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Follow the money: Managing global corruption risk

RFP
Client
•    Global manufacturer
•    $850 million in annual revenue
•    Over 2,000 global employees   
•    13 global manufacturing facilities
•    Three business units  
Many U.S. companies doing business internationally recognize the potential for corrupt business practices. They may be facing bribery issues, inappropriate behavior from employees, or third-party vendors performing questionable activity on their behalf. Consequently, they need to develop and implement an anti-corruption program as part of their enterprisewide risk management initiative. With regulations such as the Foreign Corrupt Practices Act (FCPA), UK Bribery Act and similar laws in China and Brazil — and the growing enforcement of those laws — organizations need to be vigilant. This is not a “check the box” exercise. In addition to heavy fines and high litigation costs, reputation and revenue loss are also at stake. Internal audit efforts — which include working with all stakeholders: compliance, legal, finance, sales, procurement, etc. — are essential in creating and implementing an effective program.

Best practices in action
Our client, a public global manufacturer, provides a best practice example in protecting itself from corruption when selling its products abroad. The chief audit executive (CAE) stated, “We have a significant FCPA risk because of what we’re selling and where we’re selling.” Therefore, the firm needed a strong anti-corruption program to mitigate risk and protect the business.

The client has a solid foundation for its program with an executive sponsor (corporate compliance officer) and detailed policies and procedures that lay the groundwork for their activities. The organization invests in anti-fraud and FCPA training so each employee understands expectations; training is focused on key executives and sales people, and is held regularly to account for turnover. To keep their program effective, internal audit monitors it and conducts annual compliance testing. They report program results to the board so the company can make improvements. The CAE has worked with the internal audit team and other departments (legal, procurement, sales) to evolve and improve it over time, and it’s a continuous effort to keep it effective and working properly.

Who are we paying and why?
The company focuses on the money trail to guide their activities. It’s as simple as that, but they have to be diligent and thorough in their efforts.

Improper payments
To make it explicitly clear, company policy strictly prohibits improper payments, both to public and private parties. Their policy defines improper payments for additional clarity.

Third-party fees
Paying a high sales commission may mean some of that money goes to a third party, and the client needed to understand how much and why. For instance, if they pay a salesperson a 20% commission, a very high percentage, the company asks: How much of that are pass-through costs? These could be customs, duties, inspections, training on the units or warranties. And they try to find out how much of it is “fluff money.” The company requires detailed documentation of fees, commissions or other similar payments. If the company will have to answer to regulators or litigators someday, they will have documentation showing that they did their due diligence.

Sales channel screening
The client enacted a screening policy that applies to people or businesses that meet a transaction threshold and work in corruption-prone countries, as determined by the Corruptions Perceptions Index published by Transparency International. People or businesses that meet these criteria must be screened by a background-checking service provider prior to becoming a member of the sales and distribution channel.

Contract language
Recently the company’s business units started to include specific language in their standard engagement contracts for new non-U.S. dealers, distributors, agents, consultants, customs brokers and any other party within the non-U.S. sales, marketing and distribution channel. The language states that these business partners will comply with anti-corruption laws and certify compliance periodically.

Cover your bases
Each year, the company circulates a form letter (from the general counsel and chief compliance officer) to notify all non-U.S. sales and distribution channels (dealers, distributors, agents, consultants and customs brokers) of the laws prohibiting improper payments and asks them to inform the company if they do not intend to adhere to the laws. The business unit sends the letter via a delivery service that generates a written receipt confirming delivery, tracks the delivery of the letters, and retains evidence of any responses. A negative confirmation or no response is considered acceptable.

Conclusion
As with our client, all companies should be prepared with evidence in the event that you’re questioned by investors, regulators or the board about your anti-corruption program. Document appropriately, because when the Justice Department (DOJ) looks at your program, they want to see that you’ve searched for details and asked the right questions.

We recommend the DOJ guidance for compliance program standards and best practices. Additionally, look broadly and not just at the accounting structure or internal controls. Examine the complexities in how cash is being disbursed. And if possible, travel to the larger business units and subsidiaries. Meet the distributors, agents, contractors and consultants that you are paying. You’ll learn about the barriers to overcome when setting up business in new countries, and you’ll gain perspective on how things are getting done in the world.


Additional resources
  • Transparency International Data and Reports
  • A Resource Guide to the U.S. Foreign Corrupt Practices Act  (DOJ and SEC)
  • SEC Spotlight on Foreign Corrupt Practices Act