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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

High Net Worth

High Net Worth Clients Live in CAT Zones. Here’s What Their Resiliency Plan Should Include

Having a resiliency plan and practicing it can make all the difference in a disaster.
By: | September 14, 2018 • 7 min read

Packed with state-of-the-art electronics, priceless collections and high-end furnishings, and situated in scenic, often remote locations, the dwellings of high net worth individuals and families pose particular challenges when it comes to disaster resiliency. But help is on the way.

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Armed with loss data, innovative new programs, technological advances, and a growing army of niche service-providers aimed at addressing an astonishingly diverse set of risks, insurers are increasingly determined to not just insure against their high net worth clients’ losses, but to prevent them.

Insurers have long been proactive in risk mitigation, but increasingly, after the recent surge in wildfire and storm losses, insureds are now, too.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy,” said Laura Sherman, founding partner at Baldwin Krystyn Sherman Partners.

And especially in the high net worth space, preventing that loss is vastly preferable to a payout, for insurers and insureds alike.

“If insurers can preserve even one house that’s 10 or 20 or 40 million dollars … whatever they have spent in a year is money well spent. Plus they’ve saved this important asset for the client,” said Bruce Gendelman, chairman and founder Bruce Gendelman Insurance Services.

High Net Worth Vulnerabilities

Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

As the number and size of luxury homes built in vulnerable areas has increased, so has the frequency and magnitude of extreme weather events, including hurricanes, harsh cold and winter storms, and wildfires.

“There is a growing desire to inhabit this riskier terrain,” said Jason Metzger, SVP Risk Management, PURE group of insurance companies. “In the western states alone, a little over a million homes are highly vulnerable to wildfires because of their proximity to forests that are fuller of fuel than they have been in years past.”

Such homes are often filled with expensive artwork and collections, from fine wine to rare books to couture to automobiles, each presenting unique challenges. The homes themselves present other vulnerabilities.

“Larger, more sophisticated homes are bristling with more technology than ever,” said Stephen Poux, SVP and head of Risk Management Services and Loss Prevention for AIG’s Private Client Group.

“A lightning strike can trash every electronic in the home.”

Niche Service Providers

A variety of niche service providers are stepping forward to help.

Secure facilities provide hurricane-proof, wildfire-proof off-site storage for artwork, antiques, and all manner of collectibles for seasonal or rotating storage, as well as ahead of impending disasters.

Other companies help manage such collections — a substantial challenge anytime, but especially during a crisis.

“Knowing where it is, is a huge part of mitigating the risk,” said Eric Kahan, founder of Collector Systems, a cloud-based collection management company that allows collectors to monitor their collections during loans to museums, transit between homes, or evacuation to secure storage.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy.” — Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

Insurers also employ specialists in-house. AIG employs four art curators who advise clients on how to protect and preserve their art collections.

Perhaps the best known and most striking example of this kind of direct insurer involvement are the fire teams insurers retain or employ to monitor fires and even spray retardant or water on threatened properties.

High-Level Service for High Net Worth

All high net worth carriers have programs that leverage expertise, loss data, and relationships with vendors to help clients avoid and recover from losses, employing the highest levels of customer service to accomplish this as unobtrusively as possible.

“What allows you to do your job best is when you develop that relationship with a client, where it’s the same people that are interacting with them on every front for their risk management,” said Steve Bitterman, chief risk services officer for Vault Insurance.

Site visits are an essential first step, allowing insurers to assess risks, make recommendations to reduce them, and establish plans in the event of a disaster.

“When you’re in a catastrophic situation, it’s high stress, time is of the essence, and people forget things,” said Sherman. “Having a written plan in place is paramount to success.”

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Another important component is knowing who will execute that plan in homes that are often unoccupied.

Domestic staff may lack the knowledge or authority to protect the homeowner’s assets, and during a disaster may be distracted dealing with threats to their own homes and families. Adequate planning includes ensuring that whoever is responsible has the training and authority to execute the plan.

Evaluating New Technology

Insurers use technologies like GPS and satellite imagery to determine which homes are directly threatened by storms or wildfires. They also assess and vet technologies that can be implemented by homeowners, from impact glass to alarm and monitoring systems, to more obscure but potentially more important options.

AIG’s Poux recommends two types of vents that mitigate important, and unexpected risks.

“There’s a fantastic technology called Smart Vent, which allows water to flow in and out of the foundation,” Poux said. “… The weight of water outside a foundation can push a foundation wall in. If you equalize that water inside and out at the same level, you negate that.”

Another wildfire risk — embers getting sucked into the attic — is, according to Poux, “typically the greatest cause of the destruction of homes.” But, he said, “Special ember-resisting venting, like Brandguard Vents, can remove that exposure altogether.”

Building Smart

Many disaster resiliency technologies can be applied at any time, but often the cost is fractional if implemented during initial construction. AIG’s Smart Build is a free program for new or remodeled homes that evolved out of AIG’s construction insurance programs.

Previously available only to homes valued at $5 million and up, Smart Build recently expanded to include homes of $1 million and up. Roughly 100 homes are enrolled, with an average value of $13 million.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work.” — Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“We know what goes wrong in high net worth homes,” said Poux, citing AIG’s decades of loss data.

“We’re incenting our client and by proxy their builder, their architects and their broker, to give us a seat at the design table. … That enables us to help tweak the architectural plans in ways that are very easy to do with a pencil, as opposed to after a home is built.”

Poux cites a remote ranch property in Texas.

Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“The client was rebuilding a home but also installing new roads and grading and driveways. … The property was very far from the fire department and there wasn’t any available water on the property.”

Poux’s team was able to recommend underground water storage tanks, something that would have been prohibitively expensive after construction.

“But if the ground is open and you’ve got heavy equipment, it’s a relatively minor additional expense.”

Homes that graduate from the Smart Build program may be eligible for preferred pricing due to their added resilience, Poux said.

Recovery from Loss

A major component of disaster resiliency is still recovery from loss, and preparation is key to the prompt service expected by homeowners paying six- or seven-figure premiums.

Before Irma, PURE sent contact information for pre-assigned claim adjusters to insureds in the storm’s direct path.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work,” said Curt Goetsch, head of underwriting for Ironshore’s Private Client Group.

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“If you’ve got custom construction or imported materials in your house, you’re not going to go down the street and just find somebody that can do that kind of work, or has those materials in stock.”

In the wake of disaster, even basic services can be scarce.

“Our claims and risk management departments have to work together in advance of the storm,” said Bitterman, “to have contractors and restoration companies and tarp and board services that are going to respond to our company’s clients, that will commit resources to us.”

And while local agents’ connections can be invaluable, Goetsch sees insurers taking more of that responsibility from the agent, to at least get the claim started.

“When there is a disaster, the agency’s staff may have to deal with personal losses,” Goetsch said. &

Jon McGoran is a novelist and magazine editor based outside of Philadelphia. He can be reached at [email protected]