Business ethics and anti-corruption regulation and enforcement are at the forefront of the issues facing all businesses today. Companies need to prepare themselves to account for the effectiveness of their anti-corruption initiatives. The necessity for accountability applies primarily in their relationships with national and international regulators and secondly in their dealings with customers, shareholders and political stakeholders. Companies cannot expect to retain its social license to operate, or the confidence of its financial bankers, if it fails to address bribery risks.
With this background, Control Risks which is an independent, global risk consultancy specialising in helping organisations manage political, integrity and security risks in complex and hostile environments, commissioned an international survey of 638 companies operating across the world. The key questions of the survey were: are companies ready for the challenges that they face in today’s compliance environment? Are they prepared to account for their anti-corruption agenda?
WHAT DOES SURVEY SAYS?
Critical Risks, an independent global risk consultancy conducted a survey in June and July 2014 on anti-corruption practices being adopted by the organizations of various countries. A total of 638 respondents were surveyed, of which over half (56%) were Chief Legal Officers, General Counsels, or executive level in-house counsel. 9.5% were lawyers from private practice and the remainder included: Directors/Heads of Compliance, Heads of Risk, Heads of Audit and Company Secretaries. The respondents represented a range of business sectors, including professional services (23%); financial services (15%); manufacturing (14%); oil, gas and mining (12%); IT and technology (11%); construction and real estate (7%); and telecoms (6%). Country wise breakdown shows Europe as the best-represented region, with 31.5% of respondents working for organisations headquartered there, followed by Asia/Pacific (23.5%), North America (21.3%), Latin America (14.1%), the Middle East (6.9%) and Africa (4.4%). The best-represented individual countries were the US (107 companies with US headquarters) and the UK (96 companies with UK headquarters). The respondents also included significant numbers from the emerging economies of China (51), Brazil (46), Mexico (44) and India (29).
The survey findings showed a disconnect between what head offices of the organizations believe about the adequacy and effectiveness of their anti-corruption programme and what actually happens in the higher risk markets. As per the responses of the survey anti-corruption compliance, included companies divided into: those who mean it, and those who don’t. The survey highlighted that many organizations had glossy compliance programme, with all the policies, procedures and contracts in place; however, they often represented no more than a check-the-box approach to compliance. Those who really mean it usually must have additional measures in place: there should be board level leadership and responsibility, strong and consistent messages communicated to staff; and penalties for breaches. Most importantly of all, there should be an appreciation to the organizations for robust and meaningful anti-corruption programmes which go beyond simple legal compliance. Companies should infuse strong ethical values in the decision-making process, and allow the employees and business partners to perceive the company’s compliance strategy.
To the response on whether companies expected to conduct an anti-corruption investigation of an employee in the next two years, more than two thirds thought that this was “very unlikely” (44.2% of the total), or “somewhat unlikely” (23.4%). Only 8.2% thought an employee investigation was “almost certain” in the two-year time frame. This was in spite of the fact that – as revealed by a follow-up question – more than half of the respondents (56.6%) had in fact conducted an internal anti-corruption investigation in the past two years. Typically, these were triggered by reports from internal whistle blowers (32.6%), findings from audits (32.4%) and reports from external whistle blowers (16.5%). According to critical risks, Compliance specialists need to be constantly probing – and following up on – apparent anomalies in their companies’ programmes, an internal enquiry should not be seen as an exceptional event, but rather as evidence of the active engagement needed to prevent an aggressive demand from a government regulator. The survey cited an example of the global firm GSK which has a sophisticated compliance programme which actively promotes ethical behaviour and corporate responsibility, and due diligence initiatives to ensure compliance with anti-corruption regulations around the world.
The survey also showed the organizations failure to follow- up policies and procedures. The majority (87.9%) had company policies explicitly forbidding bribes to secure contracts; however, they were still weak on essential follow-up measures. For example, only just over half of the respondents (50.2%) reported that their companies had anti-bribery and anti-corruption training programmes for all employees; and less than a third (30.9%) had training programmes for selected groups of employees, e.g. those operating in high-risk functions such as sales. The survey highlighted that many companies are good at talking about principles and not all of them were able to demonstrate the principles into practice.
WHAT DO COMPANIES REQUIRE?
The companies require:
Willingness to resist bribery
Strong leadership is crucial. Yet, less than half (47.5%) of companies represented in the survey have board directors, or board-level compliance committees, with specific responsibility for anti-corruption. Leadership includes providing compliance teams with the support that they need. 37.9% of the global sample reported that their companies were investing additional resources in mitigating anti-bribery and anti-corruption risks; however, a significant proportion 17.4% reported that they needed to increase their compliance budgets, but faced budgetary constraints. Of the UK-headquartered companies, 45% of respondents reported that their companies are increasing spending on anti-corruption compliance, as are 54% of Brazilian companies. In the UK’s case, this may reflect the continuing influence of the UK Bribery Act, which came into force in 2011. The relatively high Brazilian investment in compliance no doubt points to the impact of the Clean Companies Act which came into force in early 2014. By contrast, only 17% of Indian companies are increasing investment in compliance inspite of the New Companies Act bill of 2013.
The second key requirement is consistency, both in messaging and in action. Only 56% of the respondent companies had whistle blowing lines and the remaining 44% of companies may be tempted to take their grievances outside to the regulators or to the media rather than first raising their concerns internally. 64% of respondents included standard ‘no bribe’ clauses in their contracts with sub-contractors, agents and other business partners; however, a rather smaller proportion 58.3% conducted integrity due diligence on potential new business partners.
WILLINGNESS TO RESIST BRIBERY
The third requirement is a willingness to resist bribery, even in or especially in high-risk environments. The respondents were prominently robust in their views on what they would do if they lose business to a corrupt competitor; 39.3% said they would try to gather evidence with a view to taking legal action; and almost as many 37.8% said they would report the incident to the police or the regulatory authorities. This robustness is encouraging as it points to increased confidence in anti-corruption legal regimes. On a routine, day-to-day level 16.2% “agree” or “strongly agree” with the statement that so-called facilitation payments – small payments to speed up legitimate government transactions are “essential to keep their business going”. Respondents from India (27.5%) were most likely to take, closely followed by their counterparts in Mexico 25.5% and China 24.6%.
ACCOUNTABILITY: THE HEART OF ANTI-CORRUPTION AGENDA
Internal and external accountability are at the heart of the anti-corruption agenda, and this in turn implies both willingness and an ability to follow up on any evidence of malpractice. With this in thought, respondents were asked whether they expect to conduct an investigation concerning suspected violations of anti-bribery laws in the next two years. The findings suggest that the respondents are less prepared and less proactive than they should be.
Overall, more than two thirds (67.6%) of respondents thought that it is “somewhat unlikely” or “very unlikely” that they will need to conduct an anti-bribery investigation concerning an employee in the next two years.
Brazil-based companies were the most likely to investigate an employee: 25% thought that it was “somewhat” or “very likely” to happen, and this is undoubtedly a response to the tighter compliance environment in the wake of Brazil’s Clean Company Act, which came into force in early 2014. The US came next with 19.6% of respondents taking a similar view which is a reflection of tight FCPA enforcement. By contrast, only 9.2% of Mexican companies thought that they would “likely” investigate an employee which in the current compliance environment is a credible percentage.
THE THIRD PARTIES
We asked a similar question about investigations of third parties, an important point Because of the majority of high-profile corruption cases involving bribes paid via intermediaries such as commercial agents or consultants the respondents were asked about their view on the investigations of third parties. More than half of the respondents thought that an investigation of a third party was either “very unlikely” (27.6%) or “somewhat unlikely”. This response suggested the need to be more proactive.
On the grounds of commercial efficiency as well as compliance Critical Risks was of the opinion that Compliance teams need to be constantly curious about what these third party people actually do, do they provide legitimate service for an appropriate fee, and why exactly does the company employ third party.
INTERNAL INVESTIGATIONS: WHISTLE BLOWER RISE
The respondents when asked whether they had conducted an internal investigation concerning suspected corruption or fraud in the past two years, more than two fifths (43.4%) said that they had not conducted an investigation at all and 66.6%, were over-optimistic in their response. They evidently expected neither a report from an internal whistleblower nor an enquiry from a regulator. By company headquarters US showed the majority (39.3%) for conducting an investigation in response to a report by an internal whistle blower in the last two years and the least being Mexico with 15.9%
EXTERNAL WHISTLE BLOWERS
The external whistle blowers are different. Examples may include rival companies who suspect malpractice on a competitive bid, or tip offs from concerned citizens. In other cases, it may be motivated by a desire for revenge by a former employee, or even a former spouse. By company headquarters Europe showed the majority with 20% of companies conducting an investigation as a result of requirement from external whistle blower in the last two years and the least being Mexico 9.1%
AUDITS AND BENCH MARKING EXERCISES
Audits and bench marking exercises are examples of proactive anti-corruption initiatives on the part of the company. A high level of activity in the US reflects the tighter enforcement environment and Brazil and India also stand out in this regard. Both countries are relatively high-risk and it appeared from the findings that company managers in these countries are responding by imposing tighter audit controls.
RESPONDING TO THE REGULATOR
In the US and the UK particularly, regulators are becoming more proactive in challenging companies to demonstrate that they have effective internal controls, as well as pursuing specific violations. The high response from those in India may be attributed to the Companies Act 2013 which encourages corporate self-reporting and disclosures. The Act gives executives the primary responsibility for detecting and preventing internal fraud, thus making Indian companies more proactive and reliable than before.
CROSS-BORDER INVESTIGATIONS CHALLENGES
69.5% of the respondents were found to be dealing with local protection laws. China is a particular case in point because what might be considered open economic information in other countries is often regarded as a ‘state secret’ in this country. Even being in possession of such data can be incriminating, and transferring it out of the country – even to Hong Kong or Macau – can bring massive fines or worse. More than two thirds of respondents thought that the time companies spend on adhering to global data protection laws would increase “significantly” (39%) or “a lot” (39%) in the next two years. On a similar note, there was a clear view that the requirement to move data across country borders as a result of a corruption-related investigation would increase. However, 28.7% thought that the challenges of doing so would increase “significantly”, while 40.8% thought that they would increase “a little”
THE COMPANY’S DEFENCES – ANTI-CORRUPTION COMPLIANCE
If companies come under regulatory scrutiny, they are best placed to defend themselves if they can point to well-designed compliance programmes. The survey showed that anti-corruption is firmly placed on the international corporate agenda along with significant gaps.
SPENDING ON ANTI-CORRUPTION COMPLIANCE
55% of the respondents wanted to increase investment, but 17.4% of the total samples were unable to do so because they face budgetary constraints By contrast, 44.7% of respondents were satisfied with their existing programmes. Brazil stood first because of the impact of the Clean Company Act. Similarly, more than 40% of Mexican companies increased spending on compliance: this reflects the impact of recent international anti-money laundering and FCPA cases rather than domestic legislation. By contrast only 17% of Indian companies in the survey were increasing investment. Despite the advent of India’s new Companies Act, enforcement levels remained low as per the survey done.
As per the survey most of the companies ban bribes to secure business, only 66% ban so-called “facilitation payments” – small bribes to speed up governmental transactions such as customs clearances that are both routine and legitimate. This inconsistency reflects legal differences as well as the practical challenges of resisting demands for such payments. 85.4% of UK companies ban facilitation payments. Despite the FCPA exception, nearly three quarters (73.8%) of their US counterparts take the same stance; however, demands for small “grease payments” are a common part of everyday life in many emerging markets, and this is reflected in the fact that companies from Brazil, Mexico, India and China are less likely to ban facilitation payments.
WHAT DO COMPANIES LACK
LACK OF LEADERSHIP
Without clear leadership from the top of a company, no policies however well drafted are likely to be effective. The respondents were asked if their companies had a board director or compliance committee with specific responsibility for anti-corruption. UK (64.6%), US (57.9%) and Brazil (54.3%) had in place the board director /or board compliance committees with specific responsibility for anti-corruption in place.
THIRD PARTY CHECKS NOT ADEQUATE
Companies are expected to ensure that mediators do not pay bribes on their behalf. The survey suggested that the message is still being imperfectly understood. Nearly two thirds (63.5%) of the global sample include “no bribes” clauses.
With regard to due diligence 58.3% had procedures for integrity, due diligence on new business partners.
ANTI-CORRUPTION RISK ASSESSMENT PROCEDURES WHEN ENTERING NEW MARKETS
Overall, only 38.2% of companies have anti-corruption risk assessment procedures in place when entering new countries. As per the survey the percentage number of companies should be considerably higher if companies want to protect themselves from corruption.
Almost exactly half (50.2%) of the global sample have anti-corruption training programmes for all employees. By contrast, less than a third (30.9%) have programmes for selected groups of employees such as board directors, or executives in sales departments and other high-risk functions. These figures are far too low. By failing to introduce proper training programmes, companies are leaving themselves and their employees far too exposed.
INTERNAL COMMUNICATIONS AND WHISTLEBLOWER LINES
More than half (56%) of the respondents had confidential whistle blowing lines where employees can raise concerns about suspected bribery and corruption. The proportion is highest in the UK (83.3%), and lowest in China (33%).
IMPLEMENTATION CHALLENGES AND TACKLING ISSUES IN HIGH-RISK ENVIRONMENTS
Almost 40% identified responding to the crisis that follows an investigation as a key challenge. For response on anti-corruption investments 17.4% respondents showed that budgetary constraints were preventing them from making the anti-corruption investments that they need.
50.7% respondents mentioned ensuring compliance with laws and regulations in all countries as the major challenging external anti-corruption and compliance issue along with 46.2% respondents stating that conducting effective due diligence on third parties, agents, JV partners as a external challenge and 37.8% responded that Entering markets where corruption is endemic as a external challenge.
RISK AND OPPORTUNITY
For the response on corruption risks Africa (54.5%) topped the list followed by China (53.5%), while Japan (7.4%) and the western industrialised economies come last.
HOW DOES THE SURVEY MAKES A DIFFERENCE
The survey conducted by Critical Risks argues that companies need to be prepared to be “called to account” on their anti-corruption agenda. If the companies want to guard their records and flourish in high-risk environments they need to demonstrate consistency in resisting small bribes as well as larger ones.