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Fraud and Corruption

25 February 2009

2Marsh

Agenda

09:00 Welcome and introductionRoy White, FINPRO EMEA Practice Leader

09:05 The latest perception of corruption by country and industry Jermyn P Brooks, Director, Private Sector Programmes,

Transparency International

09:25 Fraud trends – the types of fraud threatening your business and the impact of the current financial crisis Howard Cooper, Senior Director, Financial Investigations Practice, Kroll

Stefano Demichelis, Senior Director, Financial Investigations Practice, Kroll

09:45 The impact of the Foreign Corrupt Practices Act on UK businessesRichard Abbey, Managing Director, Financial Investigations Practice,

Kroll

10:05 Wrap-up and Q&ARoy White, FINPRO EMEA Practice Leader

10:20 Close

Corruption and Business Responsibility

Presentation by Jermyn P. Brooks

Director Private Sector Programmes Transparency International (TI)

at the

Kroll and Marsh Breakfast briefing on Fraud and Corruption

 

             

A few Facts about Corruption 

• The poorest countries suffer most

• The poorest people in the poorest countries

suffer even more

• Women and children are the most vulnerable

- no clean water

- no or only primitive health care

- no education

- no housing 

- no work

= no hope

  The Fight against Poverty• Why are we not achieving the Millennium Development Goals (MDGs)?

• Main causes:  fragile state structures and zones of conflict

• But also:  50% of aid is lost to corruption and inefficiency

• Wasted economic effort:  the poor pay high levels of bribes, e.g.

• Kenya:  30% of average annual income

• Russia:  42% pay bribes = US$ 2,250 per head of the

population per annum

• Solutions

• Empowerment of the poorest to demand accountability 

• Huge increase in Foreign Direct Investment (FDI) for job creation  

Why is FDI so low? • Corruption increases costs

• Corruption creates uncertainty

• Corruption undermines trust

"Corruption goes hand in hand with increased investment risk

which deters inward investment and raises the cost of capital" 

Guardian newspaper, 23 September 2008

So what are the solutions (I)?  Key public sector goals:

• work to create stable political institutions

• defend the independence of the judiciary

• further an active media with multiple players

• support civil society groups

• reform tax, customs and related agencies to raise state income

So what are the Solutions (II)?

The Private Sector contribution

• Business is the supply side of the problem

BUT business can be a force for good

i.e. part of the solution to the problem

Start by understanding there are real issues but

also ways of tackling them: 

• extend due diligence for Corruption Perceptions Index (CPI) scores > 5.0

• no bribery commitment as a business opportunity

Are there particular lessons for the financial services industry?1. Internal processes

Make sure all staff understand and apply high ethical and operating standards, esp. risk evaluation

2. Handling other people‘s moneyHeightened responsibility to act with prudence Avoid undesirable clients (even if mega-rich)

3. Wider societal responsibilityEvaluate steps needed to avoid systemic risk

Private Sector Solutions (I)  Individual company actions

• analyse bribery and corruption risks

• develop detailed anti-bribery policies

• implement these policies throughout the company

• monitor their effectiveness

• publicly report what you are doing

• consider obtaining external assurance to increase credibility

Private Sector Solutions (II)

What guidance can be used?

Adopt one of the good anti-bribery codes

• TI's Business Principles for Countering Bribery

incl. the SME version

• PACI (Partnering Against Corruption Initiative) Principles

• ICC (International Chamber of Commerce) Code of Conduct

• UNGC (United Nations Global Compact)

Private Sector Solutions (III) Collective action (overcoming the "prisoner's dilemma")

• combine forces with competitors and the public sector

Example: TI's Integrity Pact

• work across sectors to change public behaviour

Example:

Customs reform following industry wide pressure    

from companies, trade and professional associations

• use your influence over the supply chain

Conclusions Corruption can strangle development

But business has a duty to

• make a positive contribution even in a difficult investment climate

• position itself to avoid corruption

• obtain a valuable trusted status especially in very corrupt countries

• stand out as a respected environment for employees and business partners proving that

CLEAN BUSINESS IS GOOD BUSINESS

THANK YOU to all attendees

For more information go to:

http://transparency.org

http://www.transparency.org/global_priorities/private_sector/business_principles

www.kroll.com

Fraud in the current financial crisis

25 February 2009

Howard Cooper, Kroll

Stefano Demichelis, Kroll

16Kroll

Impact of current financial situation

Why are there more fraud cases in an economic downturn?

Motivation

Personal gain - Financial pressures on individuals

“Corporate saviour” – To avoid redundancies– To avoid breaching banking covenants– Raising debt or equity– Obtaining credit from suppliers– Bonus protection

Is there really more fraud or is more fraud coming to light?

17Kroll

Impact of current financial situation

Why are we seeing more fraud?

Increased pressure from:

Bankruptcies

Increased focus on expenditure

Regulators

Corporate governance

So what are the types of fraud that Kroll is seeing at the moment?

18Kroll

Types of fraud

Financial misrepresentation

Kroll has investigated nine cases in the last 12 months

Fictitious revenues to boost results

Window dressing (revenue and expenses)

Improper asset valuations

Concealed liabilities and expenses

Improper disclosures

19Kroll

Types of fraud

Data theft

In the last 18 months Kroll has undertaken a dozen investigations involving the theft of highly sensitive and commercially valuable data.

How is data taken from the business?

PDAs

WiFi

USB devices

Misplaced, unprotected or unaccounted for backup disks

What type of data is normally removed/copied? Customer data IP data

20Kroll

Types of fraud

Internal employee fraud

Who is the typical fraudster?

What type of fraud do they commit?

Theft:

Property, Goods, cash , financial assets

Fraud:– Bribery and corruption – False accounting– Collusion– Ghost employees and suppliers– Sale of company or customer details to others

21Kroll

How to mitigate the risk of fraud

Know your business

how does the business make its money?

remote locations

Manage your staff

job satisfaction

clarity of reward

Regular review of controls

adapt as your grow

reliance on individuals

www.kroll.com

How the FCPA affects UK Businesses

February 2009

Richard Abbey, Kroll

Richard Grimes, O’Melveny & Myers LLP

23Kroll

What is the Foreign Corrupt Practices Act?

The FCPA is a US legislation that prohibits “corrupt” payments from being made by individuals or institutions caught by the act.

These are payments, either cash or benefits intended to influence acts or decisions of foreign officials (including foreign political party officials and officials in public international organizations), in order to assist in obtaining or retaining business, or to secure some improper advantage.

The bribe does not actually have to be paid to violate the FCPA - the offer, promise, or authorization of a bribe is enough.

The FCPA prohibits both direct and indirect payments, thus capturing payments knowingly made through third parties.

The “conscious disregard” of a likely payment via a third party also violates the FCPA.

24Kroll

The Provisions of the Foreign Corrupt Practices Act

The FCPA contains three substantive provisions:

(1) A requirement to maintain accurate books and records;

(2) A requirement to maintain an adequate system of internal accounting controls;

(3) A prohibition against bribing foreign officials.

Provisions (1) and (2) will apply to a UK entity if it falls into the definition of an “issuer” under SEC regulations

In general, if you make SEC filings and are not a foreign private issuers that has filed for an exemption from registration under Section 12(g) of the Securities Exchange Act of 1934, you are likely to be caught by all of the above provisions.

25Kroll

The Provisions of the Foreign Corrupt Practices Act

For a corrupt payment to be covered under the anti-bribery provision, the payment must fall within the FCPA’s jurisdictional rules. The FCPA’s anti-bribery provision has essentially two forms of jurisdiction:

Territorial

Nationality

Territorial jurisdiction turns on whether a bribe has any connection to the U.S.

A foreign company is subject to the FCPA if it causes, directly or through agents, an act in furtherance of the corrupt payment to take place within the territory of the United States. Moreover, if acting within the United States, a company uses the U.S. mail or phone lines, highways, or any other means of U.S. “interstate” commerce in furtherance of the bribe, they will be liable.

Therefore just using a telephone from a US hotel, or routing $ through a US account is enough to be caught by the provisions.

26Kroll

The Provisions of the Foreign Corrupt Practices Act

Nationality jurisdiction focuses on whether any U.S. citizen or company is involved in the bribe

The FCPA applies to the actions of both US citizens, companies and issuers wherever they are based

A US citizen employed by a non-U.S. company is liable for bribes made on behalf of the company, even if the company itself is beyond the FCPA’s reach

In such circumstances only the U.S. citizen employee, and not the non-U.S. company, would have liability under the FCPA

27Kroll

FCPA Investigations

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Reach of the DOJ and International Co-operation

BAE Systems corruption probe has demonstrated DoJ’s determination to pursue corruption on a global basis

DoJ has publicly stated its determination to co-operate and work with international law enforcement agencies, including the Serious Fraud Office (SFO) to investigate and prosecute corrupt activities

A number of cases currently or previously under investigation are non-US companies:

StatoilSiemensSmith & NephewDaimlerAstraZeneca

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