Third Party Compliance: Issues and Strategies to Mitigate Corruption Related Risk

THIRD PARTY COMPLIANCE: ISSUES AND STRATEGIES TO MITIGATE CORRUPTION-RELATED RISKMATTHEW RUBLE, SENIOR MANAGERDAN REYNOLDS, MANAGERGRANT THORNTON, LLPInstitute of Internal Auditors- Philadelphia Chapter2015 Spring Conference – Internal Audit 2020APRIL 20, 2015

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IIA PHILADELPHIA CHAPTER 2015 SPRING CONFERENCE

AGENDA

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• Corruption and Bribery• Foreign Corrupt Practices Act• Third Parties• Key Components of an Effective Third Party Program• Role of Internal Audit


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CORRUPTION:• Abuse of entrusted power for private gain

BRIBE:• Something valuable (such as money) that is given in order to

get someone to do something


BRIBERY AND CORRUPTION ARE GLOBAL CHALLENGES

5Source: 2014 Corruption Perception Index

(Transparency International)


BRIBERY AND CORRUPTION ARE GLOBAL CHALLENGES

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Source: 2013 Global Corruption Barometer

(Transparency International)


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Social

EconomicPolitical

THE IMPACT OF CORRUPTION


FOREIGN CORRUPT PRACTICES ACT (FCPA)

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Anti-Bribery Provision• Prohibit offering or promising anything of value to a

foreign government official to obtain or retain business.

Books and Records Provision• Must maintain books and records that accurately and

fairly reflect the entities transactions.• Must maintain a system of internal accounting controls.

FCPA APPLIES TO:

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Issuers Individuals in U.S. U.S. Citizens

Entities with U.S. Presence

Traded on U.S. Exchange

BRIBERY – NOT JUST CASH…

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…ANYTHING OF VALUE

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FLIR SYSTEMS, INC.

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Casablanca

Paris

Dubai

Beirut

New York City

20 Days 12 Hours

$7 Million

LARGEST FCPA ENFORCEMENT ACTIONSCOMPANY COUNTRY PENALTY

(Millions)YEAR

Siemens Germany $800 2008Alstom France $772 2014KBR/Halliburton USA $579 2009BAE UK $400 2010Total SA France $398 2013Alcoa USA $384 2014Snamprogetti Netherlands B.V/ ENI S.p.A

Netherlands/Italy

$365 2010

Technip SA France $338 2010JGC Corporation Japan $219 2011Daimler AG Germany $185 2010

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Reported FCPA cases involve third parties

Companies that do not perform due diligence on their third parties

Source: 12th Global Fraud Survey - 2013

THIRD PARTY RISK

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THIRD PARTY RISK

THIRD PARTY RISK

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Third Party Population

Third Party Representatives

A third party is any entity or person providing goods and/or services to anorganization.

A third party representative is any entity or person that acts on behalf of an organization.

KEY COMPONENTS OF A SUCCESSFUL PROGRAM

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OPERATING MODEL

COMPONENTS

CORPORATE OBJECTIVES

KEY RISK DOMAINS

THIRD PARTY RISK LIFECYCLE

Text

Text

Third Party Risk Framework

Governance Policies & standards

Business processes

Tools & technology

Risk metrics & dashboard

Risk culture

Contractual risk

Continuity of service/product risk

Financial viability risk

Transactional / Operational risk

Credit risk

Reputational risk

Legal / regulatory risk

Geo-political risk

Information security risk

Strategic risk

Planning, risk identification

Due, diligence, 3rd party selection

Contract negotiation& on boarding

Termination &off-boarding

Growth/innovation(products/services)

Improved client experience

Cost optimization

Improved time to market

Risk & compliance mgmt

On-going monitoring & mitigation

Continuous improvement

THIRD PARTY MANAGEMENT LIFECYCLE

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• Develop and implement a new, well-governed process to manage on-boarding of third parties– Confirm to whom/where they are doing

business, and the means by which they conduct business, etc.

• Conduct due diligence on third parties to assign levels of risk which determine the level of monitoring required

• Train the workforce and third parties on the rules and risk of fraud and corruption

• Monitor and detect transactions identify and act upon potential threats

Risk Model

Certification & Training

Verification & Updates

Reporting & Analytics

Financial Controls

Transaction Monitoring

Onboarding


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Services to be provided

Transaction Level Geographic

RiskInteractions with govt. officials

Input From Business


RISK MODEL DEVELOPMENT

High Risk

Low RiskModerate Risk

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STRONG TONE AT THE TOP

SUPPORTING TONE

AT THE MIDDLE

PROPER STRATEGY &

GOVERNANCE

NETWORK OF SUPPPORT

UTILIZE REPORTING AND

ANALYTICS

COMPREHENSIVE TRAINING

THIRD PARTY MANAGEMENT: KEYS TO SUCCESS

• Build and drive culture of compliance

• Communicate often

• Reinforce culture set forth by leaders

• Conduct discussion-based programs

• Don’t boil the ocean – take a risk based approach

• Make training relevant

• Train third parties on what is expected of them

• Identify critical influencers across the globe

• Develop regional/location champions

• Develop robust reporting

• Dashboards by region or business

THIRD PARTY DUE DILIGENCE: MITIGATING RISKS

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THIRD PARTY DUE DILIGENCE

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Due Diligence Process

Third Party Recommendation

DUE DILIGENCE PROCEDURES

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Third Party Questionnaire

Background/ Ownership

Policies

Business References

Open Source Investigations

Enforcement Action Databases

Sanctions/ Watchlists

Civil and Criminal Prosecutions

Due Diligence Reports

Negative Media (Local Language)

Political Exposure

State-Owned Entities

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THIRD PARTY DUE DILIGENCE: MITIGATING RISK


Contract Terms

• Anti-bribery language

• Right to audit clause

Anti-Corruption/Anti-Bribery Training

• Local language

Transaction Testing

• Review internal books and records for transactions with third party

Exercising Audit Rights

• Review third party's books and records.

Review Third Party's Compliance

Program

• Code of Conduct• Policies• Training

COLLABORATION BETWEEN COMPLIANCE AND INTERNAL AUDIT

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Third Party

ProgramAudit

Third Party Program can :- provide "of interest" third

parties by region/country- share investigation findings and

recommendations for "of interest" third parties

- provide a random sample third parties

Audit can:- share audit findings of third party

investigations- gather and provide contracts,

written agreements, other relevant data

- request investigations on thirdparties

COLLABORATION BETWEEN AUDIT AND COMPLIANCE

• To maintain independence, Audit should not be part of day-to-day management of the program• Audit can provide an opinion on the compliance program

THIRD PARTY AUDITS

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Review due diligence performed by compliance

Level 1: Internal Books and Records Review

Level 2: Third Party Books and Records Review (Exercise Right to Audit Clause)

Level 3: Third Party Compliance Program Review

OUTLOOK AND RESOURCES


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CORRUPTION OUTLOOK

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• Prosecution of individuals (FCPA)• DOJ tripled their task force 10 to 30• Continued Industry sweeps• More countries developing similar

legislation– Brazilian clean company act January 2014

RESOURCES

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• FCPA (legislation): http://www.justice.gov/criminal/fraud/fcpa/

• "A Resource Guide to the U.S. Foreign Corrupt Practices Act"http://www.justice.gov/criminal/fraud/fcpa/guidance/guide.pdf

• Transparency Internationalhttp://www.transparency.org/

http://www.justice.gov/criminal/fraud/fcpa/

http://www.justice.gov/criminal/fraud/fcpa/guidance/guid

http://www.transparency.org/

LET'S KEEP THE CONVERSATION GOING

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• Matthew Ruble– [email protected]– linkedin.com/in/matthewruble

• Dan Reynolds– [email protected]– Twitter: @DanReynoldsCFE– linkedin.com/in/dreynoldscfe

mailto:[email protected]

mailto:[email protected]

Third Party Compliance: Issues and Strategies to Mitigate Corruption Related Risk

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