Corruption is becoming personal

SUITS THE C-SUITE By Roderick M Vega

Business World (09/05/2016 – p.S1/4)

Due to a recent spate of international high-profile corruption cases and incidents of terrorist attacks, governments around the world are stepping up their efforts to address the immense challenges of corruption and terrorist financing. Fraud, bribery and corruption continue to create volatility in financial markets, with financial institutions facing increased regulatory focus. More regulators are cooperating and vigorously enforcing anti-corruption legislation, zeroing in on individual misconduct.

This was the key finding of the recent EY 14th Global Fraud Survey titled Corporate misconduct — individual consequences, which includes insights from 2,825 senior executives from 62 countries and territories. The group included chief financial officers, chief compliance officers, heads of internal audit and heads of legal departments who provided their views on the impact of fraud and corruption on business globally.

The year 2016 has shown an increasing level of cooperation between governments and multi-lateral institutions in combating corruption. This is evidenced by the concerted efforts to apply international standards on transparency on company ownership by the World Bank and Group of 20 (G20) member countries. The G20 outlined its priorities in the 2015-2016 G20 Anti-Corruption Action Plan, identifying key areas where economies and multinational organizations must strengthen their cooperation.

Among the key issues identified, the G20 highlighted the abuse of legal and corporate structures to hide or conceal criminal activity as one of the most critical areas of concern. This coincides with the survey’s findings that 91% of respondents believe that it is vital to know the ultimate beneficial ownership of the entities with whom they do business.

The G20 has also committed to increasing international cooperation in areas of particular exposure such as public procurement and customs controls. This is supported by major companies from the G20 members that participate in the Business 20 (B20) platform and believe that “requiring that all legal entity bidders disclose information on the real people who own or control them can help forestall one of the most common corruption schemes which enable bidders to hide their conflicts of interest and some government officials to enrich themselves.”

Given the frequency of such issues being reported in Philippine media, this bidding requirement is something that our national and local leaders may wish to participate in or consider adopting.

The worldwide scale of bribery and corruption is still significant. Despite the increasing efforts of governments to fight corruption, a significant number of the survey’s respondents feel a lack of effective enforcement in emerging markets. In fact, many respondents felt that the global situation has not significantly improved in the last two years, with 39% of the respondents considering bribery and corrupt practices as widespread occurrences in their respective countries. It is interesting to note that the respondents consider the situation worsening in developed countries, where perceptions of bribery and corruption have increased from 17% to 21%. This is in contrast to the trend seen in emerging markets where results indicated a small improvement in the prevalence of bribery and corruption from 53% to 51%. We should note, however, that the worsening view in developed markets may be due to the increased awareness and publicity of high-profile cases which affected major US and European corporations, rather than an actual increase in the number of incidences.

Many respondents also held the view that while governments are generally willing to prosecute incidences of bribery and corruption, they have not been very effective in securing convictions. This is further compounded by the view of most respondents that bribery and corruption are less likely to exist in their respective business sectors — they think that bribery and corruption are someone else’s problems, with only 11% of the respondents believing that they happen in their sector. Since this seems to contrast with the survey results, it raises the question of whether some of the survey respondents are unclear as to what constitutes improper actions, or perhaps, they do not see certain practices as corrupt. The survey reveals that there is still a persistent minority of executives who are willing to justify certain unethical business practices in an economic downturn, which boards and other stakeholders should note:

• 1 in 10 respondents would be willing to make cash payments to win or retain business in an economic downturn. In some areas, such as the Far East, this number rises to 1 in 4 executives.
• 16% would change the assumptions determining valuations and reserves, rising to 1 in 4 in Japan.
• 11% would extend the monthly reporting period, with a high of 26% in India.
• 7% would be willing to backdate contracts, with 10% of respondents in Eastern Europe able to justify such behavior.
• 4% of respondents would justify misstating financial performance in an economic downturn, peaking at 1 in 10 in Africa.

The possibility of such unethical behavior could expose businesses to the risk of illegal conduct, with subsequent enforcement action from regulators who are keen to hold accountable board members and audit committees. What is also remarkable is that while majority (84%) believes that most company boards are giving due attention to fraud, bribery and corruption, many also believe that boards need more detailed awareness of the business in order to effectively safeguard against these risks. This raises the point that many companies need to strengthen their existing controls against these risks.

There are also indicators that CFOs, who have a crucial role in executing effective fraud risk management, do not appreciate the full extent of the threat posed by external risks, such as cybercrime. In addition to company leaders being held accountable, responsibility for these risks can fall on the finance teams, who being the custodians of critical data, need to be aware of cyber business risks, be alert for threats, and be ready to respond in the event of a cyber breach.

Given the above, boards and executives should be aware that they and their employees are under increased personal scrutiny for matters in which previously companies were held accountable. The survey bears this out with 83% of the respondents agreeing that prosecuting individual executives will help deter future incidences of fraud, bribery and corruption. This places additional pressure on boards who must be alert to the potential risks their companies face and who have to demonstrate that they have prepared and responded appropriately.

To manage the risks of fraud and corruption, companies need to make use of both traditional and innovative fraud detection tools. In many cases, fraud is exposed by whistle-blowers, which is why many regulators are looking into new ways to support and encourage people to come forward. More notably, between 2011 and 2015, the US Securities and Exchange Commission has awarded 22 whistle-blowers with more than $54 million, of which $37 million was paid in 2015 alone. More regulators are following suit with this US model of rewarding whistle-blowers in the hope of encouraging more people to report fraudulent conducts in their own jurisdictions.

We should note, however, that while the survey finds that 55% of companies have whistle-blowing policies and hotlines in place, we cannot presume that these work all the time. Many potential whistle-blowers are still deterred by concerns such as personal safety, loyalty to the company and an unwillingness to deleteriously impact their colleagues.

In the Philippines, this “pakisama” mentality is still prevalent in both public and private sectors. On a positive note, however, local conglomerates and companies are beginning to see the benefits of having effective whistle-blowing policies in their efforts to fight fraud. Information from whistle-blowers is being used to expose commercial bribery, which is one of the most difficult types of fraud to uncover and investigate.

The global enforcement landscape is changing, even as new and greater risks are emerging for companies. While the growing cooperation and information-sharing across borders help mitigate these risks, executive integrity and collective board action are still crucial in managing and minimizing the risks of fraud, bribery and corruption. The increased rigor by regulators in prosecuting individuals also add another incentive for board directors and senior executives to put more serious effort in ensuring that their companies actively comply with laws and regulations on bribery and corruption, given that, as seen in recent global cases, the incidence of bribery and corruption in organizations often have significant personal repercussions on the board and top management.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Roderick M. Vega is a partner and leads SGV & Co.’s Fraud Investigation and Dispute Services.