Corruption is a growing concern across the globe. According to the 4th Annual Global Anticorruption Survey released by AlixPartners, 90% of survey respondents said they believe their industry is exposed to corruption risk, with 28% saying they believe their industry faces “significant risk.” These numbers increased from last year’s survey when 85% of respondents said their industry was exposed to risk, and 22% felt the risk was “significant.”
Also on the rise is the perceived risk respondents believe they face when working within different regions. Respondents believe the regions that pose the most “significant risk” in terms of corruption are Africa (78%), Russia (73%) and the Middle East (68%). The perceived threat for these regions have generally increased since last year’s survey when 59% in Africa and 45% in Middle East said these regions posed “significant threats”, apart from Russia, which dropped from 75%.
Unfortunately, respondents aren’t optimistic that the risks in these regions will dissipate any time soon. About 80% of respondents say that corruption laws in these countries and regions are ineffective, and 62% believe there are locations where it is impossible to avoid corrupt business practices, with Africa (52%), Russia (48%), and the Middle East (41%) topping the list.
Harvey Kelly, Managing Director and Global Leader of AlixPartners’ Financial Advisory Services practice, said: “Companies today are confronted by the reality of facing scrutiny for alleged misconduct in multiple jurisdictions. That prospect has become more evident particularly as the number of countries that have either adopted new laws or stepped up enforcement continues to expand. We have seen this trend in Brazil and China, for example, and based on our survey findings, the problem appears to be deepening in regions such as the Middle East.”
Corruption: Bad for business
Although 64% of respondents say their companies have not avoided doing business in a particular region due to the risk of corruption, companies operating across multiple countries and regions could still be deeply impacted by the many negative effects of corruption.
A record number of enforcement actions by the SEC potentially show that corruption, fraud, and other misconduct remain legitimate problems for many companies globally. Aggressive enforcement, which now increasingly involves the use of sophisticated technology and data analytics tools, produced a record 807 enforcement actions and roughly $4.2 billion in sanctions in 2015.
Thirty-six percent of respondents say they have pulled out of or delayed an acquisition due to corruption risk, 23% believe their company has lost business as a result of a competitor making illicit payments to a government official, and 32% of respondents have ceased doing business with a business partner or counterparty due to corruption concerns.
“Beyond the reputational and financial costs associated with a potential regulatory inquiry a company may face, comes the disruptive nature of corruption on a company’s business. It may be difficult to measure the financial implications of delaying an acquisition or having to find new counterparties due to corruption; however, not taking these actions and potentially inviting a regulatory inquiry can be even more detrimental to a company’s ability to achieve business and strategic objectives,” said Kelly.
Anticorruption policies: Opportunities and challenges
Most respondents (75%) indicated their companies have anticorruption programs in place that are distributed to all employees. Twenty-five percent of respondents have implemented an anticorruption program in the past five years, 67% have reviewed their policies within the last year and over half have received a third party assessment of their compliance programs within the last 12 months.
When asked which practices their companies have implemented to reduce risk, internal audits (44%), anticorruption compliance policies (43%) and anticorruption training for employees (42%) were seen as the most effective measures, with respondents saying these measures are “highly successful.
Whistleblower programs also remain a key tool in identifying and dealing with corruption risk: 66% reported having a whistleblower hotline, and of those companies with a hotline, 27% have received a tip from the hotline in the past 12 months, up from 20% in AlixPartners’ survey in 2015.
When asked about challenges in their companies’ anticorruption and compliance programs, the most frequent response cited was doing business in a high-risk region, with 78% citing this as being very, or somewhat challenging. Respondents were also concerned about variations in local country laws, such as date and privacy laws (76%), and due diligence on third party and other business partners (76%).
As with any industry, technology and data present real challenges for compliance and regulatory issues. Respondents indicated that ensuring the security of data (76%), dealing with local data protection laws (77%) and lack of IT experience (52%) are either very or somewhat challenging, and represent their biggest challenges to conducting cross-border investigations.
“Technology is changing not only how companies do business, but the ways in which regulators are able to scrutinize corporate activities. Regulators such as the SEC are using algorithms to monitor for potential compliance infractions,” said Kelly. “Companies need to recognize this change in the regulatory landscape and look for opportunities to utilize technology to improve their own compliance function’s ability to monitor and detect potential issues.”
Keep it simple
“It’s been almost twenty years since the OECD Anti-Bribery Convention; however, recent headlines including the focus on the potential abuse of offshore companies and investment vehicles reminds us that although much progress has been made globally to combat corruption, there is still much to do,” says Brent Carlson, director of AlixPartners’ Financial Advisory Services practice.
Carlson notes Asia continues to be largely exposed to and impacted by corruption risk. In addition, the economic slowdown is creating the perfect storm for corruption issues in the Asia region.
“Companies in Asia have made great strides over the past years to develop and implement anti- corruption compliance programs, and now there is an over-abundance of tools available to help companies in this regard; however, several challenges still remain.”
According to Carlson, any effective program needs to be simple; overly-complex policies and procedures can actually create more problems as they can be confusing for employees. He adds that an emphasis of form over function also creates the risk of missing key evolving risk areas in a company’s business.
“Also, compliance is an on-going, ever-evolving process which requires periodic focused testing of relevant transactions to make sure the program remains effective and relevant. The concept of “Trust, but verify” needs to be incorporated into every applicable situation including due diligence, internal investigations, or on-going compliance; otherwise, any such exercise risks becoming perfunctory.”