Third-Parties Pose Serious Corruption Risk

Kroll’s latest survey reveals that multinationals aren’t confident in their ability to comply with global anti-bribery and corruption laws.
By: | May 1, 2018 • 4 min read

Seeking to grow the company and develop new markets, Mondelez International Inc. (then Kraft Foods) took over confectioner Cadbury in February 2010. Less than a year later, a whistleblower contacted the SEC, alleging a consultant for Cadbury subsidiary Cadbury India bribed government officials and possibly top state politicians to obtain licenses and approvals for expansion of a chocolate factory in Baddi, Himachal Pradesh.


A seven-year battle ensued, and in January of 2017, the SEC charged Mondelez with violating the FCPA’s books and records and internal controls provisions. Mondelez agreed to pay $13 million in penalties.

Regulatory agencies around the world are holding organizations accountable for the illicit actions of the third parties they engage with. Professionals surveyed for the eighth annual Anti-Bribery and Corruption (ABC) Benchmarking Report, a study conducted jointly by Kroll and the Ethisphere Institute, put third-party violations of anti-bribery and corruption laws at the top of the list of perceived compliance risks.

What’s more, an overwhelming majority of compliance professionals (93 percent) believe their ABC risks will stay the same or worsen in 2018. Heightened enforcement of existing regulations is their key concern, followed by new regulations.

One urgent challenge is the regulatory mandate for companies to understand the beneficial ownership structure of third-party partners or acquisition targets — an area that has become increasingly opaque. Third-party issues are the driving force behind 90 percent of the bribery and enforcement actions brought forward in recent years.

John Arvanitis, associate managing director, compliance practice, Kroll

But where obtaining corporate ownership records used to be a straightforward exercise, now there might be layers upon layers of shell companies and holding companies obscuring the identity of whomever is calling the shots.

“In reality there could be a nefarious individual who’s controlling the day-to-day activities or who has established and funded the organization for personal gains or influences,” said John Arvanitis, an associate managing director in Kroll’s compliance practice. “This is probably one of the biggest conundrums that compliance professionals face today throughout the world.”

Arvanitis said face time with third parties is advantageous for risk and compliance managers.

“Everyone has a sixth sense,” he said. “If you sit across the table and have a conversation with somebody, you can flush out the type of information that would lead you to believe that an individual is ethical and wants to do business in the same manner as your organization.”

“In reality there could be a nefarious individual who’s controlling the day-to-day activities or who has established and funded the organization for personal gains or influences.” — John Arvanitis,  associate managing director, compliance practice, Kroll

When it’s warranted, inviting your third party to bring along members of their supply chain can further illuminate how they do business, he added.

The difficulty in broadly applying that strategy becomes clear when you consider at least 45 percent of survey respondents work with more than 1,000 third parties in the course of a year. Some engage with far more. It’s likely this is why less than 25 percent of respondents felt highly confident in their program’s ability to address beneficial ownership risks.

Building Strong Programs

At least 58 percent of respondents uncovered legal, ethical or compliance issues with a third party after initial due diligence, which is why ongoing monitoring, including a regular refresh of underlying third-party data, emerged in the findings as a key strategy for maintaining the effectiveness of anti-bribery and corruption programs and for keeping up with potential ownership changes.

The ABC Benchmarking Report found that 75 percent of respondents monitor some or all of their third parties. Fifty-six percent of respondents whose organizations conduct monitoring choose to refresh third-party data.

On an encouraging note, 36 percent of respondents indicated their organization dedicated more resources to ABC issues in 2017 than in 2016. In addition, 92 percent of all survey respondents said their leadership team is highly engaged or somewhat engaged in their ABC efforts.

Multinational companies must elevate their level of focus on anti-bribery and anti-corruption efforts, especially when operating in locations that could be prone to questionable behaviors. Measures to weave into an ABC program include:

  • Developing an anti-corruption policy tailored to the organizations strategic goals as well as integrity and ethical goals.
  • Assessing and monitoring the level of corruption risk in each country the company does business in.
  • Communicating ethical standards and anti-bribery and corruption policies internally and with all third parties.
  • Thoroughly verifying the track record of third-party providers, local agents, distributors or intermediaries.
  • Training the local management and employees on anti-corruption policies.
  • Having a plan in place to monitor that the policies are being properly followed, including third-party contracts.
  • Regularly refreshing data collected on third-party providers, local agents, distributors or intermediaries.

There’s no such thing as an out-of-the-box solution for ABC programs, said Arvanitis. But there are underlying elements that matter.


“What makes up an effective compliance program are quality people who are hardworking, who are ethical, who make a commitment and are dedicated to the compliance mission,” he said. Strong people and processes, combined with technological solutions, form the basis for a successful program.

Having a direct and impactful code of conduct that addresses the organization’s commitment to anti-bribery and corruption is imperative, he added, together with clear anti-corruption policies, a robust due diligence and third-party management program, as well as “a tone-from-the-top message that’s consistently provided and executed by the C-suite members,” said Arvanitis.

Download the full report. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Cyber Resilience

No, Seriously. You Need a Comprehensive Cyber Incident Response Plan Before It’s Too Late.

Awareness of cyber risk is increasing, but some companies may be neglecting to prepare adequate response plans that could save them millions. 
By: | June 1, 2018 • 7 min read

To minimize the financial and reputational damage from a cyber attack, it is absolutely critical that businesses have a cyber incident response plan.

“Sadly, not all yet do,” said David Legassick, head of life sciences, tech and cyber, CNA Hardy.


In the event of a breach, a company must be able to quickly identify and contain the problem, assess the level of impact, communicate internally and externally, recover where possible any lost data or functionality needed to resume business operations and act quickly to manage potential reputational risk.

This can only be achieved with help from the right external experts and the design and practice of a well-honed internal response.

The first step a company must take, said Legassick, is to understand its cyber exposures through asset identification, classification, risk assessment and protection measures, both technological and human.

According to Raf Sanchez, international breach response manager, Beazley, cyber-response plans should be flexible and applicable to a wide range of incidents, “not just a list of consecutive steps.”

They also should bring together key stakeholders and specify end goals.

Jason J. Hogg, CEO, Aon Cyber Solutions

With bad actors becoming increasingly sophisticated and often acting in groups, attack vectors can hit companies from multiple angles simultaneously, meaning a holistic approach is essential, agreed Jason J. Hogg, CEO, Aon Cyber Solutions.

“Collaboration is key — you have to take silos down and work in a cross-functional manner.”

This means assembling a response team including individuals from IT, legal, operations, risk management, HR, finance and the board — each of whom must be well drilled in their responsibilities in the event of a breach.

“You can’t pick your players on the day of the game,” said Hogg. “Response times are critical, so speed and timing are of the essence. You should also have a very clear communication plan to keep the CEO and board of directors informed of recommended courses of action and timing expectations.”

People on the incident response team must have sufficient technical skills and access to critical third parties to be able to make decisions and move to contain incidents fast. Knowledge of the company’s data and network topology is also key, said Legassick.

“Perhaps most important of all,” he added, “is to capture in detail how, when, where and why an incident occurred so there is a feedback loop that ensures each threat makes the cyber defense stronger.”

Cyber insurance can play a key role by providing a range of experts such as forensic analysts to help manage a cyber breach quickly and effectively (as well as PR and legal help). However, the learning process should begin before a breach occurs.

Practice Makes Perfect

“Any incident response plan is only as strong as the practice that goes into it,” explained Mike Peters, vice president, IT, RIMS — who also conducts stress testing through his firm Sentinel Cyber Defense Advisors.


Unless companies have an ethical hacker or certified information security officer on board who can conduct sophisticated simulated attacks, Peters recommended they hire third-party experts to test their networks for weaknesses, remediate these issues and retest again for vulnerabilities that haven’t been patched or have newly appeared.

“You need to plan for every type of threat that’s out there,” he added.

Hogg agreed that bringing third parties in to conduct tests brings “fresh thinking, best practice and cross-pollination of learnings from testing plans across a multitude of industries and enterprises.”

“Collaboration is key — you have to take silos down and work in a cross-functional manner.” — Jason J. Hogg, CEO, Aon Cyber Solutions

Legassick added that companies should test their plans at least annually, updating procedures whenever there is a significant change in business activity, technology or location.

“As companies expand, cyber security is not always front of mind, but new operations and territories all expose a company to new risks.”

For smaller companies that might not have the resources or the expertise to develop an internal cyber response plan from whole cloth, some carriers offer their own cyber risk resources online.

Evan Fenaroli, an underwriting product manager with the Philadelphia Insurance Companies (PHLY), said his company hosts an eRiskHub, which gives PHLY clients a place to start looking for cyber event response answers.

That includes access to a pool of attorneys who can guide company executives in creating a plan.

“It’s something at the highest level that needs to be a priority,” Fenaroli said. For those just getting started, Fenaroli provided a checklist for consideration:

  • Purchase cyber insurance, read the policy and understand its notice requirements.
  • Work with an attorney to develop a cyber event response plan that you can customize to your business.
  • Identify stakeholders within the company who will own the plan and its execution.
  • Find outside forensics experts that the company can call in an emergency.
  • Identify a public relations expert who can be called in the case of an event that could be leaked to the press or otherwise become newsworthy.

“When all of these things fall into place, the outcome is far better in that there isn’t a panic,” said Fenaroli, who, like others, recommends the plan be tested at least annually.

Cyber’s Physical Threat

With the digital and physical worlds converging due to the rise of the Internet of Things, Hogg reminded companies: “You can’t just test in the virtual world — testing physical end-point security is critical too.”


How that testing is communicated to underwriters should also be a key focus, said Rich DePiero, head of cyber, North America, Swiss Re Corporate Solutions.

Don’t just report on what went well; it’s far more believable for an underwriter to hear what didn’t go well, he said.

“If I hear a client say it is perfect and then I look at some of the results of the responses to breaches last year, there is a disconnect. Help us understand what you learned and what you worked out. You want things to fail during these incident response tests, because that is how we learn,” he explained.

“Bringing in these outside firms, detailing what they learned and defining roles and responsibilities in the event of an incident is really the best practice, and we are seeing more and more companies do that.”

Support from the Board

Good cyber protection is built around a combination of process, technology, learning and people. While not every cyber incident needs to be reported to the boardroom, senior management has a key role in creating a culture of planning and risk awareness.

David Legassick, head of life sciences, tech and cyber, CNA Hardy

“Cyber is a boardroom risk. If it is not taken seriously at boardroom level, you are more than likely to suffer a network breach,” Legassick said.

However, getting board buy-in or buy-in from the C-suite is not always easy.

“C-suite executives often put off testing crisis plans as they get in the way of the day job. The irony here is obvious given how disruptive an incident can be,” said Sanchez.

“The C-suite must demonstrate its support for incident response planning and that it expects staff at all levels of the organization to play their part in recovering from serious incidents.”

“What these people need from the board is support,” said Jill Salmon, New York-based vice president, head of cyber/tech/MPL, Berkshire Hathaway Specialty Insurance.

“I don’t know that the information security folks are looking for direction from the board as much as they are looking for support from a resources standpoint and a visibility standpoint.

“They’ve got to be aware of what they need and they need to have the money to be able to build it up to that level,” she said.

Without that support, according to Legassick, failure to empower and encourage the IT team to manage cyber threats holistically through integration with the rest of the organization, particularly risk managers, becomes a common mistake.

He also warned that “blame culture” can prevent staff from escalating problems to management in a timely manner.

Collaboration and Communication

Given that cyber incident response truly is a team effort, it is therefore essential that a culture of collaboration, preparation and practice is embedded from the top down.


One of the biggest tripping points for companies — and an area that has done the most damage from a reputational perspective — is in how quickly and effectively the company communicates to the public in the aftermath of a cyber event.

Salmon said of all the cyber incident response plans she has seen, the companies that have impressed her most are those that have written mock press releases and rehearsed how they are going to respond to the media in the aftermath of an event.

“We have seen so many companies trip up in that regard,” she said. “There have been examples of companies taking too long and then not explaining why it took them so long. It’s like any other crisis — the way that you are communicating it to the public is really important.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected] Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]