Fighting bribery and corruption is one of the biggest challenges facing businesses today. In a changing regulatory landscape, and with third-party risks rising, our recent webinar looked in detail at how organizations can protect themselves.
- A recent Refinitiv webinar – “Is bribery and corruption common business practice?” – highlighted the best approach for fighting bribery and corruption.
- With regulators no longer working in isolation, the webinar also considered the fall-out for a company involved in bribery and corruption allegations.
- Fighting bribery and corruption requires organizations to spot red flags on third-party risk and to use technology and collaboration as part of an effective ABC program.
Not only are regulators imposing hefty fines on organizations for any involvement in bribery and corruption, the risk of personal liability for directors and employees in key roles is also increasing.
Moreover, the future viability of a corporate involved in an investigation can be called into question.
Our recent webinar – “Is bribery and corruption common practice?” – examined the regulatory landscape and how organizations can best protect themselves by fighting bribery and corruption.
The speakers were Ruby Hamid, Counsel – Disputes, Litigation and Arbitration at Freshfields; Daniel Thelesklaf, Director, Financial Intelligence Unit at Principality of Liechtenstein; and James Swenson, Global Head of Proposition for Risk Managed Services at Refinitiv.
The webinar considered the wide variety of potential fall-outs for a company involved in bribery and corruption allegations. These include:
- A pronounced negative share price impact, often as soon as an investigation is announced.
- The withdrawal of lines of credit from banks.
- A significant drop in staff morale, which can be very difficult to reverse.
A changing regulatory landscape
Despite these potential consequences, the True Cost of Financial Crime survey, commissioned by Refinitiv in early 2018, revealed that 92 percent of respondents believe bribery and corruption is common practice in business.
Moreover, the complexity of corruption cases is increasing as criminals are seeking to ‘muddy the waters’, often engaging in cross-border activities that can involve up to 15 or 20 jurisdictions, and adding layers of company structures in an attempt to prevent regulators from forming a holistic view of individual cases.
To counter this, a coordinated, global prosecution response now exists, with regulators no longer working in silos within the boundaries of their jurisdictions.
Some recent key enforcement trends include:
- A significant number of investigations now underway outside of the United States, in contrast to the situation three to five years ago.
- Strengthening anti-bribery laws and enforcement in many parts of Latin America, including in Argentina, Mexico and Brazil.
- The growing popularity of the ‘failure to prevent’ model, which puts the spotlight firmly on the requirement for organizations to have rigorous anti-bribery and corruption (ABC) compliance procedures in place, rather than simply concentrating on conduct.
A focus on third-party risk
Considering that 96 percent of FCPA investigations from 2005 to 2016 involved third parties, this is an area that organizations should focus on.
However, the definition of a third party is broad and it can be a real challenge for organizations to extend controls and procedures to cover all parties that fall under this umbrella term.
When assessing third-party risk, the point of departure is that there must be a commercial justification for engaging a third party. Some common red flags to be aware of include:
- Sham consultancy contracts, where the value provided (often by a fake third party) is not clear.
- Fake invoicing, which can generate illicit funds to support corruption.
- Over-priced contracts or unreasonable commissions that cannot be justified.
Putting ABC controls in place
There are many pillars that must be considered when building an effective ABC program, but risk assessment and due diligence are of particular importance.
Effective risk assessment helps to identify areas of higher risk and should include assessing country risk (certain jurisdictions present an inherently higher risk); industry risk; and political exposure.
Applying consistent risk assessment techniques allows third parties to be ranked as high, medium or low risk. This will determine the level of due diligence that should be applied, moving from basic to enhanced, before taking a decision as to whether to onboard a particular third party.
Advances in technology
Businesses are under enormous pressure, and often find themselves having to make decisions and onboard at speed, while simultaneously needing to analyze volumes of available data on any particular third party.
Advances in technology can help in the big data arena and can be harnessed to streamline processes and automate certain aspects of risk assessment.
For example, APIs and data feeds can be imported directly into workflows and automatically flag higher risk situations. Similarly, automation can help with the ongoing monitoring of relationships, with users receiving alerts if anything material changes.
It is, however, crucial to remember the importance of the human element in the risk mitigation equation.
Technology offers the tools to augment intelligence, cut through noise, and enhance efficiency. However, it can never replace human judgement, which is shaped by ethical standards and the right culture of compliance.
United in fighting bribery and corruption
On a macro level, collaboration and the sharing of information can offer significant benefits if governments, regulators and individual firms work together to tackle corruption.
On an organizational level, screening and conducting due diligence on third parties remains every compliance department’s best defense against risk, but insufficiencies must be remedied.
Analysis of feedback reveals that 41 percent of those who completed our survey have never screened their third-party vendors, suppliers or partners. Plugging these gaps by building an effective ABC program is essential if organizations are to be successful in fighting bribery and corruption.