Transparency and training are key but most companies are failing to even acknowledge risk exists
When was the last time your organisation undertook a corruption risk assessment?
Probably never, according to the latest research by EcoVadis. Only 4% of companies in Europe and North America have implemented this – and just 2% in China, Latin America and AMEA.
Many businesses are taking a reactive, unstructured approach to fighting corruption risks, found the EcoVadis study of more than 20,000 company assessments, across 100 countries and 150 industries. This is despite the fact that all employees involved in corporate bribery can face lengthy jail terms.
The anti-corruption study published late last year reports on how businesses manage critical ethical issues, including bribery and fraud, with performance evaluated on a scale of 0-100. Scores below 45 represent medium to high risk for corruption, bribery and fraud, and scores below 25 indicate very high risk.
The world’s average business ethics score is 42.4. Wholesale, transportation and storage, and construction sectors all scored below the world’s average (42.2).
Although 56% of companies in North America and 51% in Europe have a formal policy on corruption – likely due to respective regulatory environments that bring greater scrutiny, disclosure obligations and penalties – that’s not enough, according to Pierre-Francois Thaler, EcoVadis co-CEO. He says implementing internal control measures is essential.
“Written frameworks are a great starting point, but they are not sufficient for mitigating all corruption risks, which can wreak havoc on companies’ bottom lines and reputations if not addressed,” says Thaler. “To tackle these issues effectively, executive leaders need to deploy a holistic and structured risk mitigation programme that fosters transparency, encourages collaboration on performance improvements, and holds all parties accountable.”
But to avoid corruption risks in the first place, businesses have to understand the type of fraud or corrupt practices that exist, such as bid-rigging or bid-splitting; creation of shell companies to facilitate fraudulent payments; variations in contracts or purchase orders; collusion between suppliers; unjustified single source awards; and false invoices for nonexistent suppliers.
Alan Robertson, category specialist at Coronado Global Resources, in Australia, says: “Corruption is a multifaceted problem. Bribery, diversion of public/business funds and conflicts of interest are still present in even the best-performing countries. In the supply chain, and especially concerning global organisations, the potential for corruption is high, due to the increase in touch points involved and the differing standards of ethics in various countries.” Taking short cuts outside of agreed processes, or accepting gifts – which leads to favouring an outcome to a certain supplier – is also fraud, as is purposely not documenting meeting outcomes and actions, or being influenced by senior management to perform duties outside code of conduct and policy.
Whistleblowing is the most common best practice, followed by anti-corruption training and audits of internal controls, according to the EcoVadis study. But there is widespread disparity between methods used to fight corruption, and more needs to be done.
Mike Blanchard, director and principal at 4Value in New Zealand, says: “From personal experience, you need: executive leadership support, transparent systems and reporting, clear training for staff with code of conduct policy, a gift and benefits policy, investigation and audit on a regular basis with access to forensics, and clear segmentation of your supplier base and transparent partnering, training and reporting.”
Approach allegations with care
Blanchard suggests businesses create an anonymous whistleblower app to enable employees to report if they witness unethical behaviour. But be aware that whistleblowers can get it wrong. They may report incidences with the best intentions, but without any substantial evidence behind their allegations, warns CIPS. “If the corrupt practice was revealed by a whistleblower, then you need to be aware of the Public Interest Disclosure Act or if the whistleblower signed-up to going public. Once the information about the allegation has been collated and recorded, the company has to carry out thorough checks as to the credibility of the allegations and information surrounding it.
“Colleagues who are conducting the investigation should also be checked before the enquiry starts, in case there are any close relationships that could compromise the investigation.”
Following an investigation into the solicitation and receipt of corrupt payments from a contractor, Blanchard shares a few recommendations that came from an independent commission to improve systems and procedures and prevent future opportunities for corruption. “Lots of training, implementing a new supplier, development of management programmes with regular reporting to executives, along with training suppliers in anti-fraud and corruption, was highly recommended,” he says.
It was also suggested that the company implement a system of random auditing: senior managers audit middle managers’ procurement approvals and internal auditors audit those of senior managers. If orders vary from standard procedures, penalties should be enforced. The investigation identified inadequately trained staff as the major risk area that made corruption possible.
Training is key and corruption in the supply chain can go under the radar if employees don’t feel equipped to tackle it. “There is fear around what could be unearthed if there are no mechanisms to deal with it,” says CIPS.
“Sometimes, by the time concerns are raised, products and services have been in place for some time and initially can be difficult to find. Once found, it can be difficult and damaging to established relationships if suppliers or individuals are under investigation.
“Procurement corruption can be one of the more complex investigations to undertake, which can put people off,” says CIPS. “But also procurement doesn’t have the exposure, or get given the attention it deserves, even though it accounts for around two-thirds of company spend.”
Maintain your personal integrity
Procurement managers are required to ensure the integrity of the tender process. Even the mere allegation that a business has paid bribes can severely damage reputation and future business prospects.
A Procurement Policy Notice recently issued by the UK Cabinet Office advises government agencies to exclude bidders of a contract who have committed serious offences, and manage conflicts of interest in public procurement.
Robertson says: “As procurement managers, we have the reputation of the company at our fingertips. Be clean, be open and honest and you will be able to keep your personal integrity, which is everything. Recent happenings in Australia with one of the largest construction groups – Leighton Holdings – has lifted the lid on directors and their roles in corruption at home and overseas. Lesson: if you find it, report it.”
It has been alleged that Leighton Holdings won a US$733m contract in Iraq by using middlemen to bribe a range of Iraqi officials, including a deputy prime minister and two former oil ministers.
“The lack of trust caused by corruption being found in an organisation has a major impact on everyone,” says Blanchard. “It is not only internal stakeholders and suppliers that are affected, it is also the ability to recruit top class capability.
“Systems, processes and building transparent relationships with stakeholders, especially main suppliers, are key to mitigating this risk. However, even with these in place, vigilance is vital through monitoring and eventually investigating,” he adds.
If your organisations does fall foul of corruption, deal with it quickly and in a transparent way and without breaking any laws, advises CIPS: check the company’s own database to see if corruption has appeared elsewhere, and a quick Google search for news stories can reveal if other companies have also been caught out with the same malpractice.
Check with agencies such as the UK’s National Fraud Office for any information, and factor in relevant laws into the investigation, for example: The UK Human Rights Act 1988; The Police and Criminal Evidence Act (PACE) 1984; The Criminal Procedure and Evidence Act 1996.
“Depending on the nature of the corruption, you may wish to investigate internally first to reduce the risk of the fallout spilling out into lurid media reports,” says CIPS. “Unless of course it looks as though internal colleagues were involved and then an objective, discreet external investigator may be best. Taking careful steps to follow the right procedures in these kinds of investigations is also essential, with good record-keeping and company policy adhered to, ensuring any necessary prosecutions are not scuppered further down the line.
“Think about whether the investigation methods are justifiable, accountable, proportionate and necessary.”
Robertson and Conor McGarrity, co-founder and director of Risk Insights in Australia, have both been involved in reducing various business risks with the aid of data analytics. They argue that internal audits are no longer enough.
McGarrity says: “The emergence of more sophisticated detection techniques such as machine learning, provides greater opportunities to harness and analyse vast amounts of data.
“Boards and senior management must ensure their organisations use a variety of corruption prevention and detection measures for good coverage of corruption risks, instead of relying on a single approach, such as internal audits, which are unlikely to provide adequate coverage over potential risk exposures.”
Don’t wait for it to happen
Using machine learning and algorithms to check data in the procurement and supply chain systems can detect and stop corruption, according to Robertson and McGarrity.
“The ways in which corruption is being perpetrated is becoming more and more sophisticated, particularly with the ease with which funds can now easily be electronically transferred between countries,” says McGarrity.
“Be constantly vigilant – the modes of corruption are ever-changing, so businesses need to be continually assessing their risk environment to understand their corruption risk profile. This is all the more important for businesses entering new countries or where regulations differ from their normal operating environment.”
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