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The best line of defence

27 June 2017 by Tom Hollobone

Risk: The best line of defence - read more

An effective anti-corruption and bribery programme is vital to protect a company’s reputation

Kroll’s latest annual ‘Anti-Bribery and Corruption Benchmarking Report’ revealed a marked upshift in the importance of reputational risk. In this year’s survey, reputational concern has now become the top reason third parties fail to meet an organisation’s standards, overtaking dealing with sanctioned entities, involvement in opaque corporate structures, and exposure to politically exposed persons.

This increased concern around reputation is reflected in recent media reports. Consider GSK, which according to a December 2013 report in the Financial Times, suffered an estimated 60% decline in Chinese sales after it was accused of bribing doctors to promote its products in China.

Senior executives interviewed by business ethics firm Ethisphere as part of Kroll’s report discussed the impact such an event can have. Ricardo Turra, Global Director of Internal Audit at Votorantim Cimentos, Brazil’s largest cement company, concisely encapsulates the sentiment of many of the survey respondents: ‘Hours or days can destroy decades spent to create a great brand.’

The visible impact of reputational damage will no doubt have caught the eye of board members across the world, and is now driving an increased focus on anti-bribery and corruption measures from senior leadership teams, not just from risk teams and compliance officers.

Board members have broadened their vision; whereas once they focused primarily on regulatory risk, they now increasingly acknowledge that reputational risk is closely associated with the

board’s good standing and their organisation’s share price. Boards are starting to gain a greater appreciation of the input their role has in the success of their anti-corruption programme.

Board authority

‘The tone from the top’ has long been cited as a key component of a successful compliance programme – and with good reason. Boards decide how much focus and budget a programme will receive, and use their authority to drive home the types of behaviours the organisation will foster, or at least accept. Take this support away and the most able compliance teams will struggle to be effective.

In Kroll’s report, Kristen Ludgate, Chief Compliance Officer at 3M, noted the importance of the ‘tone in the middle’, which involves departmental and business unit management keeping a watchful eye on business practice at the local operational level. She adds: ‘Compliance doesn’t really happen at the centre of the company, it happens on the ground.’

Effective anti-corruption programmes, then, should do more than simply ensure regulatory compliance; they should enhance commercial practice. An organisation’s anti-corruption programme should move far beyond ‘box-ticking’ exercises for existing or potential third parties. It can help to identify issues that could materially affect the success of the business, such as conflicts of interest, business continuity problems, financial weakness, or potential legal disputes, along with a host of other issues.

Due diligence

In a recent example, an organisation entering a joint venture conducted due diligence, in line with its compliance programme, on a shipyard owner in Spain and a number of third parties. Although no bribery or corruption concerns were identified, the due diligence unearthed concerns about the financial management of the shipyard owner’s other businesses. Due to the unique location of the shipyard, it was not possible to find an alternative partner. The organisation pressed ahead, and armed with this information, was able to mitigate the risk by negotiating for control of the joint venture’s finance functions.

This example demonstrates how a well-conceived and implemented compliance programme can save the organisation from making the costly mistake of contracting with a bad partner or supplier, including the reputational damage and litigation risk, along with the internal fallout, including wasted time and the need to source an alternative.

Sell the programme internally

Kroll notices organisations increasingly tie-in their anti-corruption programmes to their wider corporate social responsibility initiatives. Many organisations now understand that embracing an anti-corruption programme not only requires management buy-in and compliance processes, but also a change in attitude in the way staff interact and what they understand to be acceptable behaviour.

Setting a positive, open, morally-responsible tone across a business creates an environment in which it is harder to undertake corrupt activity and in which detection and prevention are more achievable. Importantly, it is also evident in the way the business deals with its third parties, again setting the tone for how business should be conducted on its behalf.

The challenge for the board and for compliance officers is demonstrating the return on investment this ethical approach brings to the organisation, which is not always easy, unless they can either prove that a damaging event has been averted, or point to the costs of failure experienced by rival organisations that did not adopt this approach.

Prevention is always better than reaction and getting it wrong is costly. Fines imposed for breaches of anti-bribery legislation far outweigh the cost of an effective compliance programme – and this is before legal bills, the burden of remediation work, and lost opportunity costs while an organisation puts its house in order.

In November 2015, the US Department of Justice announced that French transportation company Alstom agreed to pay $772 million after it admitted bribing government officials in a number of countries. A damaged corporate reputation often has a real impact on the financial performance of an organisation and, for listed entities, on share price.

Ethisphere’s 2017 ‘World’s Most Ethical Companies’ ranking is one way to demonstrate the upside of successfully managing reputational risk. These publicly traded companies, with comprehensive corporate social responsibility and compliance programmes, outperformed the S&P 500 by 9.6% over the past four years, showing a clear link between ethics and performance.

Third-party risk

For those who do not feel they have an adequate or reasonable programme, the initial step is identifying the risk posed by counterparties, which can be established through risk-ranking. This can also be used to help plan a budget around the cost of implementing or improving a programme.

However, it is not uncommon for organisations to have fragmented data on their third parties spread over a number of systems, business units, and regions. This can be a result of acquisitions not being fully integrated, of regional differences, or simply of an organisation having outgrown its historical governance structure.

There is, however, one data set which will be available to every organisation – financial payment information. Regardless of other constraints and gaps, it is normally possible to access records of outgoing payments to third parties, usually capturing the nature of the goods or services provided, the payment amounts, and the countries where these payments are made. Reviewing this data can quickly give compliance officers a ‘snapshot’ of their organisation’s exposure to third parties.

Detecting suspicious activity

As well as helping to gather information about third parties, finance teams can offer a strong line of defence in detecting suspicious payments. 73% of respondents to Kroll’s survey said their CFO either had an active or supporting role in their anti-corruption programme. Preventing a suspicious payment can prove critical to avoiding bribery exposure.

From this point, the process can take a number of paths. Some organisations will choose to conduct basic due diligence to identify whether there are any references to bribery or corruption to indicate where to focus immediate attention. Some will move straight to distributing a third-party questionnaire to gain further risk-relevant information about the third party.

Best practice suggests organisations should also distribute their anti-bribery policies to their third parties, for them to acknowledge. Risk-scoring of the questionnaire can help to flag the higher-risk third parties and those with known issues.

Pilot the programme

The UK Ministry of Justice lists ‘a proportionate and risk-based approach’ to due diligence as one of the key principles of the UK Bribery Act, and this is likely to be a key factor in being able to demonstrate adequate procedures are in place.

This can, however, still seem a daunting and sometimes impossible task. The perception of an anti-corruption programme for the business can be as important as its content. Many organisations will choose to pilot their programme with a subset of their third parties, whether by business unit or geographically. Lessons learned from this pilot can be used to fine-tune the programme before a larger roll-out across a business.

The benefit for business managers is a well-oiled programme that has minimal impact on their processes, but which could prevent a bribery event from arising and protect the organisation from engaging with a questionable third party.

Above all else, each programme and policy must be tailor-made to fit individual organisations. A programme that is not bespoke may not focus on the key risks specific to that particular business and industry and may not be effective as a result. A programme that is not well-thought through and tailored to individual organisation also may not be well received or adopted by middle management, critical stakeholders for successful implementation.

Continued monitoring

More than half of respondents reported identifying issues with a third party after due diligence and onboarding. Of those, 40% believed the issue did not exist at the time of onboarding. Monitoring plays a key part in maintaining knowledge of an organisation’s third-party risk. As with risk-based due diligence, monitoring is one of the main principles of the UK Bribery Act.

Monitoring a large number of third parties can be achieved for a relatively low cost with the help of automated tools, which can flag the most recent results that need to be reviewed. This again should be weighed against the cost of an issue arising when a third party is acting on an organisation’s behalf.

Heightened concern

It is no surprise that as the UK Serious Fraud Office and the US Department of Justice ramp up enforcement of their respective Acts, compliance officers and senior managers are becoming more concerned about possible reputational damage that could be caused by failing to have adequate measures to prevent bribery and corruption.

A well-organised, relevant, and proportionate anti-corruption programme has a better chance of preventing an event than a standard approach. Being able to demonstrate this clearly to a regulator or to law enforcement could make the difference between what is deemed an exception, and a serious issue that requires full investigation, potentially inflicting lasting damage to an organisation’s reputation and brand.

Tom Hollobone is Senior Director, Compliance, at Kroll

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