How boards can bolster multinationals’ anti-corruption defences

Many boards don’t fully understand the fraud, bribery, and corruption risks their multinational companies face as regulatory scrutiny and enforcement worldwide are intensifying to tackle new threats and persistent misconduct, according to EY research that involved more than 2,800 executives in 62 countries.

Risks increased in developed markets and remained high in emerging economies, respondents participating in EY’s 2016 poll suggested. Twenty-one per cent reported widespread bribery and corrupt practices in developed markets, up from 17% two years ago. In emerging markets, about half (51%) reported prevalence of such behaviour compared to 53% in 2014.

Unethical behaviour and misconduct included intentionally misstating financial performance, using bribes to win or retain business, and backdating contracts. Thirty-six per cent of CFOs participating in the survey said they were willing to justify such inappropriate conduct under pressure, for example, to meet financial targets during a downturn. Risks also included new threats to finance such as attempts by foreign terrorist organisations to use a multinational’s third party as conduit to fund operations.

Enforcement of anti-corruption and anti-bribery laws also increased. The G20, the international organisation made up of 20 of the world’s largest economies, has stepped up the fight against the abuse of legal and corporate structures to hide or conceal criminal activity. As a result, national governments co-operate more to investigate bribes and tax evasion across borders.

But boards aren’t keeping up with developments. Almost half of the executives participating in EY’s global fraud survey said they did not believe boards had adequate understanding of the specific risks their businesses face.

“In this context, boards and executives need to be confident that their businesses comply with rapidly changing laws and regulations wherever they operate,” David Stulb, the global leader of EY’s Fraud Investigation & Dispute Services practice, wrote in the foreword to the survey.

To bolster defences against fraud, bribery, and corruption, boards should ensure companies:

Apply anti-corruption compliance programmes. Adequately resource compliance and investigations functions to ensure they can proactively engage before regulators take action. Eighty-four per cent of respondents said they thought the board was giving the correct level of attention to fraud, bribery, and corruption risks, but 49% believed board members needed to better understand the business to effectively safeguard against these risks.

Undertake appropriate due diligence on third parties before entering into business partnerships. Business partnerships, either in mergers and acquisitions, joint ventures, or the supply chain, can introduce additional risks for which regulators increasingly tend to hold companies responsible. Unfortunately, the EY survey suggests companies decreased their due diligence in the past two years. For example, 36% of companies reduced their due diligence for country-specific risks in 2016, compared to 27% in 2014; 29% did fewer assessments of anti-corruption policies, compared to 22% in 2014; and 27% reduced their due diligence for industry-specific risks, compared to 17% in 2014.

Also, identifying and mitigating fraud, bribery, and corruption can help businesses make decisions about an investment. Over half of the companies that exited investments in Africa, Brazil, China, Eastern Europe, or India said fraud, bribery, and corruption risks were contributing factors. Still, one in five respondents participating in the survey said they did not include third parties in their anti-corruption due diligence, and one in three respondents said they did not assess country- or industry-specific risks before an investment.

Encourage and support whistleblowers to come forward. Fraud, bribery, and corruption are frequently exposed by whistleblowers. Recognising that fact, regulators are adopting new tools to support and encourage individuals to come forward. For example, the US Securities and Exchange Commission has awarded more than $54 million to 22 whistleblowers from 2011 to 2015.

More than half (55%) of the companies participating in the EY survey had whistleblower hotlines in place, but loyalty to colleagues or the company can be a deterrent to reporting fraud, bribery, or corruption. Such loyalties tend to be strongest in emerging markets; 24% of respondents cited loyalty to their company as a factor in keeping silent.

Set the right tone at the top. Boards’ corporate governance responsibility is not only tasked by the significant minority of executives willing to justify unethical behaviour and misconduct under pressure, but also by evolving external risks and support to hold board members accountable for fraud, bribery, or corruption that happens under their watch.

Survey results suggest that, for example, finance teams do not appreciate the extent to which cybercrime poses a threat. Only 41% of CFOs participating in the poll viewed it as a concern. However, 83% of respondents supported prosecution of individual executives to help deter misconduct, which can place more pressure on boards to protect the independence of their companies’ compliance and investigations function.

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