China Tops the List of Ethical, Compliance Issues with Third Party Violations of Bribery Laws

While third party violations of anti-bribery and corruption laws top the list of perceived risks for compliance professionals for the second consecutive year of a survey, China tops the list of markets where respondents have experiences in legal, ethical or compliance issues with a third party after initial due diligence had been conducted.

Those are part of the findings of the 8th annual Anti-Bribery and Corruption Benchmarking Report (ABC Report), a joint study conducted by Kroll and the Ethisphere Institute.

China has surpassed Africa and becomes the market most cited by respondents (27%) that they had experiences in legal, ethical or compliance issues with a third party after initial due diligence had been conducted in the country in 2017, Kroll said.

“Beneficial ownership has become more of a concern across Asia in recent years from the continued impact of 1MDB (Malaysia’s state development fund) to Xi Jinping’s continued anti-corruption campaign,” said David Liu, Managing Director, Head of APAC Compliance at Kroll.

Changes made recently by the China Banking Regulatory Commission limiting any individual investor who owns more than 5% (considered a major shareholding) to no more than two commercial banks, or a controlling stake of no more than one lender as well as large Chinese conglomerates being under scrutiny, have made this issue more exposed, but it has always been a challenge, he added.

Ultimate beneficial ownership will continue to be a concern for all involved from governments, firms being considered for investments by foreign companies, as well as firms looking to invest in foreign companies, he estimated.

ABC risks might worsen in 2018

Despite the increased focus and robust deployment of organizational resources supporting compliance efforts, a staggering 93% of the 448 respondents believe their ABC risks will remain the same or worsen in 2018, Kroll said.

Those who expect a greater level of ABC risks attribute the rise to increased enforcement of existing regulations, followed closely by new regulations, Kroll added.

Indeed, heightened regulatory activity is evidenced in China’s sweeping anti-corruption campaign over the past five years; the UK Criminal Finances Act and France’s Sapin II, both of which became effective in 2017; a host of new anti-bribery and corruption legislation introduced worldwide, including in Germany, Ireland, and Slovakia; and ongoing U.S. Department of Justice and Securities and Exchange Commission enforcement actions, according to the report.

“The stakes are high and so is the risk level, which is likely to cause some sleepless nights for compliance professionals,” said Steven J. Bock, Global Head of Operations with Kroll’s Compliance practice. “In today’s hypersensitive business environment where a company’s hard-earned reputation can be easily lost through a lapse of judgment by a third party, the job of a conscientious compliance professional has never been tougher or more central to the success or failure of a business.”

Opaque ownership

The study also shows that while reputational and integrity concerns remain the number-one reason why a third party fails to meet an organization’s standards, the corporate or ownership structure of a third party has emerged as a major concern for compliance teams.

Notably, more than half of respondents reported that they were “concerned” or “very concerned” with beneficial ownership risks associated with their third parties, while less than 25% feel highly confident in their program’s ability to address these risks.

Ongoing monitoring that includes a regular refresh of the underlying third party data emerged among the ABC Report findings as a key strategy for maintaining the effectiveness of anti-bribery and corruption programs overall, and especially for keeping up with potential ownership changes, Kroll observed.

There is still hope

While ABC risks might worsen, there is good news too, said Kroll.

“For instance, 36% of respondents indicated that their organization dedicated more resources to ABC issues in 2017 than in 2016. Executive leadership support also remains strong, as 92% of all survey respondents said that their leadership team is highly engaged or somewhat engaged in their ABC efforts,” Bock pointed out.