Supply Chain Risks

Third-Party Reputational Risk

Compliance officials rank reputational risks posed by third-party partners as their top risk, and one-third expect the risks of bribery and corruption to increase.
By: | March 30, 2017 • 5 min read

Companies are increasingly concerned that third-party partners could be subject to bribery and corruption – which could then come back to haunt the organization in more ways than one.

Joseph Spinelli, senior managing director at Kroll, said that the vast majority of regulatory actions alleging corruption brought by the U.S. Department of Justice and the Securities and Exchange Commission usually involve third parties.

And in many of those cases, global organizations had not sufficiently vetted their third parties.

Joseph Spinelli, senior managing director, Kroll

“It’s interesting – no matter where I go, no matter who I speak with, chief compliance officers especially, I ask them what’s the one thing that keeps you up at night, and they all say “third party risk’,” Spinelli said.

“That includes suppliers, distributors, joint venture partners, agents – any type of third party.”

Compliance officials see reputational risks posed by third parties as their top risk, according to Kroll’s recently released “2017 Anti-Bribery & Corruption Benchmarking Report” in conjunction with the Ethisphere Institute.

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In 2016, that risk was No. 7 on the list, said Steven Bock, managing director and head of operations and research with Kroll’s compliance practice.

“With media scrutiny providing instant information, corporate entities are looked at not solely for what they do, but also what they do with their affiliations with regards to human trafficking, illegal child labor  – whatever the risk issues may be,” Bock said.

Plus, more than one-third (35 percent) of the respondents expect their risks from bribery and corruption to increase, while 57 percent expect the level of risk to remain the same as last year.

Top risks are expected from third party violations (40 percent), a complex global regulatory environment (14 percent), and employees making improper payments (12 percent).

According to the report, 40 percent of the respondents had more than 1,000 third parties and 29 percent had more than 5,000.

Spinelli said that global organizations need to risk-rank third parties into categories of high, medium, and low risk.

“For those third parties that fall into the high-risk category, it’s incumbent for global organizations to ensure enhanced due diligence is conducted,” Spinelli said. “This will require actual boots on the ground, with people who can speak the language, know the culture, and can ascertain all the relevant information.”

Steven Bock, managing director and head of operations and research, Kroll compliance practice

Kroll recommends that compliance officials employ a tiered screening program for third parties. If issues turn up on an initial screening, a company can then “dig deeper” to determine levels of concern, similar to a system that uses green, amber and red light symbols as triggers.

“If the third party answers truthfully and there are no issues, then it’s a green light to proceed further,” Bock said.

“If it’s amber, the company can decide whether it should proceed, and a red light would cause the company to make an immediate stop and not proceed any further without a more costly and detailed due diligence effort to understand whether the initial questions are as problematic as they seem on face value.”

The report also highlighted the importance of monitoring third parties after initial screening. More than half (55 percent) of the respondents discovered a problem with their third party’s qualifications or associations, after an initial screening.

Respondents attributed that to many factors, including misconduct that arose subsequent to the time of initial on-boarding, non-compliant behavior that was concealed or not disclosed by third parties, and red flags not discovered because of inadequate initial screening.

“I think we’ve gotten a clear message from these respondents that, from their perspective, monitoring is now a key component to an overall comprehensive and successful due diligence program,” Bock said.

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Companies must also consider the third-party firm’s reputation, it’s relationship with foreign officials – and the company’s actual business rationale for using that company, he said.

According to the report, however, nearly half (49 percent) of the respondents said they did not have enough resources to support anti-corruption efforts, and one-third had a greater level of concern about personal liability than they had the prior year.

Many of the surveyed compliance officers noted they were receiving support from their chief financial officers and finance teams.

“This is not surprising, as the chief financial officer and the finance team often have insight into the operations of multinational enterprises through their dealings with complex cross-border accounting controls and awareness of customs regarding local payment terms,” the report’s authors wrote.

Third parties must understand “there’s a zero tolerance for bribery and corruption when doing business on the organization’s behalf.” – Joseph Spinelli, senior managing director, Kroll

Respondents were also stepping up the compliance expertise and activities of board members as a result of increasing regulatory expectations by the DOJ, according to the report.

The engagement of senior leadership in anti-bribery and corruption efforts is on the rise, with more than half (51 percent) of respondents saying that senior leadership at their organization is “highly engaged,” a 4 percentage point increase over what respondents said in last year’s survey.

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Third parties must understand “there’s a zero tolerance for bribery and corruption when doing business on the organization’s behalf,” Spinelli said.

Contractual arrangements are a big part of that, he said, and should specifically describe expected duties, performance of duties, payment terms and audit rights, he said. In addition, third parties should be trained periodically on – and certify that they understand – the anti-bribery and corruption compliance program, which is now mandated by the DOJ.

“Global organizations should know that the third party is actually performing the work, and what compensation the third party is receiving for that work.”

Katie Kuehner-Hebert is a freelance writer based in California. She has more than two decades of journalism experience and expertise in financial writing. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Management

The Profession

After 20 years in the business, Navy Pier’s Director of Risk Management values her relationships in the industry more than ever.
By: | June 1, 2017 • 4 min read

R&I: What was your first job?

Working at Dominick’s Finer Foods bagging groceries. Shortly after I was hired, I was promoted to [cashier] and then to a management position. It taught me great responsibility and it helped me develop the leadership skills I still carry today.

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

While working for Hyatt Regency McCormick Place Hotel, one of my responsibilities was to oversee the administration of claims. This led to a business relationship with the director of risk management of the organization who actually owned the property. Ultimately, a position became available in her department and the rest is history.

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

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The risk management community is doing a phenomenal job in professional development and creating great opportunities for risk managers to network. The development of relationships in this industry is vitally important and by providing opportunities for risk managers to come together and speak about their experiences and challenges is what enables many of us to be able to do our jobs even more effectively.

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

Attracting, educating and retaining young talent. There is this preconceived notion that the insurance industry and risk management are boring and there could be nothing further from the truth.

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

In my 20 years in the industry, the biggest change in risk management and the insurance industry are the various types of risk we look to insure against. Many risks that exist today were not even on our radar 20 years ago.

Gina Kirchner, director of risk management, Navy Pier Inc.

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

FM Global. They have been our property carrier for a great number of years and in my opinion are the best in the business.

R&I: Are you optimistic about the US economy or pessimistic and why?

I am optimistic that policies will be put in place with the new administration that will be good for the economy and business.

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

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The commercial risks that are of most concern to me are cyber risks, business interruption, and any form of a health epidemic on a global scale. We are dealing with new exposures and new risks that we are truly not ready for.

R&I: Who is your mentor and why?

My mother has played a significant role in shaping my ideals and values. She truly instilled a very strong work ethic in me. However, there are many men and women in business who have mentored me and have had a significant impact on me and my career as well.

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

I am most proud of making the decision a couple of years ago to return to school and obtain my [MBA]. It took a lot of prayer, dedication and determination to accomplish this while still working a full time job, being involved in my church, studying abroad and maintaining a household.

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

“Heaven Is For Real” by Todd Burpo and Lynn Vincent. I loved the book and the movie.

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

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A French restaurant in Paris, France named Les Noces de Jeannette Restaurant à Paris. It was the most amazing food and brings back such great memories.

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

Israel. My husband and I just returned a few days ago and spent time in Jerusalem, Nazareth, Jericho and Jordan. It was an absolutely amazing experience. We did everything from riding camels to taking boat rides on the Sea of Galilee to attending concerts sitting on the Temple steps. The trip was absolutely life changing.

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

Many, many years ago … I went parasailing in the Caribbean. I had a great experience and didn’t think about the risk at the time because I was young, single and free. Looking back, I don’t know that I would make the same decision today.

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

I would have to say the relationships and partnerships I have developed with insurance carriers, brokers and other professionals in the industry. To have wonderful working relationships with such a vast array of talented individuals who are so knowledgeable and to have some of those relationships develop into true friendships is very rewarding.

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

My friends and family have a general idea that my position involves claims and insurance. However, I don’t think they fully understand the magnitude of my responsibilities and the direct impact it has on my organization, which experiences more than 9 million visitors a year.




Katie Siegel is a staff writer at Risk & Insurance®. She can be reached at [email protected]