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.

Advertisement




“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.

Advertisement




“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.

Advertisement




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

Insurtech

Kiss Your Annual Renewal Goodbye; On-Demand Insurance Challenges the Traditional Policy

Gig workers' unique insurance needs drive delivery of on-demand coverage.
By: | September 14, 2018 • 6 min read

The gig economy is growing. Nearly six million Americans, or 3.8 percent of the U.S. workforce, now have “contingent” work arrangements, with a further 10.6 million in categories such as independent contractors, on-call workers or temporary help agency staff and for-contract firms, often with well-known names such as Uber, Lyft and Airbnb.

Scott Walchek, founding chairman and CEO, Trōv

The number of Americans owning a drone is also increasing — one recent survey suggested as much as one in 12 of the population — sparking vigorous debate on how regulation should apply to where and when the devices operate.

Add to this other 21st century societal changes, such as consumers’ appetite for other electronic gadgets and the advent of autonomous vehicles. It’s clear that the cover offered by the annually renewable traditional insurance policy is often not fit for purpose. Helped by the sophistication of insurance technology, the response has been an expanding range of ‘on-demand’ covers.

The term ‘on-demand’ is open to various interpretations. For Scott Walchek, founding chairman and CEO of pioneering on-demand insurance platform Trōv, it’s about “giving people agency over the items they own and enabling them to turn on insurance cover whenever they want for whatever they want — often for just a single item.”

Advertisement




“On-demand represents a whole new behavior and attitude towards insurance, which for years has very much been a case of ‘get it and forget it,’ ” said Walchek.

Trōv’s mobile app enables users to insure just a single item, such as a laptop, whenever they wish and to also select the period of cover required. When ready to buy insurance, they then snap a picture of the sales receipt or product code of the item they want covered.

Welcoming Trōv: A New On-Demand Arrival

While Walchek, who set up Trōv in 2012, stressed it’s a technology company and not an insurance company, it has attracted industry giants such as AXA and Munich Re as partners. Trōv began the U.S. roll-out of its on-demand personal property products this summer by launching in Arizona, having already established itself in Australia and the United Kingdom.

“Australia and the UK were great testing grounds, thanks to their single regulatory authorities,” said Walchek. “Trōv is already approved in 45 states, and we expect to complete the process in all by November.

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group.” – Scott Walchek, founding chairman and CEO, Trōv

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group,” he added.

“But a mass of tectonic societal shifts is also impacting older generations — on-demand cover fits the new ways in which they work, particularly the ‘untethered’ who aren’t always in the same workplace or using the same device. So we see on-demand going into societal lifestyle changes.”

Wooing Baby Boomers

In addition to its backing for Trōv, across the Atlantic, AXA has partnered with Insurtech start-up By Miles, launching a pay-as-you-go car insurance policy in the UK. The product is promoted as low-cost car insurance for drivers who travel no more than 140 miles per week, or 7,000 miles annually.

“Due to the growing need for these products, companies such as Marmalade — cover for learner drivers — and Cuvva — cover for part-time drivers — have also increased in popularity, and we expect to see more enter the market in the near future,” said AXA UK’s head of telematics, Katy Simpson.

Simpson confirmed that the new products’ initial appeal is to younger motorists, who are more regular users of new technology, while older drivers are warier about sharing too much personal information. However, she expects this to change as on-demand products become more prevalent.

“Looking at mileage-based insurance, such as By Miles specifically, it’s actually older generations who are most likely to save money, as the use of their vehicles tends to decline. Our job is therefore to not only create more customer-centric products but also highlight their benefits to everyone.”

Another Insurtech ready to partner with long-established names is New York-based Slice Labs, which in the UK is working with Legal & General to enter the homeshare insurance market, recently announcing that XL Catlin will use its insurance cloud services platform to create the world’s first on-demand cyber insurance solution.

“For our cyber product, we were looking for a partner on the fintech side, which dovetailed perfectly with what Slice was trying to do,” said John Coletti, head of XL Catlin’s cyber insurance team.

“The premise of selling cyber insurance to small businesses needs a platform such as that provided by Slice — we can get to customers in a discrete, seamless manner, and the partnership offers potential to open up other products.”

Slice Labs’ CEO Tim Attia added: “You can roll up on-demand cover in many different areas, ranging from contract workers to vacation rentals.

“The next leap forward will be provided by the new economy, which will create a range of new risks for on-demand insurance to respond to. McKinsey forecasts that by 2025, ecosystems will account for 30 percent of global premium revenue.

Advertisement




“When you’re a start-up, you can innovate and question long-held assumptions, but you don’t have the scale that an insurer can provide,” said Attia. “Our platform works well in getting new products out to the market and is scalable.”

Slice Labs is now reviewing the emerging markets, which aren’t hampered by “old, outdated infrastructures,” and plans to test the water via a hackathon in southeast Asia.

Collaboration Vs Competition

Insurtech-insurer collaborations suggest that the industry noted the banking sector’s experience, which names the tech disruptors before deciding partnerships, made greater sense commercially.

“It’s an interesting correlation,” said Slice’s managing director for marketing, Emily Kosick.

“I believe the trend worth calling out is that the window for insurers to innovate is much shorter, thanks to the banking sector’s efforts to offer omni-channel banking, incorporating mobile devices and, more recently, intelligent assistants like Alexa for personal banking.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.”

As with fintechs in banking, Insurtechs initially focused on the retail segment, with 75 percent of business in personal lines and the remainder in the commercial segment.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.” — Emily Kosick, managing director, marketing, Slice

Those proportions may be set to change, with innovations such as digital commercial insurance brokerage Embroker’s recent launch of the first digital D&O liability insurance policy, designed for venture capital-backed tech start-ups and reinsured by Munich Re.

Embroker said coverage that formerly took weeks to obtain is now available instantly.

“We focus on three main issues in developing new digital business — what is the customer’s pain point, what is the expense ratio and does it lend itself to algorithmic underwriting?” said CEO Matt Miller. “Workers’ compensation is another obvious class of insurance that can benefit from this approach.”

Jason Griswold, co-founder and chief operating officer of Insurtech REIN, highlighted further opportunities: “I’d add a third category to personal and business lines and that’s business-to-business-to-consumer. It’s there we see the biggest opportunities for partnering with major ecosystems generating large numbers of insureds and also big volumes of data.”

For now, insurers are accommodating Insurtech disruption. Will that change?

Advertisement




“Insurtechs have focused on products that regulators can understand easily and for which there is clear existing legislation, with consumer protection and insurer solvency the two issues of paramount importance,” noted Shawn Hanson, litigation partner at law firm Akin Gump.

“In time, we could see the disruptors partner with reinsurers rather than primary carriers. Another possibility is the likes of Amazon, Alphabet, Facebook and Apple, with their massive balance sheets, deciding to link up with a reinsurer,” he said.

“You can imagine one of them finding a good Insurtech and buying it, much as Amazon’s purchase of Whole Foods gave it entry into the retail sector.” &

Graham Buck is a UK-based writer and has contributed to Risk & Insurance® since 1998. He can be reached at riskletters.com.