Gareth Thomas of GoodCorporation says bribery risk is highest among third parties and intermediaries, yet due diligence in this area is worryingly not improving
Despite laws prohibiting bribery in most countries, reports of money laundering, fraud, kickbacks and other inducements to win contracts continue to hit the headlines. According to the United Nations, the annual cost of international corruption amounts to an alarming $2.6tn, with the World Bank estimating that businesses and individuals pay $1tn in bribes every year.
Across the globe, governments and regulators are intensifying their efforts to compel organisations to mitigate the risks of bribery by implementing more robust anti-corruption procedures. Legislation has been strengthened in multiple jurisdictions and more such developments are expected. We are also seeing prosecutors working closely together, co-operating and sharing information at unprecedented levels to facilitate successful prosecutions.
As a result, many organisations are investing considerable sums in their anti-corruption compliance programmes. The key to making these programmes successful is having adequate procedures in place to prevent corruption occurring.
Any company that fails to identify and assess its exposure to specific bribery risks is vulnerable to corruption
For over a decade, GoodCorporation has been working with national and international companies to assess, measure and advise on their anti-corruption programmes using our Framework on Bribery and Corruption. In its latest paper Combating corruption: businesses still at risk, GoodCorporation analyses the results of these assessments, updating the findings published in 2014. The paper shows that while there has been some improvement in the levels of adequacy (up from 62% to 70% adequate), there are still some significant areas for concern, most notably in anti-corruption risk assessment and due diligence.
Forty per cent of the 7,000 anti-corruption risk assessment procedures evaluated by GoodCorporation, were found to be inadequate, with no improvement in adequacy in the five-year period from 2014 – 2019. This lack of improvement should be ringing alarm bells.
Any company that fails to identify and assess its exposure to specific bribery risks is vulnerable to corruption and limited in its ability to demonstrate an effective compliance programme as a line of defence.
Legislators, including the UK Ministry of Justice, US Department of Justice (DoJ) and the French Anti-corruption Agency (AFA) all state that organisations must understand their exposure to the risk of corruption in order to implement effective bribery prevention programmes.
One reason this is so crucial is that an informed risk assessment will ensure that organisations take a proportionate approach to developing their anti-bribery and corruption (ABC) systems. It will also enable them to implement controls that are appropriate to their size, structure, location and the nature of their activities. Not only does this ensure that management time and resources are not unnecessarily diverted, it also allows companies to prioritise the most important risks and implement mitigation measures where they are most needed.
More than three quarters of the companies in the bottom quartile of GoodCorporation’s data set have not conducted an appropriate risk assessment. Likewise, 83% of companies in the bottom quartile are not regularly monitoring and reviewing their ABC controls.
Part of the problem is that risk assessments are undermined by being too high-level or generic
By contrast, the best companies have recognised that this is both important and achievable, with 94% of companies in the top quartile conducting appropriate ABC risk assessments and 89% regularly monitoring and updating their ABC controls.
Part of the problem is that risk assessments are undermined by being too high-level or generic. A detailed risk assessment will focus on the granular details of corruption risks. Key areas include selling through intermediaries, and operating in sectors and countries where bribery demands for facilitation payments to obtain licences and permits are commonplace.
Other risks include a lack of transparent payment processes, as well as sales incentives that rely too heavily on sales success and risk encouraging inducement payments.
Not only would taking a more risk-based approach to bribery prevention improve the overall adequacy of the ABC programme, it would also help with conducting ABC due diligence of third parties.
This is the weakest anti-corruption control, with 53% of the due diligence procedures tested by GoodCorporation graded inadequate. While an improvement from 63% in 2014, this is still an area of concern.
As the prosecutions of Rolls-Royce, Vantage Drilling and Petrofac have shown, businesses are more at risk from corruption by third parties or intermediaries than in any other area of their business. In many cases, organisations could have prevented this by undertaking due diligence or improving the nature of the due diligence conducted.
In more than half of the assessments conducted there was no clear process for deciding which third parties needed due diligence checks, and in nearly two-thirds of assessments, there were insufficient procedures for examining the practices of agents, intermediaries, suppliers and distributors.
It is clear that the commitment of senior management to preventing bribery is essential to the development of strong anti-corruption procedures
Developing a process to get this challenging area of anti-corruption due diligence right is clearly vital. Even those companies in the top quartile of the GoodCorporation anti-corruption benchmark struggle to implement some aspects of due diligence, with more than 20% still failing to implement appropriate checks on third parties and suppliers.
For those companies in the bottom quartile, the position is even worse, with 89% having inadequate systems in place for examining the ethical practices of suppliers or deciding when due diligence is required.
All too often companies attempt to conduct due diligence across too many third parties and suppliers. The results from such an approach are only ever superficial. The best strategy is to begin with a careful risk-based assessment of third parties to identify those that pose a real threat. This more targeted approach ensures that ABC due diligence is proportionate, manageable and, most importantly, effective.
Whether it is ABC risk assessment or due diligence, it is clear from all the work we have undertaken that the commitment of senior management to preventing bribery is essential to the development of strong anti-corruption procedures. As the Ministry of Justice states: “Those at the top of an organisation are in the best position to foster a culture of integrity where bribery is unacceptable.”
This is borne out by our findings. All of the companies in the top quartile of our anti-corruption benchmark could evidence senior management commitment to bribery prevention; in the bottom quartile 72% of the companies lacked such top-level commitment. Furthermore, where we have seen serious corruption, the collusion of top management was often a factor. For organisations wanting to fight corruption, there is no substitute for the most senior people championing ABC personally and actively.
The fight against bribery and corruption has become more high profile than ever as prosecutors and regulatory authorities increase their focus on the role businesses are playing in that fight. Where companies are found to have engaged in misconduct, they, and potentially those employees involved in the misconduct, will be prosecuted. The means by which companies and employees can best protect themselves is by ensuring there are robust ABC business practices in place.
The companies at the top of the GoodCorporation ABC Benchmark demonstrate what can be achieved through a rigorous and well-embedded programme. As time progresses, organisations and prosecutors alike will notice what can be achieved. Those that flounder in their endeavours to implement an effective ABC programme may leave costly penalties in their wake.
Gareth Thomas is a director of GoodCorporation, leading work in anti-corruption and integrity compliance which has included ABC projects for multilateral development banks, other financial institutions and for companies involved in M&A projects. Gareth is a graduate of the London School of Economics and has a PhD in economic geography from Kings College London.
anti-corruption Ministry of Justice US Department of Justice Anti-corruption agency Rolls-Royce Vantage Drilling Petrofac ABC Benchmark