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Changing corruption risks
 

Changing corruption risks

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The private sector faces one of its most formidable compliance challenges yet with anti-corruption regulation. In some countries, regulation goes further than the US's Foreign Corrupt Practices Act. ...

The private sector faces one of its most formidable compliance challenges yet with anti-corruption regulation. In some countries, regulation goes further than the US's Foreign Corrupt Practices Act. Too often, commitment at the top is not flowing through organizations. Nor are policies being extended to parties acting on a company's behalf. Make sure you understand changing corruption risks — use our eight questions to direct your operational teams.

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    Changing corruption risks Changing corruption risks Presentation Transcript

    • 10Minutes on changing corruption risks November 2011 Higher stakes as more businesses go international and more countries step up enforcements Highlights The likelihood of an anti-corruption probe is much higher, and not just in the US. Employee training plays an important role. Fighting corruption is as much about cultural change as it is about rules. Some companies are already proactively data mining for problematic transactions, but IT alone is not a silver bullet. New incentives for whistleblowers and sector-wide probes are two recent developments changing corruption risks. The anti-corruption regulatory movement is emerging as one of the most formidable compliance challenges confronting the private sector. As risk perceptions change, voluntary disclosure is on the rise in the US and internationally, as is staffing among specialist legal firms. At least one insurer now offers a new policy to cover bribery-related probes. Major multinationals have taken significant steps to bolster their anti-bribery controls as they confront not only the powerful Foreign Corrupt Practices Act (FCPA) in the US, but a new set of anti-corruption laws, that seemingly go further than the FCPA, such as the UK Bribery Act. More can be done. Too often we’re seeing that greater commitment at the top is not effectively flowing through the organization. Companies are often not addressing the related financial controls that can detect and prevent bribery with the same alacrity, nor are they always extending policies to parties who act on their behalf. To help business leaders and corporate directors better understand changing corruption risks, we’ve compiled eight questions to direct to their operational teams. What’s driving the focus on risks? 1. US prosecutors have been increasingly aggressive at expanding the reach of the FCPA, and now have added support from Dodd-Frank–linked measures that incentivize corporate whistle blowers. 2. Coordinated approaches to enforcement internationally create the prospect of double, or even multiple, jeopardy. We expect harmonization of regulations will lead to an increase in parallel investigations, with the likely consequence of increased penalties. 3. Slow growth in mature markets is propelling the business case for further expansion in emerging markets, where populist revulsion against corruption is being met with official crackdowns on bribery in some places and outright revolt in others. Consider the recent anticorruption movement in India. 4. In the US, individual prosecutions of business executives for bribery are a further incentive for the private sector to get tough on cleaning up their operations. Sixty people have been charged in the US over the past three years.1 1 Philip Urofsky, Recent Trends and Patterns in the Enforcement of the FCPA, July 2011.
    • At a glance A framework for corporate anti-corruption policies and procedures Organization and responsibilities Raising concerns and seeking guidance • The board of directors (or equivalent) is responsible for overseeing the development and implementation of an effective anti-corruption program, while the CEO is responsible for its implementation. • Employees should be encouraged to raise concerns and report suspicious circumstances to responsible officials through secure and accessible channels. Business relationships Communication • The company should apply its anti-corruption program to its dealings with subsidiaries, jointventure partners, agents, contractors, and other third-party business partners. • The company should publicly disclose its anticorruption policies. Human resources Internal controls • The company should link the anti-corruption program to other programs, such as anti-money laundering, where appropriate. • The company should establish internal communications for its anti-corruption policies. • Human resources should ensure that no employee • The company should maintain accurate books and records. would suffer any adverse consequences for refusing to pay bribes, even if that may result in • The company should establish and maintain a the loss of business. system of internal controls. Training Monitoring and review • Employees, contractors, and suppliers (especially high-risk ones) should receive training on the company’s anti-corruption program. • Senior management should periodically assess the strength of the anti-corruption program. • The company should periodically evaluate the adequacy of the anti-corruption program. Source: PwC, Under the Table, On the Radar: Improving Anti-corruption Compliance for Financial Services Institutions, August 2011.
    • 01 Going global: Tailoring to comply with US law no longer suffices 1. Do we know how anti-corruption initiatives in other jurisdictions could impact us? It should by now be clear that acting with integrity deserves to be a high priority for US companies with an international presence. The likelihood of an investigation is much higher than even a few years ago, and not just in the US. German authorities, for example, are driving investigations, as are the multilateral development banks, which have debarred more than 900 firms and individuals over the past 10 years. Guidance from UK authorities, as they set expectations for the Anti-Bribery Act, stresses that the quality of a company’s compliance program is significant; in fact, the failure of a company’s controls to prevent bribery in the first place may be treated itself as a violation. FCPA criminal and civil fines imposed on corporations globally Mil. $ 1,800 1,782 1,600 1,400 1,200 1,000 800 803 600 579 400 200 0 28.2 36.3 87.2 155.1 333.3 Jan-Jun 2004 2005 2006 2007 2008 2009 2010 2011 Source: Philip Urofsky, Recent Trends and Patterns in the Enforcement of the FCPA, July 2011. (www.shearman.com) Secondly, what compliance programs emphasize likely will need to change. Tailoring policies to comply with US law will no longer suffice. There is a lot of overlap, but jurisdictions nonetheless do define aspects of corruption differently. For example, ‘facilitation payments’– small fees to foreign government officials to expedite or secure a routine, non-discretionary action–are allowable under US law, but they are deliberately banned in the UK as well as many other countries, and also in recommendations released by the OECD in late 2010. 2. Are we focused on the right risks in the right places? It doesn’t make much sense for most companies to layer on more complexity at this time with different anti-corruption programs for different regions. It is possible–indeed advisable–to have a single global anti-corruption framework that accounts for corruption risks companies confront in different regions. Rules are not that drastically different under the various international frameworks. Moreover, regulators clearly seem to favor risk-based compliance programs, and also expect that companies do more where the risks of corruption are higher. Every business leader knows–or should know– where the corruption risks are higher, and what business activities create corruption vulnerabilities. In some regions, managers can face a barrage of everyday barriers to doing business that may be eased with bribes. In other places, the schemes are more sophisticated, and involve agents, suppliers or former government officials, for example. In the first case, effective measures can emphasize antibribery training for employees. In the latter case, companies will seek to bolster anti-corruption due diligence with third parties, joint-venture partners or potential acquisitions. In our experience, some companies also choose to enhance compliance in high-risk regions that have been targets for investigations.
    • 02 Commitment at the top and in the middle 3. Are our policies well understood by our employees... Titles of those charged with civil and/or criminal violations 2006–2011 (ytd) CEO/COO/ President 22 8 Vice president 7 Head of sales Regional or country manager 5 Third party agent 5 4 CFO 2 Owner 8 Misc. 0 5 10 15 20 Number of SEC/DOJ Cases in Study Source: Scott Peeler, A Study of Individual Liability under the Foreign Corrupt Practices Act,” Chadbourne Compliance Quarterly, October 2011 25 The right tone at the top on anti-corruption vigilance is the first step. Where many companies fall short is demonstrating the same strong commitment in the middle. We’ve come across enough cases where employees far from headquarters aren’t well versed on the policy, or know their actions really aren’t being adequately monitored. Compliance programs designed without an appreciation that fighting corruption is as much about a cultural change as it is about rules are going to have holes like this. Employees should understand how the company defines corruption or bribery and what constitutes an infraction. Those in highrisk areas like contracting should know how to report an occurrence and importantly, feel comfortable that the company won’t retaliate against them. Yet employees should also know about the consequences, and that may mean publicizing reprimands. A no-tolerance tone can have the opposite effect if employees don’t see anti-corruption taken seriously, with the message perversely interpreted to mean ‘we talk tough but you do what it takes’. These are competitive times and the pressure on frontline managers to perform can be intense. Consider their frustration when they know their product or service is good and well priced. What happens to their careers if they walk away and refuse to “pay to play”? Senior officials in a company should also feel comfortable they understand how their companies are addressing these issues. How they should respond, for example, if a subordinate reports a suspected bribe to them. Questions related to the personal liability of top company officials in the case of enforcement are being raised in the wake of several high-level prosecutions in the US of individuals for bribery. 4. ...And the people we do business with? Effective internal and external communications should leave little doubt of the importance the company places on preventing bribery, and how the company will respond to a violation of its policy. All parties acting on behalf of a company, moreover, should understand that they, as well as the company, are liable for their actions, and know who in the company is overseeing the initiative. As part of putting intentions into practice, Transparency International recommends the chairman or CEO become the program owner and provide oversight, and that a senior manager be appointed to take organizational responsibility for implementation. Being hard-nosed on corruption publicly and in practice helps where vulnerabilities are often the greatest–with the frontline and country managers.
    • 03 Avoid the paper tiger trap 5. Do we have the resources to do this task? Despite many improvements in compliance, we’re seeing some programs fall short in how they incorporate better controls and accounting procedures into their ongoing anti-corruption measures and how they conduct due diligence related to third parties and acquisition targets. More robust preventative controls and tools should enable companies to detect potential bribes and secondly, help them deter it. Some companies are proactively data mining and conducting specialized searches for potentially problematic transactions based on certain risk factors, for example. Corporate prosecutions of FCPA violations (affiliated companies aggregated) 25 20 20 15 13 10 10 5 5 3 11 4 0 2004 2005 2006 2007 2008 2009 2010 Source: Philip Urofsky and Danforth Newcomb, Recent Trends and Patterns in the Enforcement of the FCPA, January 2011 Currently available technology can be used to make due diligence more uniform and efficient. Yet while IT systems will send up red or green flags, IT will not be able to do this alone. Upgrading controls and staffing compliance costs money and this isn’t an area to do more with less. What won’t serve companies well in this climate is a paper tiger. When it comes to due diligence, companies must actively take measures to find out who they are actually doing business or planning to do business with in foreign markets. As an example, a large US-based corporation was engaged in a major transaction involving Middle East-based counterparties. An analysis of public information revealed a number of scandals, including bank fraud and threats to business associates, and the corporation cancelled the deal. 6. Do we need to change the way we treat facilitation payments or marketing costs? The US and the UK treat these small payments to cover routine, non-discretionary governmental actions or hospitality gifts differently. If recorded and managed correctly, they are currently legal under US law, although this exception may well have a short shelf life. UK authorities and the OECD are specifically critical of these payments, regarding them as a legal way for companies to defy anti-corruption initiatives. The same goes for the allowance of the bona fide business promotional/marketing costs under FCPA. The exception is not the same under the UK Bribery Act. Perhaps in recognition of the dilemma this creates, guidance from the UK and the OECD sets some importance on phasing out facilitation payments. This offers a reasonable approach. If they’re banned outright, there’s the risk that the practice will be driven underground. For now, companies will want to be sure they’re accounting for them appropriately and importantly, that they’ve clearly defined acceptable facilitation payments and ‘bona fide’ marketing costs.
    • 04 04 Look out for new methods and measures in US enforcements 7. What do sector-wide investigations mean for our company? Not only is cooperation among jurisdictions on anti-corruption increasing, there is also a growing list of industry-wide investigations around specific issues. Take for example the recent cases in the financial services industry around involvement with sovereign wealth funds. Sometimes industry-based probes are publicly announced, and sometimes they are not. There are reports of sector-wide trends drawing official notice that include deals between aerospace companies and state-owned airlines; a probe in Brazil of allegations related to the 2014 World Cup and 2016 Olympic Games; and deals related to South Sudan’s oil industry.2 Geographical distribution of individual civil and/or criminal cases Based on location(s) of alleged bribe 2006−2011 (ytd) Mexico, Central & South America 29 Asia 21 14 Africa 2 Europe 0 5 10 15 20 25 Number of SEC/DOJ Cases Source: Scott Peeler, “A Study of Individual Liability under the Foreign Corrupt Practices Act,” Chadbourne Compliance Quarterly, October 2011 30 What it all means, clearly, is that risks are also greater for companies in the same industry in which probes are already under way. Gone are the days when business leaders can wipe their brow and say “glad it’s them and not us.” It doesn’t take much more investigative resources to follow the threads uncovered in a probe of one company to the source of corruption, and that is more than likely to lead investigators to competitors in the same sector instead of opening new investigations in areas that they may know little about. Companies operating in 2 Andrea Shalal-Esa, “UK Anti-corruption Drive Scares US Companies,” Reuters, July 15, 2011. such sectors need to carefully assess their risk accordingly. It may change the dynamics involved with taking the initiative to report any violation that the company itself uncovers to authorities. 8. What is our response to possible whistleblowers in our company? Under the 2010 Dodd-Frank reforms, the SEC has a new weapon in its arsenal–a new whistleblower program that sets bounties between 10% and 30% of amounts recovered in an enforcement based on the information provided. Considering the scale of settlements recently, the provision creates a clear and considerable incentive for people to tell their stories outside of a company’s compliance channels. While there are some safeguards to encourage reporting possible violations to the company first, in our view, the provision is very likely to inspire complaints and tips to the SEC–and even more costly investigations of alleged activity. In response, some smarter companies are evaluating how to change their compliance programs to address the new risks, specifically how quickly they are able to respond to reports of violations and whether ‘no retaliation’ policies are effectively in place. Some are considering measures where the company pays whistleblowers themselves.
    • Upcoming 10Minutes topics The boardroom agenda Leading an innovative company Corporate directors are under intense scrutiny to be more effective in the boardroom amid a changing governance landscape. Executive compensation, risk management, strategy and succession planning are top areas of focus for directors.10Minutes explores how directors are working to modify and improve their oversight roles. Operational efficiency is necessary to run the business of today, but it’s not enough to build the business of tomorrow. CEOs recognize they need to innovate to sustain share and target new growth trajectories. 10Minutes discusses important organizational and cultural attributes to consider that can make or break the best idea. Workplace flexibility Flexibility over time and place has long been one of the best incentives companies can offer to improve retention. Yet these options are now almost standard practice among top US companies. 10Minutes addresses the question: How can businesses revamp flexibility approaches to better attract and engage employees?
    • How PwC can help To have a deeper discussion about changing corruption risks, please contact: Frederic R. Miller Co-leader FCPA Practice, Forensic Services (703) 918-1564 frederic.r.miller@us.pwc.com Tell us how you like 10Minutes and what topics you would like to hear more about. Just send an email to: 10Minutes@us.pwc.com. Download and experience the 10Minutes series with enhanced multimedia on your iPad. Look for “PwC 10Minutes” in the iTunes App store. Manny A. Alas Co-leader FCPA Practice, Forensic Services (646) 471-3242 manny.a.alas@us.pwc.com Glenn Ware Co-leader Anti-corruption Practice, Forensic Services (703) 918-1555 glenn.ware@us.pwc.com David Jansen Co-leader Anti-corruption Practice, Forensic Services (813) 329-1128 david.jansen@us.pwc.com © 2011 PwC. All rights reserved. “PwC” and “PwC US” refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. 10Minutes® is a trademark of PwC US. LA-12-0086