The intersection of several trends is pushing the topic of corruption risk into an increasing number of board rooms.
As more and more companies of all sizes invest in doing business abroad, regulators in many parts of the world have increased enforcement of anti-corruption laws, research by watchdog group TRACE showed.
Meanwhile corruption – or the perception of corruption – appears to be on the rise. More than one in four people around the world reported having paid a bribe in the previous year when interacting with key public institutions and services, according to Transparency International’s Global Corruption Barometer 2013. Fifty-three per cent of respondents in the Barometer surveys thought corruption had increased a lot over the past two years.
Bribery allegations levelled this month at drugmaker GlaxoSmithKline by Chinese authorities have sparked questions about whether China is stepping up enforcement against foreign companies and/or corruption in general in its health-care sector.
Paul Solomon, a litigator with the law firm Skadden’s government enforcement and white collar crime group in Washington, D.C., said the most frequent troubles companies have experienced under the US Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act involve corruption charges related to third parties, such as distributors, sales agents, intermediaries or suppliers, particularly in developing economies.
“That’s where you run into a lot of the difficulties, especially when you have no prior history with the third party,” he said.
To safeguard against becoming embroiled in a corruption case, Solomon suggested companies doing business abroad follow three steps:
1. Develop and monitor compliance with internal controls. Comprehensive policies and guidelines offer companies a way to minimise corruption risks. Regulatory corruption investigations suggest that these internal controls and record-keeping procedures can be enhanced and fine-tuned by:
- Employing senior, qualified staff in the corporate compliance organisation.
- Establishing controls over promotional expenses, travel, entertainment, sponsorships and gifts and over regulatory relationships.
- Training employees and clearly conveying the company’s principles and policies. The depth of training should be based on business and geographic risks.
- Applying the parent company’s internal controls at subsidiaries and joint ventures and having someone at the parent company oversee compliance.
2. Perform rigorous due diligence. Even companies that have internal controls in place can have a difficult time checking out third-party business partners. Due-diligence techniques that can reduce corruption risks include:
- Conducting a thorough background check to ensure the third party is qualified and has a solid reputation for business integrity.
- Obtaining disclosures from the third party regarding any relationships with government officials.
- Communicating to the third party the company’s zero-tolerance policy for involvement in corrupt activity.
3. Look for red flags. Internal controls and due diligence are helpful tools to detect red flags. These warning signs of corruption risks tend to be more likely to appear in developing economies. Among the red flags companies should look out for:
- Excessive or unusual payment requests, such as payments to a third party, a foreign bank account or in cash.
- Any refusal or hesitancy by a third party to promise in writing to observe applicable anti-corruption laws.
- Monitoring closely payments to the third party to ensure that there are no cash payments, that commission percentages are reasonable and based on work performed and that receipts are available for all requested reimbursements.
- Vendor fees that are contingent upon the sale going through and the customer paying.
- Close relationships between the third party and a foreign official.
- Large payments for translating and preparing tender documents.
- A third party’s desire to keep the representation of the company or the terms of the retention secret.
Related CGMA Magazine content:
“Despite Exposure to Corruption Risk, Due Diligence on Third-Party Business Partners Remains Low”: All of the FCPA enforcement actions brought in 2011 by the DOJ and the SEC 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.
“Brush Up on Your Anti-Corruption Controls”: The DOJ and SEC released a 120-page guide providing a detailed analysis of the agencies’ approach to enforcement of the FCPA, which is designed to prevent bribery and corruption of foreign officials by companies seeking to gain a competitive business advantage.
“Six Best Practices for Combating Fraud and Corruption”: Pressure to generate growth in a challenging economic climate keeps many managers from addressing fraudulent and corrupt behaviour, especially in rapid-growth markets.
“Managing Fraud Risk: Preparing a Response Plan”: This snapshot of the CGMA report, Fraud Risk Management: A Guide to Good Practice, highlights how properly responding to fraud can make or break an organisation’s recovery from an incident.
—Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.
