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

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]