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Anti-Corruption Efforts Must Incorporate These Three Themes
There are many steps companies must take to avoid the myriad short- and long-term ramifications of corruption in global business— ramifications such as the DOJ and SEC fines and penalties that totaled $2.45 billion during the 24 months of 2010 and 2011.
According to a recent report by Sherman & Sterling, while enforcement activity dropped from 2010 to 2011, and the dollars collected by DOJ and SEC fell from $1.2 billion in 2010 to $652 million in 2011 (also see the FCPAProfessor.com), last year was an “eventful” one for the FCPA. Among the trends they cite are the expanded interpretation of what constitutes an “instrumentality” of a foreign government to include state-owned entities indirectly controlled by a foreign government, and both the DOJ’s and SEC’s continued focus on prosecuting individuals.
The activity and amount of money eventually collected do not tell the whole story, however, just like a defense verdict in litigation does not mean a company skipped happily through a lawsuit without a mark.
“Repercussions are often felt long before the charging documents have been drafted,” attorneys at Fried Frank said in a recent client memorandum.
“The investigations, both an internal investigation by counsel and the official investigations by the U.S. and foreign authorities, can be extremely time consuming and often result in distractions within the company. The scope of those investigations can be staggering—multiple geographies, business units, languages, and accounting systems—and the costs of counsel, forensic accountants, and other consultants are not insignificant. Moreover,” the Fried Frank memo continues, “while government investigations are conducted non-publicly, leaks to the media are not uncommon, and, under certain circumstances, public companies may be required to disclose the existence of the investigation in their public filings.”
The steps companies must take are many, but our review of commentary from experts revealed three themes that make the top of any best practices list: 1) continually collect and analyze business data; 2) take a proactive approach to ensure compliance and reporting by employees; and 3) make sure your company’s suppliers and vendors are operating within the rules.
Principled Performance: What You Should Know
Carole Switzer, president of OCEG, a non-profit think tank that develops standards and guidance to help organizations achieve what they have termed “principled performance,” pointed to the importance of making sure you know with whom you are working. In an article she wrote for a series in Compliance Week, she started off with this advice: “Want to know one of the surest ways to strengthen your organization’s anti-corruption capabilities? Start by discovering what you do not understand about the third parties who help you do business abroad.”
Studies have confirmed that the vast majority of FCPA investigations involve payments made by third parties, Switzer says. The definition of what your company “knows” can be expanded for you by governments if the corporation does not learn more about its business partners. That can mean criminal liability, substantial fines and a shredded reputation.
Switzer says maintaining anti-corruption analytics about third parties can provide actionable information your company can use to reduce risk. “By collecting and analyzing such data, following a rigorous risk assessment and third-party selection process, and establishing ongoing third-party controls and monitoring; compliance and risk managers can tame the due diligence data deluge.” She says these best practices help executives “continually understand what they should know.”
One-Fifth of Global Business is Lost Due to Corruption
Self-monitoring is increasingly encouraged— and acceptable by the government, too. The Sherman & Sterling report said that in 2011 the DOJ and the SEC “almost completely withdrew from their prior practice of routinely requiring an independent monitor in all cases and demonstrated a willingness to accept various forms of self-monitoring.”
What type of information should companies analyze and understand? Switzer advises companies tackling corruption risk to look at factors such as where you are conducting business, the nature of your business, and with whom you have relationships overseas.
It is important to know how your company obtains new business, she advises, as well as how it keeps business. Corruption plays an all-too-significant role in retention of business globally. Transparency International says that 20% of all business today is lost due to bribery and corruption with some 40% of executives polled saying they have been offered bribes relating to public institutions. “You should evaluate and then rank these risks based upon your company’s risk appetite and be prepared to respond to internal or external forces that might change this risk assessment,” Switzer wrote in her Compliance Week series.
The Guide to Bribe Payers
When examining the relative risk of where business is conducted, companies will want to consult Transparency International’s Bribe Payers Indexi. The 2011 index ranks 28 of the world’s largest economies according to the perceived likelihood that companies from these countries will pay bribes abroad.
Among the findings of the 2011 report— the fifth from Transparency International— is that bribery between companies is just as common as it is between companies and public officials. It says the rate of bribery on average across countries and business sectors has not changed since 2008. Importantly, it concludes that companies from China and Russia are most likely to pay bribes.
“The growing importance of China and Russia in international trade and investment flows makes the need for them to address foreign bribery and corruption globally an urgent one.” Mexico and Indonesia follow China and Russia on the “most likely” list.
The countries with the best scores are The Netherlands, Switzerland, Belgium, Germany and Japan. The United States is ranked at #10 right behind the U.K., Singapore, Canada and Australia.
Taking a broader view, the organization sums up the harms created by corruption this way: “Foreign bribery has significant adverse effects on public well-being around the world. It distorts the fair awarding of contracts, reduces the quality of basic public services, limits opportunities to develop a competitive private sector and undermines trust in public institutions. Engaging in bribery also creates instability for companies themselves and presents ever-growing reputational and financial risks. This is particularly relevant in light of recent anti-bribery reforms in a number of key countries around the world, such as in China and the United Kingdom.”
Supporting the themes of proactivity, data collection and analysis, and close attention to third-party business relationships, Transparency International recommends that companies’ anti-corruption policies should be verified by third parties and meet international standards. Corporate transfers made to governments and local communities must be reported country by country, and political contributions must be made at the board level in consultation with shareholders.
Whistleblowers, Internal Audits and Luck
The organization advises companies to “take the fight against corruption” by assessing their entire supply chains, evaluating prospective contractors and suppliers, and by empowering whistleblowers.
Proactively empowering whistleblowers is a concept that is supported by data provided by the Association of Certified Fraud Examiners. In the past only 14% of detected corruption has been found by internal audit.
Adding that 45% of fraud activities are reported by tip or by accident, Ernst & Young’s Jared D. Crafton, Senior Manager Fraud Investigation & Dispute Services, says traditional internal audit tests are not effective in identifying high-risk transactions that may indicate the presence of bribery and corruption. Like Switzer, Crafton pointed to new approaches to data analytics that integrate statistical analysis, anomaly detection, data visualization and text mining to detect bribery and corruption at an early stage.
Sharing his insights during a recent OCEG Webinar, Crafton said many companies have good response plans, but proactivity is lacking. “Companies are not doing enough to ensure that the policies they are putting in place are actually being followed. The more resources they put in the proactive space the less reactive incidents they will have,” Crafton said. “The reactive incidents are prohibitively expensive.”
Text Mining: Connecting Phrases to Disbursements
As a specific example, Crafton said companies should employ text mining, as opposed to keyword searching which is limited to what terms you select and therefore will not expose new and emerging phrases that might signal corruption. Text mining will reveal the frequency of various phrases, and do not depend on anyone anticipating potential red-flag language.
During the OCEG Webinar Crafton showed a report where the phrase “volume contract facilitation” appeared often. Other phrases in his example included combinations like “release expense” and “sponsorship to congress.” When you compare these phrases to the disbursements you can see how much money went out the door relating to those phrases, he explained. A dashboard he used illustrated how data visualization helps identify potential problem activity. (Note: the complete recording of this and other Webinars are online at the OCEG website: http://www.oceg.org/event/analytics.)
The proactivity theme is behind the 15th International Anti-Corruption Conference scheduled to take place in Brasília, Brazil, in November 2012, titled “Mobilizing People: Connecting Agents of Change.” The organization, which is encouraging attendees to “be part of the solution,” is expected to draw more than 1,500 individuals and leaders from the public and private sectors, investigative journalists, law enforcement professionals, activists, academics, and many others. The IACC expects 135 countries will be represented— a truly global and proactive gathering.