In an attempt to prevent and detect corruption, individuals are being increasingly subjected to life-style audits (also known as lifestyle assessments or simply audits). But what exactly is a lifestyle audit and how does it work to detect or prevent corruption.
Simply put,
A lifestyle audit compares the known income of an individual with their standard of living to identify gaps / indicators that the person may be living beyond their means.
They are considered by many companies as a critical tool to detect corrupt activities and in many circumstances are carried out by an employer suspecting an employee of fraud.
A local example of this is in 2010, when the City of Durban municipality embarked upon a program of lifestyle audits for all workers during 2010 in an attempt to root out “rogues fleecing the city of millions of Rands”. The program came hot on the heels of claims by the Auditor-General that the city lost more than R100-million through fraud and corruption during 2009. Contracts valued at a further R680 million had “deviated” from normal procedures.
During the same period, the city stated it was also probing how contracts worth R100-million had been awarded to spouses, children or parents of senior city officials, as well as 13 cases of fraud, amounting to R48.5 million, relating to non-compliance with its supply chain management policy.
Not confined to Government
Lifestyle audits, of course, are not only confined to state organs and those responsible for issuing or receiving tenders from state owned enterprises. As already mentioned,
The commercial world has also adopted lifestyle assessments as a tool for preventing and detecting fraud.
KPMG, for example, learnt a number of costly lessons from their association with the Gupta family and in 2019, the company began evaluating the financial lifestyle of employees and their close family members. These evaluations were undertaken by independent parties and the policy applied indiscriminately.
“Every single partner, their spouses and dependent children go through this. Even I, my wife and my 19-year-old student son had to undergo integrity and lifestyle checks done by an independent party”, said KPMG CEO Ignatius Sehoole of the assessments.
Why is it necessary?
Several reports and studies have outlined that people who are generating wealth from illicit activities, such as corruption and crime in general, conceal their assets and sources of wealth to avoid detection and the penalties for committing crime. Forensic investigators when investigating a subject would want to understand how the subject conceals misappropriated assets or how they were acquired from fraudulent activities.
Rather than store or save the proceeds of illicit gain in cash, subjects may spend lavishly on conspicuous items such as cars, homes and investments. Typical investments held in these types of crime are insurance products and or investments in shares companies.
ACFE, in its training advisories explain that subjects may also attempt to avoid detection and conceal their assets by transferring them to another closely connected person, such as:
- Family members or close parties under their control
- Transferring assets to a trust
- Repaying a large portion of their home mortgage or vehicle finance loans
- Accumulating large numbers or loan finance contracts such as mortgage bonds or vehicle finance loans
It is necessary then to conduct a lifestyle audit in order to ascertain, amongst other things, whether an individual has misappropriated funds or hidden assets; highlight undeclared income; narrow down possible fraud suspects living beyond their means and to identify direct evidence of fraud.
A lifestyle audit of an individual requires the collection of information from a number of sources. In a forensic investigation, some of these sources may include:
- Regulatory agencies
- Court records
- Government records; births, marriages and deaths
- Land registry office
- Court litigation records
- Bankruptcy data
- Credit bureau data
- Credit card and bank account data
- Other commercial databases
- Employer records and data sources, e-mails, mobile phone data etc
- Social media postings
- Press and media searches
What are the benefits?
The key benefits to come from a lifestyle audit can be to identify hidden assets, direct the forensic investigation and help with the recovery of any assets that are the proceeds of crime.
In selecting a subject for lifestyle audit, the primary means in doing so are when a person has been in close proximity to a crime or being labelled a suspect. An immaterial number of people were chosen as a result of risk scoring, risk profiling or the identification of red flags.
The thinking here is that a person who has been judged to be living beyond their means could be in financial distress due and in need of additional funds – and so may be motivated to commit fraud or corruption– or equally so, this subject may have already committed a crime to accumulate assets or finances disproportionate to their income.
Once found, the investigators would need to ascertain whether or not the accumulation of wealth is linked to a crime. Have there been irregular transactions, movement of large sums of money or any other indicators aimed at concealing illicit gains.
What is the end game?
The veracity and accuracy of evidence and data is sometimes extremely difficult to determine. Information systems may contain erroneous or outdated information. There could also be a lag or time delay between information changing and being updated on a system. Such delays can have a negative impact on the course enquiry in an investigation.
The objective is to provide an opinion upon a subject’s involvement in a crime or transgression, while the test is to determine if the allegations made may be sustained, usually in a court of law. A secondary objective may be to enable an organisation to take action, for example, a civil action to recover monies or assets or terminate a contractual relationship.
None of these outcomes, however, would develop or identify red flags to prevent fraud and corruption. They may well assist in identifying future events, but in principle, they are used to confirm that corruption or fraud has been detected and to identify the person or persons involved in the transgressions. Essentially, they occur after the fact.
They can also be costly, with red-flag checking ranging from R5000 to R20 000, while a lifestyle audits as part of a forensic investigation could be up to R80 000. They can also have lasting effects on the company, damaging employee morale and a lingering culture of mistrus.
Continual Assessments
What all these methods do identify, however, is the need to identify an individual’s behaviour that points to one or more red flags, combined with an assessment of the level of wealth of an individual to determine if they could have legitimately obtained and maintain those assets. Finally, a person’s level of financial distress is considered a leading indicator of risk to commit fraud or corruption.
Companies are in need of continual assessments, despite many believing they do not have a history of corruption or fraudulent practices. if you are not collecting it and measuring it, how do you know you are not at risk?
Does your company have a deep understanding of employee and vendor risk? How is their behaviour changing over time? For example, if a vendor or an employee in a position of trust is beginning to enter into financial distress or an employee in a position of trust is amassing undisclosed wealth or income, would you know ahead of time and could you react?
It’s crucial to the sustainability of your business that you know the answers.
Protect yourself
Corporate Insights has developed a one-of-a-kind modular system that combines TransUnion’s big data universe with our own artificial intelligence and smart logic algorithms. It enables you to continually monitor, detect, act on, and prevent critical risks, both internally and externally.
The Corporate Insights system will allow you to protect your business from succumbing to the typical pitfalls that lead to corruption. It also comes with a host of additional benefits to ensure your company continues to operate optimally, free of the threat of corruption.
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