Companies do poorly managing corruption risks in emerging markets

Effective processes exist to identify and mitigate corruption risks, but a new Deloitte survey suggests that a majority of companies doing business in regions considered among the most prone to corruption may not use them well.

Emerging markets have great potential for rapid growth, but bribery, money laundering, criminal activity and violations of economic and trade sanctions can run rampant there. Most emerging countries score below the 50th percentile on the Corrupt Perception Index, a gauge maintained by global watchdog group Transparency International.

“Given the reputational and financial risks involved in investing in emerging markets, one might expect that boards of directors and senior management would be actively involved in overseeing activities to manage these risks,” the Deloitte report says. “Yet, … this is often not the case.”

Deloitte’s research follows similar studies conducted this year. A CGMA report, Managing Responsible Business: A Global Survey on Business Ethics, indicated pressure to act unethically increased during an economic downturn, and that pressure was higher in some emerging economies. More than half of the respondents from India, Malaysia, Pakistan, Sri Lanka and Zambia said they felt some pressure to compromise their organisations’ ethical standards. The United States and the United Kingdom reported the lowest pressure – 18% each.

In the Deloitte survey, only 47% of the 126 executives polled said top management was very involved in overseeing the company’s due-diligence activities to prevent corruption risks. Thirty-nine per cent said their boards of directors were very involved.

While due diligence was standard practice, executives’ confidence in their companies’ ability to manage compliance and risks was comparatively low: 40% of the executives surveyed felt extremely or very confident in their company’s ability to manage corruption risks in engaging vendors. Thirty-eight per cent felt that way when conducting mergers and acquisitions, 36% when working with a range of third-party agents and 34% when establishing new operations.

Executives’ concerns about corruption in countries where their companies were doing business were high, the Deloitte survey found. Seventy per cent were extremely or very concerned and about as many thought the risks had increased the past two years.

Passage of the UK Bribery Act, which took effect July 1, 2011, plus stepped-up enforcement of the US Foreign Corrupt Practices Act, have heightened scrutiny of corrupt practices.

In 2011, the US continued to lead active enforcement under the Foreign Corrupt Practices Act with 275 cases over 15 years (up from 227 the year before) and 113 ongoing investigations that year (up from 106 in 2010), according to Transparency International. The UK had 23 cases in 2011–12 under the UK Bribery Act, up from 17 in 2010–11.

Vetting third-party vendors, sales agents, distributors and intermediaries that are not under a company’s direct control can be particularly challenging, according to the Deloitte survey. Third parties can lower costs and add flexibility in the supply chain, and some large companies engage thousands of them.

Companies cited the following challenges in pursuit of their anticorruption efforts:

• 45% of the polled executives said it is difficult to adequately verify information provided by business partners and third parties.

• 32% said conducting timely and sufficient due diligence on third parties is a problem.

• 29% had difficulties securing qualified local professionals and firms to gather information about third parties.

• 25% said senior management lacked commitment to adequately vet third parties.

• 18% experienced resistance from the sales group.

• 16% cited a lack of technological capabilities.

Related CGMA content:

“Despite Exposure to Corruption Risk, Due Diligence on Third-Party Business Partners Remains Low”: All of the Foreign Corrupt Practices Act enforcement actions brought last year by the US Department of Justice and the US Securities and Exchange Commission involved alleged bribes by companies’ third-party business partners, Deloitte researchers found. Nonetheless, a poll shows that corporate due diligence and risk assessments on third-party business partners remain low.

“Too Many Australian, New Zealand Companies Face Corruption Risk With ‘Blissful Ignorance’ ”: A string of bribery scandals and stricter enforcement of foreign and domestic anti-corruption laws is slowly raising awareness among Australian and New Zealand companies doing business abroad that they are at risk. But many remain in total denial, according to a Deloitte survey.

“Recession Dampens Effort to Stem Corporate Corruption”: A few wealthy nations stepped up efforts last year to crack down on companies that bribe foreign officials to get lucrative contracts abroad, a watchdog group reported. But most of the 39 countries that joined the crackdown did nothing or not enough to stop corruption in international business transactions last year, according to a report.

“Pay to Play? Survey Shows Increased Risks of Bribery, Corruption”: An erosion of ethical standards amongst decision-makers leaves companies increasingly vulnerable to corruption, a new fraud report shows.

“Bridging the Ethical Divide”: More organisations are voicing a commitment to ethical performance, but their proclamations do not appear to be matched by action – a disconnect that is emerging as financial professionals are facing more pressure to act unethically.

—Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.