in its member countries in Africa. To date, African Development Bank has collected USD22.7 million in penalties from Snamprogetti, Kellogg Brown & Root, Technip and JGC Corporation for their involvement in disbursing USD 180 million in bribes through three Portuguese companies, in order to secure the awarding of the liquefied natural gas production plants project in Nigeria.

In addition to the penalty, the Negotiated Resolution Agreement foresees the debarment from bank projects for a period of three years of the three Portuguese companies, namely Madeiran Serviços de Engenharia Lda, Construções Internacionais Sociedade Unipessola Lda and Serviços and Gestão de Projetos Lda. The Portuguese companies affiliated to Snamprogetti played an active role in funneling bribes to public officials in relation to the project. These three Portuguese companies were formed in 1990 by Snamprogetti as joint ventures together with the three other multinational engineering services companies in order to bid collectively for engineering, procurement and construction services contracts for liquefied natural gas production plants in Nigeria.


United States: Credit Suisse pleads guilty to criminal charges

The Swiss bank, Credit Suisse, has agreed, as part of a plea deal that it was guilty of conspiring to aid in tax evasion for decades. Its chief executive has agreed to pay about USD2.6 billion in penalties and hire an independent monitor for up to two years.

It is hoped that this will help prevent overseas tax “dodging”, but the bank is hoping that it will not have an adverse effect on its customers or business. The Department of Justice opted to contain the damages so as to ensure that regulators did not revoke the bank’s licence to operate.

It appears that many Credit Suisse employees were involved in the scheme and created offshore accounts that were held in the names of fake companies. The plea deal is likely to result in further prosecutions in the future.