Corruption Risk -- Money, Reputation, Even Life On the Line

An international corruption trial in China imposed the death penalty (with a reprieve) on a China Mobile executive found to have taken bribes from Siemens. His colleague received a 15-year prison term. Siemens had already paid a record $1.6 billion in 2008 to settle U.S. and German corruption charges and the SEC and Department of Justice and the German authorities provided investigative support for the Chinese prosecution.

Stan Abrams of China Hearsay wrote a column about the Siemens corruption case that concluded:

Companies that do business in more than one jurisdiction cannot look narrowly at regulatory risk anymore, saying "This is a China problem" or "Our U.S. team will deal with this." That was the past. These days, when a corruption matter (or any issue that involves international regulatory enforcement) arises, companies will have to take a look at each jurisdiction in which they are doing business.

A new study from KPMG provides some insight on how U.S. and U.K. companies are assessing and managing the risk of corruption in international operations. It shows that more than 70 percent of executives in those two countries think that corruption is endemic in some parts of the world, but that less than half of that group acknowledge not doing business in those countries to avoid corruption risk.

KPMG Principal Michael B. Schwartz, who leads Anti-Bribery and Corruption Services for the U.S. audit, tax and advisory firm, told me that companies try to manage risk by requiring their local partners, vendors, agents, and distribution channels to "certify" that they don't engage in corrupt activities.

Certification is not enough
But certification and due diligence aren't enough. The companies also audit third parties for compliance. And, he adds, "Companies must have an appropriate tone at the top, led by senior management that says doing the right thing is the only way to operate, and that it is OK to lose business if getting the business would mean breaking the law."

The FCPA can no longer be seen as a competitive disadvantage, Schwartz said.

Now, more than 38 countries have some version of a law reflective of FCPA, and companies in those jurisdictions have to catch up to the compliance requirements that have become second nature to U.S. firms. The world is coming to us and moving to that model. The enactment of the U.K. Bribery Act and new or pending anti-corruption laws in Russia, China, India, Brazil and elsewhere are indicative of this trend.

Red flags boards should look for, according to Schwartz:

First, there should be clear directives from the audit committee and the full board that management must book transactions as they are. Some red flags to consider would be payments going to a location other than where the service or parts supplier is located; if vendors are put into the procurement process other than the method directed by company policy; a one-off service, and:

• New contracts in high risk countries
• Unusual bonuses to foreign operations managers
• Unusually high or requests for increased commissions
• Requests for payments to third countries or parties
• Close relationships amongst distributors and government entities
• Political contributions, donations, excessive rebates
• Consultant recommended by official
• Unusual or excessive entertainment cost (may include seminar sponsorships)
• Misrepresentations during due diligence

Illustration by David Apatoff © 2011
Related:

• China is Indeed Home to Many Deceitful, Corrupt Companies
• How to Ensure Your Company Doesn't Violate Federal Anti-Corruption Law