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Regulatory Compliance

Clampdown on Corruption

Amid anti-bribery reform, corruption is more aggressively investigated around the world.
By: | December 14, 2017 • 6 min read

If one doubts that progress is being made in anti-corruption enforcement in some of the world’s corruption hotspots, look no further than Brazil.

In a bid to clean up the country’s energy sector, investigators unearthed a network of bribery and corruption that would, over three years, lead to the impeachment of President Dilma Rousseff, a nine-year jail term for her predecessor Luiz Inacio Lula da Silva and the implication of 80 of Brazil’s political and business elite.

Corina Monaghan, senior vice president of credit, political, and security risk improvement, JLT Specialty USA

While this example is glaring and high-profile, the anti-corruption landscape is undoubtedly becoming more stringent around the world. China, for example, expanded the scope of its anti-corruption watchdog in October, while France this year introduced a game-changing ‘Sapin II’ framework.

Other countries are becoming more watchful, including developing markets with a history of corruption.

Multinational companies could find themselves facing heavy penalties if they fail to keep up with compliance demands. However, corruption is often deeply culturally rooted and traps remain.

According to John Kocoras, partner with the law firm McDermott, Will and Emery, the most susceptible companies are those that operate in countries where bribery is part of the business landscape, or in highly regulated industries involved in sales to foreign government agencies and government-owned corporations.

“In short, the more government touch points a company has, typically the greater the risk of anti-corruption compliance challenges,” he warned.

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“Like crime, corruption cannot be totally avoided,” said Corina Monaghan, senior vice president of credit, political, and security risk improvement, JLT Specialty USA.

“What remains to be seen is whether these law changes are transparent and enforced consistently enough for foreign investors to clearly know what constitutes breaching the law,” she added.

“When there are gray areas in bureaucracy, this creates room for corruption.”

Legal Landscape

It is, of course, essential for multinational companies to get to know local conditions as comprehensively as possible in every jurisdiction in which they operate. That’s particularly true of systems, though the law can sometimes work differently in theory and practice.

Monaghan advises clients to find out who the key players and counterparties are in the sector in which they operate, including the government ministry with whom they’ll be dealing.

“If there are elections coming up, find out who may be elected and how this could affect your business,” she added.

“If your employees are colluding with third parties to create slush funds to further the business agenda, you have got a serious risk on your hands — and collusion is definitely rife.” — Annabel Reoch, head of anti-bribery and corruption, KPMG

However, even a granular knowledge of local legislation will only get multi-national companies so far, as they could run afoul of domestic law even if they do not break the rules overseas.

U.S.-listed companies, for example, are obligated to maintain accurate books and records. They also are obligated to enforce effective internal control. Failing to do so in a foreign operation could cause liability in the U.S.

“A substantial change over the last 10 years is our ability to address anti-corruption issues outside of the U.S.,” said Kocoras.

“This used to be seen as a U.S. concern, with the tail wagging the dog as far as multinational operations were concerned, but now cross-border conversations have become much more routine, which is good for serious compliance efforts,” he added.

“Considering the amount of fines we’re seeing and government interest in increasing fair competition, we expect that trend to continue.”

Governments also are increasingly willing to work together to investigate and resolve cross-border corruption claims.

In September, for example, Swedish, Dutch and U.S. authorities reaped the rewards of a combined effort when Nordic telecom giant Telia agreed to pay nearly $1 billion in penalties after admitting to paying more than $331 million in bribes to an Uzbek government official.

Formal, Effective Compliance

The most fundamental step a company can take to comply with the growing patchwork of international anti-corruption laws is to implement a formal compliance framework.

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“Although anti-bribery laws and enforcement may differ from one place to another, there are common elements to an effective program that are important to legal compliance and good business,” said Kocoras.

This starts with prohibiting anyone within the organization from paying or receiving bribes to or from officials in either the public or private sectors. Bribery is not limited to cash payments and can vary in nature from sector to sector, from nepotistic hiring practices to extravagant entertainment. The perception of bribery also varies significantly between cultures and  legal systems.

“It makes very good business sense to adopt a broad view of what constitutes a bribe, both to ensure compliance and protect the business,” Kocoras advised.

“Companies with operations around the world should enact policies and procedures that address the strictest standards they might face.”

According to Annabel Reoch, head of anti-bribery and corruption for KPMG in the UK, middlemen or ‘introducers’ are often at the heart of the problem.

“One of the biggest risks is third parties operating on your behalf. They may act unethically or make payments on your behalf to obtain or retain business,” she explained.

“If your employees are colluding with third parties to create slush funds to further the business agenda, you have got a serious risk on your hands — and collusion is definitely rife.”

KPMG’s 2015 Global Anti-Bribery and Corruption (ABC) survey found that 70 percent of all corruption cases involved collusion and 61 percent included an individual from within the company itself.

“It is essential to know who you are doing business with, to conduct  due diligence on those third parties, understand the risks and the business justification of working with the parties, and to have proper contract protections in place,” said Reoch.

Creating a More Ethical Culture

In the future, predictive data analytics that identify trends in bribery and corruption activity could help companies stay one step ahead of potentially risky behavior, though Reoch said this requires the complex triangulation of multiple data points.

John Kocoras, partner, McDermott, Will and Emery

“For example, you might look at the big contracts you’re tendering for, the employees involved in that tendering process and their gift, entertainment and hospitality activity and also any potential conflicts of interest.

You might look also at new third parties on-boarded around the time of that tender and the average commission payment and the outcome of any due diligence conducted,” she explained.

“Pinning those data points together could raise a red flag that proactively tells you there could be some problems in a particular region, rather than reacting after an incident.”

The most effective steps a company can take, she said, are to make sure its staff on the front lines knows the rules, procedures are embedded in the operations of those countries, and accountability for managing the risk is transferred to the staff working on the ground overseas.

“In remote jurisdictions, individual employees often claim they didn’t understand the process they were supposed to follow, they weren’t given proper training and that they didn’t recognize there was a problem because this is the way business is done where they are.

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When operating really effectively, compliance has handed over that responsibility into the first line of defense so that they are the ones owning and managing that risk,” Reoch explained.

But Reoch added that while putting functions, controls and procedures in place is necessary for compliance, “delivering the right training to raise awareness, accountability and appreciation of bribery and corruption risk goes a lot further.”

“Capturing broad prohibitions on bribery and effective internal controls within a coherent policy is very important,” added Kocoras.

“But communication of that policy and compliance issues on all levels and with foreign operations is essential.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

The Profession

Curt Gross

This director of risk management sees cyber, IP and reputation risks as evolving threats, but more formal education may make emerging risk professionals better prepared.
By: | June 1, 2018 • 4 min read

R&I: What was your first job?

My first non-professional job was working at Burger King in high school. I learned some valuable life lessons there.

R&I: How did you come to work in risk management?

After taking some accounting classes in high school, I originally thought I wanted to be an accountant. After working on a few Widgets Inc. projects in college, I figured out that wasn’t what I really wanted to do. Risk management found me. The rest is history. Looking back, I am pleased with how things worked out.

R&I: What is the risk management community doing right?

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I think we do a nice job on post graduate education. I think the ARM and CPCU designations give credibility to the profession. Plus, formal college risk management degrees are becoming more popular these days. I know The University of Akron just launched a new risk management bachelor’s program in the fall of 2017 within the business school.

R&I: What could the risk management community be doing a better job of?

I think we could do a better job with streamlining certificates of insurance or, better yet, evaluating if they are even necessary. It just seems to me that there is a significant amount of time and expense around generating certificates. There has to be a more efficient way.

R&I: What was the best location and year for the RIMS conference and why?

Selfishly, I prefer a destination with a direct flight when possible. RIMS does a nice job of selecting various locations throughout the country. It is a big job to successfully pull off a conference of that size.

Curt Gross, Director of Risk Management, Parker Hannifin Corp.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?

Definitely the change in nontraditional property & casualty exposures such as intellectual property and reputational risk. Those exposures existed way back when but in different ways. As computer networks become more and more connected and news travels at a more rapid pace, it just amplifies these types of exposures. Sometimes we have to think like the perpetrator, which can be difficult to do.

R&I: What emerging commercial risk most concerns you?

I hate to sound cliché — it’s quite the buzz these days — but I would have to say cyber. It’s such a complex risk involving nontraditional players and motives. Definitely a challenging exposure to get your arms around. Unfortunately, I don’t think we’ll really know the true exposure until there is more claim development.

R&I: What insurance carrier do you have the highest opinion of?

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Our captive insurance company. I’ve been fortunate to work for several companies with a captive, each one with a different operating objective. I view a captive as an essential tool for a successful risk management program.

R&I: Who is your mentor and why?

I can’t point to just one. I have and continue to be lucky to work for really good managers throughout my career. Each one has taken the time and interest to develop me as a professional. I certainly haven’t arrived yet and welcome feedback to continue to try to be the best I can be every day.

R&I: What have you accomplished that you are proudest of?

I would like to think I have and continue to bring meaningful value to my company. However, I would have to say my family is my proudest accomplishment.

R&I: What is your favorite book or movie?

Favorite movie is definitely “Good Will Hunting.”

R&I: What’s the best restaurant you’ve ever eaten at?

Tough question to narrow down. If my wife ran a restaurant, it would be hers. We try to have dinner as a family as much as possible. If I had to pick one restaurant though, I would say Fire Food & Drink in Cleveland, Ohio. Chef Katz is a culinary genius.

R&I: What is the most unusual/interesting place you have ever visited?

The Grand Canyon. It is just so vast. A close second is Stonehenge.

R&I: What is the riskiest activity you ever engaged in?

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A few, actually. Up until a few years ago, I owned a sport bike (motorcycle). Of course, I wore the proper gear, took a safety course and read a motorcycle safety book. Also, I have taken a few laps in a NASCAR [race car] around Daytona International Speedway at 180 mph. Most recently, trying to ride my daughter’s skateboard.

R&I: If the world has a modern hero, who is it and why?

The Dalai Lama. A world full of compassion, tolerance and patience and free of discrimination, racism and violence, while perhaps idealistic, sounds like a wonderful place to me.

R&I: What about this work do you find the most fulfilling or rewarding?

I really enjoy the company I work for and my role, because I get the opportunity to work with various functions. For example, while mostly finance, I get to interact with legal, human resources, employee health and safety, to name a few.

R&I: What do your friends and family think you do?

I asked my son. He said, “Risk management and insurance.” (He’s had the benefit of bring-your-kid-to-work day.)

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]