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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