Fraud and corruption risks: strategy for prevention, detection and response John Bray, Control Risks Kuala Lumpur, 24 March 2016
Fraud and corruption risks: strategy
for prevention, detection and response
John Bray, Control Risks
Kuala Lumpur, 24 March 2016
Since 1975, we have worked in over 130 countries for more than 5,000
clients
Trusted advisor to more than 80% of the Fortune 500
34 offices on 5 continents
Control Risks is a global, independent risk consultancy
Over 2,000 employees
We enable our clients to succeed in complex environments
What are the best books or articles about compliance?
1. WHAT’S GOING ON?
Rapid, not necessarily consistent change
Companies that have failed to win contracts where
there is strong circumstantial evidence of bribery by
the successful competitor
30%
38%
31%
39%42%
38%
18%
24%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Global Brazil China India Indonesia Nigeria UK US
Companies that decided not to conduct business in a particular
country because of the risk of corruption.
By HQ country.
30%
18%
27% 26%
21%
9%
18%
43%
29%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Global Brazil China Germany India Indonesia Nigeria UK US
What is the impact on your company of refusal to
pay facilitation payments?
• No one ever asks us.
• Minor delays and no significant costs.
• Major delays and therefore significant commercial
costs.
• Refusal to would cause our business to grind to a halt.
Impact of refusal to make ‘facilitation payments’
38%
41%
19%
3%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
No one ever asks Minor delays Major delays Grinds to a halt
Impact of refusal to make ‘facilitation payments’
36%
48%
16%
19%
26%
47%
45%
38%
46%
38%
36%
39%
48%
39%
31%
41%
13%
13%
48%
36%
17%
15%
22%
19%
2%
2%
0%
7%
9%
0%
3%
3%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
US
UK
Nigeria
Indonesia
India
China
Brazil
Total
No one asks Minor delays Major delays Grinds to a halt
Has the risk of corruption been the primary reason for
you pulling out of deal in which you have already spent
time and money?” By HQ country
41%
52%
27%
50%
61%
53%
31%
44%
0%
10%
20%
30%
40%
50%
60%
70%
Globalaverage
Brazil China India Indonesia Nigeria UK US
If you pulled out of a deal because of corruption risk, what
information did you use to make the decision?
2.7%
12.1%
14.9%
16.3%
20.9%
24.8%
27.4%
0% 5% 10% 15% 20% 25% 30%
Other
Interviews with target/parner'semployees
Interviews with target/partner'smanagement
Review of target/partner financialinformation
Global and strategic risk assessment
Review of target/partner compliancedocuments
External due diligence
Do you agree or disagree, strongly or slightly, with
the following statements relating to business in high
risk markets?
• The laws serve as a deterrent to corrupt competitors.
• The laws improve the business environment for
everyone.
“International anti-corruption laws serve as a deterrent
for corrupt competitors.”
17.5%
7.8% 6.4%
46.4%
22.0%
0%
10%
20%
30%
40%
50%
60%
70%
Strongly agree/agree Strongly disagree/agree Don't know
63.9%
28.8%
“International anti-corruption laws make it easier for good
companies to operate in high-risk markets.”
14.1%8.0% 6.2%
40.4%
31.3%
0%
10%
20%
30%
40%
50%
60%
Strongly agree/agree Strongly disagree/agree Don't know
54.5%
39.3%
2. RISK ASSESSMENT
It’s not just about legal risk…
Legal risks
Security risk
Legal risk Political risk
Fraud riskCommercial risk
… and of course country risk
Specific risks for specific sectors
What are the three greatest
commercial risks for a
construction company?
What are the three greatest
integrity risks?
A closer look at a risk register
3
Inflation in cost of
materials
Prices of construction materials increases due to
shortages.
4Subcontractor
performance issuesSubcontractor defaults or falls short of targets
7 Weather Adverse weather conditions impede site access
8 Land ownership Disputes over ownership delay start of project
22 Permitting Issue of permits delated
23 Availability of
planned resources
Key staff are not available
26 Client sign-off Project deliverable rejected due to technical or
quality deficiencies
30 Corruption Staff, sub-contractors or vendors not complying with
FCPA requirements.
Potential risks at every stage…
Specification Tendering Execution Conclusion/dispute resolution
Owner rigs specification to favourparticular company
Agent bribes client to release details of competitor bid
Contractorbribes consultant to accept sub-standard work
Contractor bribes manager to sign off unnecessary expenses.
Monkey wisdom on partnership risk: ?
‘See no evil’ isn’t good enough
FCPA definition of ‘knowledge’:
You ‘know’ that a bribe will be paid if you are aware that there is a high probability, and you do nothing to prevent it.
Key considerations for commercial agents:
• What is the business case? What will this partner
actually do?
• Do you know who they really are?
• What is the incentive structure?
• What are the project milestones, and who will monitor
them?
• Is the contract clearly defined?
Your potential joint venture partner is a cousin of a senior minister
INSIGNIFICANT
This isn’t a concern at
all.
ROUTINE
We can manage the
corruption risks
through our normal
procedures and
compliance
programme.
MAJOR
We can go ahead, but
we need heightened
management care or
special measures to
manage the risks.
DEAL-BREAKER
We can’t go ahead
with the project
under these
circumstances.
Your potential joint venture partner is a cousin of a senior minister
20%
37%
20%23%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Insignificant Routine Major Deal-breaker
Control Risks International Business Attitudes to Corruption, 2013.
Your potential JV partner is a cousin of a senior minister
4%
17%
23%
41%
42%
33%
40%
23%
20%
17%
19%
23%
33%
33%
19%
14%
0% 20% 40% 60% 80% 100%
India
Brazil
UK
US
Insignificant Routine Major Deal-breaker
Control Risks International Business Attitudes to Corruption, 2013.
3. MAKING IT REAL
How to deter corrupt business behaviour?
Fear of legal penalties
Personal example by senior manager
High standards of personal ethics
A wish to avoid public shame
Fear of company penalties (demotion, dismissal)
Effective internal monitoring
Company performance criteria that highlight integrity as well as
financial targets
Clear company accounting procedures
“The most effective ways to deter corrupt business
behaviour”
3%
4%
7%
11%
7%
24%
15%
30%
6%
8%
10%
14%
21%
12%
18%
12%
9%
11%
10%
13%
13%
10%
19%
15%
0% 10% 20% 30% 40% 50% 60%
A wish to avoid public shame
Clear company accounting prodecures
Company performance criteria that highlightintegrity as well as financial targets
Personal example by senior manager
Fear of company penalties (demotion,dismissal)
High standards of personal ethics
Effective internal monitoring
Fear of legal penalties
1st choice 2nd choice 3rd choice
Compliance measures in place
20.6%
29.7%
38.6%
42.8%
43.2%
57.5%
58.0%
58.1%
64.2%
86.7%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Transaction risk monitoring software/application
Training programme for senior executives andboard members
A procedure corruption risk assessment whenentering new countries
The right to audit third parties
A corruption-specific audit or review process
Integrity due diligence on business partners
A standard clause in contracts with sub-contractorsforbidding bribes
A confidential whistleblowing line whereemployees can raise concerns
An anti-corruption training programme foremployees
A formal policy that explicitly forbids bribes
Sorting out a problem for the Chief Executive
Officer?
• The CEO is coming to visit our local office next week.
• He’s heard a lot about the country and he’s determined to visit an
important project in a restricted area an international border.
• But he needs a special permit and it normally takes three weeks to get
one. The permit fee is USD 300.
• One of our colleagues has a relative in the Permit Office. He can get the
permit in two days for USD 600. He will give us a receipt, but only for
USD 300
• We are proud of being able to solve problems and it’s really important to
keep the CEO happy.
If you come under pressure to pay
Strategies that can work include:
• Ask for a detailed explanation: what exactly is
required?
• “I can’t possibly pay this: I’d lose my job”.
• Get out your mobile phone and make a show of
seeking assistance from someone powerful.
• Ask to see a superior officer.
• Ask for a formal receipt.
Always be courteous
Be prepared to wait
Personal safety is paramount
4. PROBLEM-SOLVING
Where do you turn for help if you have a problem?
In the last two years, has your
organization conducted an internal
investigation into suspected corruption
triggered by any of the following?
52%
34%31%
18%
11% 9% 7%
0%
10%
20%
30%
40%
50%
60%
A suspected violation has come to your attention: it looks
serious but you are not sure. What do you do?
• Self-report first, then investigate?
• Investigate first, self-report if violation is confirmed?
• Investigate, and report only if likely to be found out?
A suspected violation has come to your attention: it
looks serious but you are not sure. What do you do?
53%
31%
15%
0%
10%
20%
30%
40%
50%
60%
Self report first, theninvestigate
Investigate first, self-report if violation is
confirmed
Investigate, and reportonly if likely to be found
out
Your competitor appears to have won a countract by
paying a bribe. What action did you take?
CONCLUSIONS
Compliance is not just about compliance
Be prepared to look in dark corners
Take a strategic approach for senior management…
… in support of the people on the front line
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