Steinhoff case

Khushi Chugani

30 October 2020

Corporate crime, which is also referred to as an organized crime, is a type of white-collar crime committed by an individual(s) that acts on behalf of the company for the respective organization’s benefit. Fraud is a subcategory to white-collar crime- along with bribery, embezzlement, and money laundering. Section 1 of the UK Fraud Act (2006) mentions that ‘A person is guilty of fraud if he is in breach of any of the sections.’ The sections mentioned are ‘(a) section 2 (fraud by false representation), (b) section 3 (fraud by failing to disclose information), and (c) section 4 (fraud by abuse of position).’ The majority of the time, this fraud is hidden behind a substantial and legitimate business in order to disguise the illicit activity that occurs behind closed doors. Due to its massive negative impacts on its stakeholders and the rising public concerns, regulators in various countries demand that companies maximize efforts to avoid this issue from recurring. However, many multinational companies are still involved in such wrongdoings, one of them being Steinhoff International Holdings NV. Steinhoff International Holdings NV is an international retail holding company based in South Africa and operates in Africa, Australia, Europe, the United States, New Zealand, and Asia. It was founded in 1964 in Westerstede, Germany. This corporation focuses on household goods and furniture. Steinhoff seemed to be an extremely successful retail company to the public eye; however, the public (including investors) was oblivious to their involvement in fraudulent activity for an accumulated time of 8 years. As mentioned, there are three types of fraud, and the one that occurred in the Steinhoff case is found in section 2- fraud by false representation. Section 2 of the UK Fraud Act (2006) characterizes fraud by false representation to occur when ‘(1) A person is in breach of this section if he— (a) dishonestly makes a false representation, and (b) intends, by making the representation— (i) to make a gain for himself or another, or (ii) to cause loss to another or to expose another to a risk of loss.’

In December of 2017, Steinhoff’s accounting irregularities were disclosed, further causing their financial statements to be investigated by PricewaterhouseCoopers (PwC). This investigation proved that Steinhoff had overstated their profits and inflated its asset values for approximately eight years. This corporate crime involved top executives, including outsiders, and accumulated up to €6.5 billion worth of accounting fraud between fiscal years 2009 and 2017. PwC’s investigation summary acclaimed that an individual ‘senior management executive’ was in charge of this scam. However, Chief Executive Markus Jooste resigned along with other high-level executives in the corporation after denying any misconduct. Later that month, Steinhoff disclosed the hole in their accounts. As this news surfaced, shareholder value plunged by 66% and continued to do so till the fall exceeded 90%, which acted as a significant disadvantage towards investors who supported the retail company. After this information was revealed, former CEO Markus Jose and former CFO Ben la Grange, along with six other entities (who had maintained anonymity), were identified as the organizers of this crime. The key players acted as third party companies who faked transactions in order to fabricate an illusion of income to conceal losses. These companies were named: 1) the Campion or Fulcrum Group, 2) the TG group, and 3) the Talgarth group, of which the Talgarth group was responsible for €4.15 billion of the €6.5 billion in inflated assets and profits. This crime has proved to be South Africa’s largest corporate scandal to date.

Soon after information about the irregularities were disclosed, the first reports of class-action investor’s lawsuits started emerging. A German law firm, TILP, files a lawsuit in order to recuperate the amount lost to Steinhoff’s shareholders, causing the company to lose over €10 billion in market capitalization. In 2018, global banks and numerous other bodies, including the Companies and Intellectual Property Commission (CIPC), Johannesburg Stock Exchange (JSE), and the Financial Services Board (FSB) started coming forward to report their losses and institute legal action as Steinhoff faces investigations. In total, this scandal left Steinhoff to meet almost a hundred lawsuits that seek up to a total of at least €6.8 billion. The company’s current CEO, Louis du Preez, released a statement in 2020 where his proposed settlement ‘is the culmination of 12 months of intensive effort.’ He also claims that he is unsure if they can conclude the settlement; however, he believes that it is in the stakeholders’ best interest. Steinhoff offered their settlement in shares and cash in their South African retail business, Pepcor; however, their debts and the current pandemic is negatively impacting their operations. In their latest financial year, the corporation paid off €160 million worth of advisory fees and recorded a €1.8 billion loss along with their €9 billion group debt. Some lenders did agree to restructure their debt last year; however, this would have to be signed off in a legal settlement. The corporation has been raising cash through the sale of their French retail furnishing chain- Conforama to Mobilux Sàr, as well as through selling their assets. Since this does not satisfy their pending fees, they are currently listing a sale of their European discount store group, Pepco, to reduce their debts further.

Corporate governance is defined as a system where a company organization is directed and controlled by an authoritative entity. Honesty, transparency, and principles of accountability are fundamental principles that the public should be able to expect out of corporate governance. During Steinhoff’s incidents, they were assigned to King Code of Governance Principles for South Africa 2009. Similar to Enron and multiple other corporations with fraudulent backgrounds, Steinhoff seemed to comply with the jurisdictions’ listing and legal requirements. Hence, this created a sense of security and reassurance for the stakeholders, including their investors, causing them not to doubt the ‘trusted’ corporation. Steinhoff abided by this as they claimed their solid stance on corporate governance. This is evident in their Integrated Report of 2013, which states that ‘Steinhoff’s board of directors and entire management team are committed to sound governance and good corporate citizenship. We accept that good governance practices are fundamental to creating, protecting and sustaining shareholder and stakeholder value, especially within the current volatile economic environment. Our governance structures are in line with King III and the Companies Act 71 of 2008.’ Over the years, the corporate governance raises some concerns about the company’s ethics but does not press on it. Instead, Steinhoff seems to tick off checklist required by the governance mindlessly. This raises a lip service issue where they are being paid simply for emphasising the company’s compliance as the governance does not proactively detect potential risks, further raising an issue of a moral dilemma.

Educating the corporation’s financial sector about the possibility of CEO fraud is extremely crucial to prohibit fraudulent activities. The finance team should be vigilant when responding to monetary demands from inside or outside of the company. This can be done through the implementation of training programs revolving around security and privacy. Another solution that could be proposed to eliminate such internal frauds could be implementing multi-factor authentication (MFA) to key applications, where users who are initiating wire transfers are required to confirm their identity. This is especially applicable in this case as the key players of this fraud fabricated false transactions. Session monitoring may also be advantageous as it will allow for control and access to the systems by administrations. In addition, merely utilizing different independent parties once in a while to fact-check the corporation’s standing may also eliminate the possibility of fraud by executives or other internal powerful parties by ensuring that nothing slips beyond notice. If Steinhoff had applied extreme security lengths or identity controls such as those mentioned, this scandal might have been avoided, further decreasing disturbances for all stakeholders involved.