Cleaning up: tackling bribery and corruption in a changing world

October 2020 | COVER STORY | FRAUD & CORRUPTION

Financier Worldwide Magazine

October 2020 Issue

Bribery and corruption are endemic across the globe, a statement borne out by reams of irrefutable data, as well as persuasive anecdotal evidence. Sadly, and probably inevitably, during extraordinary events, such as natural disasters, wars and pandemics, such behaviours can spike.

The emergence of the coronavirus (COVID-19) pandemic has created such a climate. It is perhaps more a probability than a possibility that current conditions will lead to an escalation in corrupt practices and behaviours across public and private sector environments.

An elevated propensity for bribery and corruption can be attributed to several pandemic-related factors, including a volatile financial environment, increased cyber security threats and businesses forced to focus attention on issues that would otherwise not be on their radar. These factors, and others, highlight how important it is for companies to identify bribery and corruption risks and ensure they have an effective anti-bribery and corruption (ABC) programme in place.

“COVID-19 has significantly increased the risks of bribery and corruption in business,” says Rory Donaldson, business integrity programme manager at Transparency International UK. “Supply chains are being disrupted, so businesses are dealing with new, unfamiliar companies, which heightens corruption risks. These risks are compounded by the fact that many companies’ compliance departments are now operating with a reduced team, trying to oversee sales staff who are now facing more pressure to deliver.”

That said, prior to the pandemic, bribery and corruption was already extensive across the globe, with third parties and intermediaries among the main source of risk for companies. According to the United Nations, the annual cost of international corruption amounts to $2.6 trillion. Furthermore, the World Bank estimates that businesses and individuals pay $1 trillion in bribes every year.

“Bribery and corruption are a significant risk facing both domestic and multinational companies,” concurs Gail Rodgers, a partner at DLA Piper. “The extent of both varies across countries and Transparency International’s Corruption Perceptions Index is a frequently utilised source to assess the risk of corruption in a particular country.

“COVID-19 and the associated global financial impact have undoubtedly contributed to a spike in corrupt activities,” she continues. “Corrupt actors have capitalised on opportunities from the need for personal protective equipment (PPE) to stimulus monies to enrich themselves. Furthermore, employees or companies who have good intentions may be tempted to bend or break the rules due to the risk of losing a job or going out of business.”

In the view of Aaron R. Hutman, a partner at Pillsbury Winthrop Shaw Pittman LLP, three key factors are driving bribery and corruption risk. First, the pandemic caused actual or perceived scarcity, particularly early in the crisis, and deep pockets were chasing limited resources. Various government officials and private personnel had to decide who got what, with substantial opportunity and incentive for corrupt offers. Second, governments sought to maintain orderly trade and business amid a breakdown of supply and supply chains, putting underpaid, frontline personnel in a position of gatekeeper. Third, governments, multilateral funding organisations and charitable groups have made massive expenditures in reaction to the economic, medical and personal challenges introduced by the pandemic, with procurement and distribution of relief funds always fertile ground for corruption and bribery.

“It is perhaps more a probability than a possibility that current conditions will lead to an escalation in corrupt practices and behaviours across public and private sector environments.”

“The pandemic environment has fostered a substantial increase in corruption, fraud and money laundering,” adds Mr Hutman. “We will not know the full extent until the current crisis crests and enforcement officials in the US and around the world have the ability to look back, investigate and prosecute. However, I would expect to see a wave of such enforcement beginning in 2021 and 2022.”

ABC strategies

With many companies operating in volatile global markets, where adverse political, social and economic conditions are likely to heighten the risk of corrupt behaviours, the need for an effective ABC programme should be viewed as critical.

“The concern at the back of every compliance officer’s (CO’s) mind is that the anti-corruption programme looks great on paper but does not actually mitigate the risks their company is facing,” says Mr Donaldson. “Even with all the documentation in place, without an ethical culture, even the best ‘paper programme’ will not be effective in deterring corruption.”

To create such a culture, Transparency International’s ‘Anti-Bribery and Corruption During COVID-19: Six Tips for Compliance Officers’ report advises that COs: (i) ensure there is a good risk-assessment framework in place and that it is actively used as business changes; (ii) recognise the importance of tone from the top, with business leaders acting with integrity and employees doing the same; (iii) review lobbying practices to ensure ethical policies and procedures are in place and be open about what is being lobbied for and against; (iv) consider conducting a self-assessment of their company’s compliance programme to ensure it is fit-for-purpose; (v) seize colleagues’ inability to travel as an opportunity to conduct ethics and compliance training; and (vi) reiterate ethical requirements – such as codes of conduct – to suppliers and keep track of how suppliers’ risks profiles may be changing.

“All businesses are under pressure, whether they are positively or negatively impacted by COVID-19,” affirms Mr Donaldson. “Suppliers and wider supply chains will also be feeling these effects and will be making some difficult decisions. These risks need to be effectively managed too. Third-party management is always a high-risk area for business, but now more than ever. Key things to consider are regular communication with your suppliers about changing risks, conducting renewed due diligence and setting expectations of exercising audit rights when possible again.”

Ongoing diligence

The success of a company’s ABC programme is not only dependent on how effectively it assesses then tackles the bribery and corruption risks it faces, but also on how diligently it is maintained and its accommodation of fresh risk scenarios, COVID-19-related or otherwise.

To ensure an ABC programme is flexible enough to identify as yet unknown sources of bribery and corruption, Mark Taylor, product director at the International Compliance Association (ICA), suggests that companies increase their use of new technologies to boost their monitoring and surveillance capabilities, incentivise old-fashioned values and business practices, develop an ethical culture and encourage whistleblowing, so that employees feel able to challenge decisions without fear of retaliation.

“It is also very important for companies to have a consolidated third-party due diligence perspective at every stage of their operations,” adds Mr Taylor. “Such an approach creates confidence in the ethics and integrity of third parties, as well as boosting investor and business partner confidence in a company’s own conduct. It also enhances conditions for responsible investing and promotes the environmental, social and governance (ESG) agenda. Furthermore, the risk of prosecution is reduced, as is the potential cost of fines and penalties and related reputational damage.”

Of course, to be universally effective, an ABC compliance programme should also include mechanisms to ascertain and monitor transactions, products and services on an ongoing basis. “During and after the pandemic, companies should continually assess the effectiveness of their compliance programmes and actively look for wrongdoing,” suggests Ms Rodgers. “Assessments should be made on a risk-based approach. The US Department of Justice (DOJ) recently provided a roadmap for risk-based assessments which should consider these factors: company size, industry, geographic footprint, regulatory landscape and other factors both internal and external to a company’s operations.”

According to Mr Hutman, for the majority of companies, the challenge is not to come up with creative new tools, but to double down on existing best practices. “Rigorous know your customer processes, identifying beneficial owners, engaging in transaction due diligence, recognising red flags – informed by knowledge of risks increased by the pandemic and of new money-laundering typologies – and performing enhanced due diligence should all be utilised,” he suggests.

ABC legislation

With bribery and corruption likely to have significantly spiked in the wake of COVID-19, the reach of ABC laws and regulations – while varying in standards of implementation, investigation and enforcement by jurisdiction – remain a significant tool.

“The UK Bribery Act and the US Foreign Corrupt Practices Act (FCPA) remain the gold standard of anti-bribery legislation, with both allowing for vast extraterritorial reach,” believes Mr Donaldson. “However, what companies need to appreciate is that a collection of similarly powerful legislation is becoming established globally, including laws in France, Brazil, Thailand and the Netherlands.

“A company will be playing a dangerous game if it gambles on the law not being enforced, particularly with the eye-watering fines and legal costs attached, which for larger cases run into several billions of dollars,” he continues. “In addition to the tangible legal and financial impacts, companies that become embroiled in corruption scandals can also expect to suffer long term, sometimes irreparable, damage to their brand and reputation – such is often the price of doing business without integrity.”

Muddying the legislative waters to an extent is the fact that many jurisdictions have ABC laws and regulations that reflect their varying culture and attitudes, with no single, consistently applied global definition of what is a bribe or what constitutes corrupt practices. “Some locations limit their ABC laws and regulations to working with public officials and others to a broader population, including commercial organisations,” explains Mr Taylor. “Some locations permit facilitation payments and others do not. The UK Bribery Act, among others, has a long reach outside the UK.”

Indeed, Mr Hutman notes that for many years the UK, along with the US, were the only jurisdictions that took anti-corruption rules and their enforcement seriously. “Many companies and individuals reacted by watching their back against the FCPA and later the UK Bribery Act,” he recalls. “However, governments around the world, often reacting to popular pressure, have begun to add new laws and enforce existing ones.

“Even China has taken real steps to rein in bribery in its economy,” he continues. “At the same time, the World Bank and other multilateral development banks have developed strong sanctions and debarment regimes for fraud and corruption. Thus, as the pandemic evolves, it is not an anti-corruption environment where market participants need to watch their back, but rather a world of crossfire. Again, we see a wave of enforcement in coming years as governments seek to account for the events of this year.”

Time will tell

In a markedly changed world, where the status quo has largely been turned on its head, identifying bribery and corruption, wherever and whenever it may occur, is likely to become even more challenging. For many, things are going to get a lot worse before they conceivably get any better, with corruption exponentially escalating – a scenario the likes of the Organization for Economic Cooperation and Development, the DOJ and the Securities and Exchange Commission certainly foresee.

“Financial pressures and unprecedented needs for particular services, particularly in the healthcare industry, will spur spikes in corruption,” believes Ms Rodgers. “As the pandemic evolves, and business and society respond, it remains to be seen how long lasting the spikes in corruption remain. This likely will be dependent upon how well and how quickly the global economy rebounds and how robustly companies and enforcement authorities ensure compliance.”

Boiled down, now is not the time for companies to stint on their ABC compliance programmes. “While the imperative is to build back better, doing something better usually takes more resource, and at the moment many businesses are struggling to just keep core operations running,” observes Mr Donaldson. “It is important, however, for companies not to cut corners at this stage; not only may they contribute to the hugely damaging force that is corruption, they could risk their entire business by becoming either knowingly or unknowingly complicit in criminal behaviour.”

Whether, the pandemic progresses or regresses in the months ahead, companies and legislators alike will undoubtedly be taking a close look at the bribery and corruption landscape to ascertain the ABC models that were effective when difficulties arose, as well as those that proved to be fundamentally flawed. “Only time will tell,” ponders Mr Taylor. “As Warren Buffet is often quoted as saying, ‘it is only when the tide goes out do you discover who has been swimming naked’.”

Fraser Tennant