The best defence against falling foul of third party corruption law is to keep proper records of what has been done and why ©123RF
The best defence against falling foul of third party corruption law is to keep proper records of what has been done and why ©123RF

Procurement must lead on third party corruption

12 December 2016

Procurement professionals need to protect their businesses from the growing legal risk of third party corruption.

They need to deliver “high levels of professional skill, knowledge and integrity”, said David Noble, group CEO of CIPS.

His comment follows revelations that only half of multinational businesses surveyed carried out basic corruption checks on third parties.

New legislation continues to make companies increasingly liable for third parties’ acts of corruption or bribery. This puts added pressure on businesses to conduct the right due diligence on their partners.

Low levels of due diligence in large businesses are “disappointing, but maybe not that surprising”, said Noble.

“A licensing approach to procurement and supply will begin to ensure the right structures are in place to enable this to happen, with the attendant law of consequence that the licence will be lost if malpractice is discovered,” he said.

The survey of 604 chief compliance officers and heads of legal, conducted on behalf of law firm Hogan Lovells, found only half of respondents (53%) said they conducted desktop due diligence on third parties. 

Nearly half (44%) did not conduct face-to-face interviews or send questionnaires to third parties, and the same percentage did not have audit clauses in all their contracts. Well over a third of respondents (42%) said they did not have a complete record of all their third party suppliers.

Considering many of the companies interviewed had a potential risk of third party corruption, Crispin Rapinet, global head of investigations, white collar and fraud, at Hogan Lovells, said it was surprising so few companies did this due diligence. 

“It means 45%, let’s say, are going to have a problem if anything goes wrong. Which, given the risks of things going wrong in terms of size of the penalties, we find quite surprising,” he said. 

International anti-corruption laws have become increasingly tough, added Rapinet, with more countries developing and enforcing their own regulations.

The main issue with third parties was knowing exactly who you’re dealing with, he said: “In the procurement and supply chain arena you would probably still have fixers in some markets.

“The Middle East is a prime example where people who have good connections can get you contracts, and I expect can get you suppliers to provide things at a price that seems to be better than the normal market price. In that situation, historically people would have turned a blind eye… These days no multinational corporation can afford to take that risk and adopt that attitude.” 

The fact many multinationals fail to have an accurate picture of their third parties was not surprising, but still concerning, said Peter Van Veen, director of Transparency International UK’s Business Integrity Programme.

“Managing third party bribery risk is complex, and resource constraints can be a challenge,” he said. He advised firms to prioritise screening, training and monitoring of high-risk partners.

“When it comes to your supply chain, the highest risks may lie beyond your immediate relationships, with second and third tier suppliers. Companies should therefore have a sense not only of their immediate third party relationships, but also the extent to which their suppliers are themselves reliant on third parties,” he said.

Due diligence needed to be proportional to the risk, and the best defence companies can take against falling foul of third party corruption law is to keep proper records of what due diligence has been done and why, said Rapinet. 

“If you have a problem, but you can produce a file that shows that you did a risk assessment – that you took a view that this person, or this agency, was relatively low risk for theses reasons and on the basis of that risk assessment you did the following due diligence – you would get a sympathetic hearing from the regulators,” he said.

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