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

Risk Management

The Profession

As a professor of business, Jack Hampton knows firsthand the positive impact education has on risk managers as they tackle growing risks.
By: | April 9, 2018 • 4 min read

R&I: Who is your mentor and why?

Ellen Thrower, president (retired), The College of Insurance, introduced me to the importance of insurance as a component of risk management. Further, she encouraged me to explore strategic and operational risk as foundation topics shaping the role of the modern risk manager.

Chris Mandel, former president of RIMS and Risk Manager of the Year, introduced me to the emerging area of enterprise risk management. He helped me recognize the need to align hazard, strategic, operational and financial risk into a single framework. He gave me the perspective of ERM in a high-tech environment, using USAA as a model program that later won an excellence award for innovation.

Bob Morrell, founder and former CEO of Riskonnect, showed me how technology could be applied to solving serious risk management and governance problems. He created a platform that made some of my ideas practical and extended them into a highly-successful enterprise that served risk and governance management needs of major corporations.

R&I: How did you come to work in this industry?

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From a background in corporate finance and commercial banking, I accepted the position of provost of The College of Insurance. Recognizing my limited prior knowledge in the field, I became a student of insurance and risk management leading to authorship of books on hazard and financial risk. This led to industry consulting, as well as to the development of graduate-level courses and concentrations in MBA programs.

R&I: What was your first job?

The provost position was the first job I had in the industry, after serving as dean of the Seton Hall University School of Business and founding The Princeton Consulting Group. Earlier positions were in business development with Marine Transport Lines, consulting in commercial banking and college professorships.

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

Creating a risk management concentration in the MBA program at Saint Peter’s, co-founding the Russian Risk Management Society (RUSRISK), and writing “Fundamentals of Enterprise Risk Management” and the “AMA Handbook of Financial Risk Management.”

A few years ago, I expanded into risk management in higher education. From 2017 into 2018, Rowman and Littlefield published my four books that address risks facing colleges and universities, professors, students and parents.

Jack Hampton, Professor of Business, St. Peter’s University

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

The Godfather. I see it as a story of managing risk, even as the behavior of its leading characters create risk for others.

R&I: What is your favorite drink?

Jameson’s Irish whiskey. Mixed with a little ice, it is a serious rival for Johnny Walker Gold scotch and Jack Daniel’s Tennessee whiskey.

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

Mount Etna, Taormina, and Agrigento, Sicily. I actually supervised an MBA program in Siracusa and learned about risk from a new perspective.

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

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Army Airborne training and jumping out of an airplane. Fortunately, I never had to do it in combat even though I served in Vietnam.

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

George C. Marshall, one of the most decorated military leaders in American history, architect of the economic recovery program for Europe after World War II, and recipient of the 1953 Nobel Peace Prize. For Marshall, it was not just about winning the war. It was also about winning the peace.

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

Sharing lessons with colleagues and students by writing, publishing and teaching. A professor with a knowledge of risk management does not only share lessons. The professor is also a student when MBA candidates talk about the risks they manage every day.

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

Sensitizing for-profit, nonprofit and governmental agencies to the exposures and complexities facing their organizations. Sometimes we focus too much on strategies that sound good but do not withstand closer examination. Risk managers help organizations make better decisions.

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

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Developing executive training programs to help risk managers assume C-suite positions in organizations. Insurance may be a good place to start but so is an MBA degree. The Risk and Insurance Management Society recognizes the importance of a wide range of risk knowledge. Colleges and universities need to catch up with RIMS.

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

Cyber risk and its impact on hazard, operational and financial strategies. A terrorist can take down a building. A cyber-criminal can take down much more.

R&I: What does your family think you do?

My family members think I’m a professor. They do not seem to be too interested in my views on risk management.




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