Too many Australian, New Zealand companies face corruption risk with “blissful ignorance”

A bribery scandal involving the Reserve Bank of Australia was one of the most spectacular of a string of wake-up calls Australian and New Zealand companies received in the past three years that exposure to corruption has become a risk worth paying attention to.

Following a two-year investigation, Australian authorities in July 2011 cracked down on two banknote printing companies partly or fully owned by the Reserve Bank of Australia. Former executives and agents of the companies were arrested for allegedly offering or paying bribes to officials in Indonesia, Malaysia, Nepal and Vietnam in exchange for contracts to supply central banks, according to a case study by watchdog group Transparency International. Both companies and eight former executives were charged, and Australian lawmakers questioned Glenn Stevens, the Reserve Bank governor.

Board members and employees responsible for risk management at Australian and New Zealand companies show a worrisome lack of awareness of foreign and domestic anti-bribery laws, according to a Deloitte survey of 390 senior executives.

Forty-four per cent of the respondents who worked for companies with offshore operations had either limited or no working knowledge of applicable domestic or foreign anti-bribery laws, and 48% did not have a formal policy or compliance programme in place to manage corruption risk.

“There’s no excuse for not being aware,” said Frank O’Toole, a partner at Deloitte Forensic in Australia.

The bribery scandal involving the Reserve Bank of Australia has prompted many companies in Australia and New Zealand in the past 12 months to focus on their exposure risk to bribery, O’Toole said. “We are at the beginning of a shake-up, but there’s still a long way to go.”

Too many companies are still in “complete denial, [thinking] what we don’t know won’t hurt us,” he said.

Exposure risks have risen as more Australian and New Zealand companies do business in emerging markets in Asia, Africa, the Middle East and South America.

With companies worldwide increasingly looking for new business in emerging markets during the global financial crisis, the US ratcheted up enforcement of its 1977 Foreign Corrupt Practices Act, and the UK in 2010 passed the Bribery Act. Both laws can reach far beyond US and UK borders. For example, UK authorities can prosecute an Australian company doing business in the UK on bribery allegations that stem from mining operations the company has in Africa, according to Deloitte.

The Deloitte survey, which was the first of its kind conducted by Deloitte in Australia and New Zealand, reflects the rising awareness among a number of companies and the “blissful ignorance,” as O’Toole called it, among the majority of companies.

Nineteen per cent of companies with offshore operations reported that they encountered a corruption incident in the past five years. About half of the reported incidents occurred in the previous 12 months. Companies in the energy, manufacturing and financial services sectors reported 60% of the known incidents. The types of overseas business relationships most prone to encountering bribery incidents were joint ventures, office locations and subsidiaries.

Of the 79% of companies with offshore operations that reported no known corruption incidents, nearly half had never conducted a corruption risk assessment, and about one in five admitted to not discussing corruption risk at the management or board level, the survey found.

O’Toole said he expected attention to bribery risk to increase slowly among Australian and New Zealand companies, especially since Australian authorities have pledged to make bribery investigations a priority.

Transparency International acknowledged the increased enforcement of foreign and domestic anti-corruption laws in Australia in the past year, ranking the efforts as moderate.

To evaluate and upgrade their anti-corruption vigilance, Deloitte suggests companies:

• Gain a sound understanding of their regulatory obligations.

• Establish a strong and effective policy that clearly communicates from top and middle management that implementation and compliance with anti-bribery laws are essential.

• Assess their exposure to bribery risk, implement a compliance programme to prevent and detect bribery and train employees on anti-bribery policy and business ethics.

• Establish a whistleblower policy and procedure.

• Put basic controls into place to raise awareness, monitor compliance and ensure management commitment.

• Consider running data analytics to detect corruption flags, such as large petty cash movements or provisions of gifts, hospitality, travel or entertainment to foreign officials or their relatives.

• Conduct due diligence to determine whether a potential acquisition target or a consultant abroad poses a corruption risk.

Related CGMA content:
 
“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 launched 15 years ago have done nothing or not enough.

“Despite Exposure to Corruption Risk, Due Diligence on Third-Party Business Partners Remains Low”: Corporate due diligence and risk assessments on third-party business partners remain low even though all of the US 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.

“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 face more pressure to act unethically.

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