Don’t let corruption bite your bottom line

Payment of bribes is considered a big problem by a majority of Latin Americans, according to research by watchdog group Transparency International.

Rampant corruption raises costs and risks for companies. Keeping a tight rein on suppliers, employing experienced consultants, and rigorously training staff are just a few ways companies can cut their corruption risk and limit damage to both their reputation and bottom line, finance professionals experienced in working in the region suggested.

“We all know Latin America is a risky area in terms of corruption; it’s part of the culture,” said Thibaut Ternynck, the CFO at Italian eyewear maker Safilo’s Brazilian subsidiary. “Consultants, lawyers, it’s an investment you need to be ready to make.”

In its 2019 Global Corruption Barometer for Latin America and the Caribbean, Transparency International found that 53% of more than 17,000 respondents in 18 countries think graft rose over the last year, despite growing pressure to cut corruption.

In Mexico, where President Andrés Manuel López Obrador took power on an anti-graft pledge, 44% thought corruption was higher. In crisis-hit Venezuela it was 87% of respondents. It was 54% in Brazil in the wake of the “Operation Car Wash” crackdown that sent dozens of high-ranking politicians and executives to jail for their role in a sprawling corruption scandal.

While politicians are seen as the most crooked, an average 37% of respondents thought business executives were corrupt. Respondents in several Latin American countries said corruption is on the rise amongst business executives. In Brazil, 50% of respondents said business executives are corrupt, up from 35% in 2017. In Argentina, it was 47%, up from 38%, and in Colombia it was 36%, up from 25%.

Pinpointing corruption risks

If companies operating in the region are to stem their exposure to corruption risk, they need to first identify their weakest links and then find ways to mitigate any damage, finance professionals said.

Tight legislation and high fines spurred an anti-money-laundering crackdown in Mexico’s banking sector, said Ankit Sharma, ACMA, CGMA, a senior manager at PwC’s Strategy& in Mexico City who specialises in financial services.

Many banks have strong internal policies designed to root out corruption risk and have taken a strong line on avoiding issues such as conflicts of interest when it comes to dealing with third parties, he said. Some are putting limits on gifts and publishing salaries, which could stop senior executives from elevating family and friends to highly paid board positions.

But there’s still some ground to cover, Sharma said. Currently, most banks are investing to implement the latest technologies to harvest and analyse relevant data, recruit qualified staff to identify and tackle corruption, and find better ways to drive innovation and incentivise their staff to root out corruption, he added.

“Banks in Mexico lack the level of maturity we see in other developed countries, as in multiple cases they do not possess the right combination of tools and skills to manage this,” he said.

Mexico’s second-tier banks could be more at risk, he said. The international banks have the backing of their international counterparts and have demonstrated better policies and procedures to tackle corruption risk.

In Brazil, the country’s labyrinthine taxation system is an obvious area where indirect corruption risk can seep in, Ternynck said.

In a typical government tax audit, companies might be threatened with hefty fines for apparently not following the rules correctly, he said. But instead of asking outright for a bribe, an official might refer them to a “cousin’s” consultancy that then charges outrageously high fees to “fix” the problem.

Steps to avoid corruption traps

Taking steps to avoid these traps can be costly, said Ternynck, adding that CFOs need to know their markets and benchmark themselves against similar companies. Being well prepared, using experienced lawyers to defend against any allegations, and enlisting specialist consultants experienced at dealing with companies in similar sectors are among the best ways to deal with the situation, he said.

“It takes time and money, but this is the way we behave, we don’t accept it,” said Ternynck. “What we’re doing is choosing transparency.”

Closing any loopholes in the extended supply chain is also vitally important for the company, which imports its high-end, branded eyewear into Brazil, he said.

He suggests that companies set up detailed contracts with third parties to define clear scope and costs, ask for references, and visit their businesses to get a better understanding of their costs and operations.

“Don’t panic,” he said he tells executives if they find themselves potentially exposed to corruption, and draw on personal and business networks for support.

In Mexico, Sharma advises clients to invest in training across the board to ensure all staff have an ethical approach and know how to identify corruption risks.

“It starts from the bottom, so if you train people working on the ground, it helps,” said Sharma. “Senior leadership has to understand that this is something that creates a culture in an organisation and can have potential reputational risks in the long run.”

— Sophie Hares is a freelance writer based in Mexico. To comment on this article or to suggest an idea for another article, contact Sabine Vollmer, an FM magazine senior editor, at Sabine.Vollmer@aicpa-cima.com.