By Zafar I. Anjum, MSc, MS, CII, CFE, CIS, MICA, Int. Dip. (Fin. Crime)
MABI, MIPI. Group Chief Executive Officer
Corporate Research and Investigations Limited
DATELINE: KABUL, AFGHANISTAN (DECEMBER 2012) — Two former contractors of the U.S. Agency for International Development (USAID) are facing a possible three-year imprisonment and financial penalties for conspiring to steal nearly $10,000 from the development agency in 2011. The employees worked for a USAID implementing partner for the Afghanistan Farm Service Alliance project in the country, were charged with fraud for allegedly falsifying documents.
A seemingly endless stream of business fraud allegations flows continuously over our news tickers. The growing preponderance of corruption, collusion, coercion and fraud in the procurement of business contracts has thrust companies into the international limelight and forced organizations to become more accountable.
Be it major grant work awarded by government or other funding agencies, securing lucrative contracts around the globe, or using third-party intermediaries to aid in new business development, business organizations worldwide are becoming increasingly susceptible to corporate fraud and increasingly scrutinized by law enforcement agencies – and the public – in the manner by which they conduct business. And the risk of collusion increases markedly in the context of the economy and greater levels of subcontracting.
In the past year, law enforcement agencies have taken a more proactive stance to identify, apprehend and prosecute perpetrators of corporate fraud, leveling record fines against companies and harsh sentences against executives as a way to demonstrate intolerance towards fraud and judgment on those found guilty.
Business organizations worldwide – under the auspices of the Foreign Corrupt Practices Act (U.S.), the UK Bribery Act, and a myriad of other laws laid down by governments worldwide – have been cajoled into re-examining their fraud compliance programs and incorporating tighter internal and external controls to identify irregularities, pinpoint infractions and mitigate the risk of damages.
How does your organization rate in its ability to deter fraud? Let’s take a look at the current state of affairs and focus in on what progressive companies are doing to crack down on wrongdoers and reduce risk.
FCPA: The Letter of the Law for Businesses in the U.S. and Abroad
The Foreign Corrupt Practices Act (FCPA) has largely been effective in its intended goal of bringing a halt to the bribery of foreign officials in order to restore public confidence in the integrity of the American business system.
The act makes it unlawful for a U.S. citizen, and certain foreign issuers of securities, “to make a payment to a foreign official for the purpose of obtaining or retaining business for or with, or directing business to, any person. The law also applies to foreign firms and persons who take any act in furtherance of such a corrupt payment while in the United States,” as stated by the U.S. Securities and Exchange Commission.
Further, the FCPA prohibits corrupt payments through intermediaries. It is unlawful to make a payment to a third party, while knowing that all or a portion of the payment will go directly or indirectly to a foreign official.
(It should be noted here that the FCPA does not require that a corrupt act succeed in its purpose. The mere offer or promise of a corrupt payment can constitute a violation of the statute.)
DATELINE: VIETNAM (NOVEMBER 2012) — A British businessman has been accused of bribing a Vietnamese central bank governor by offering to arrange and pay for his son’s university education in Britain. The businessman is alleged to have made the offer in return for a lucrative contract to print the Vietnamese currency in 2003. The allegations were made after investigating the company for corrupt practices in securing international banknote contracts.
Homing in on Procurement Fraud
Procurement fraud is a generic term describing fraud relating to the purchase of goods and/or the commissioning of services. Procurement fraud usually involves collusion between one or more members of an organization’s staff and one or more outside suppliers.
Such transaction are identified as being “at risk” due to the known or suspected involvement of government officials or politically exposed persons, irregularities in procurement processes and contract awards, and other red flags.
General examples of procurement fraud would involve:
- Persuading government officials to receive kickbacks during the procurement process;
- Using outside contractors that have bid on substantial jobs with no previous experience;
- Working with contracting companies which are owned by politicians; or
- Forming working relationships with private sector partners, individuals or politicians who have been previously prosecuted in kickback schemes.
Frequent areas where misrepresentations often occur include unauthorized use of outside consultant resumes without the consultant’s authorization, bait and switch offers on products or services, misrepresentation of past performance, provision of falsified bank guarantees, and misrepresentation of financial position.
The Overall Cost of Fraud to the Company
Above and beyond the usual and customary criminal and civil penalties that a person or company can incur if found guilty of violating the FCPA, the statute also emphasizes further action, which could include:
- Being ruled ineligible to receive export licenses;
- Suspension or barring of individuals from the securities business; and
- The possible suspension or debarment from agency programs.
So, from the sheer bottom-line standpoint, it behooves a business to execute a highly regimented corporate program which acts as a watchdog for improper business conduct.
As a well-executed and managed corporate anti-corruption enforcement program will not only deter collusive activity and allay the subsequent criminal and civil penalties which result, it will also position the organization in a more favorable light with clients and customers, the trade, suppliers and shareholders by:
- Boosting stakeholder assurance that the company is acting in everyone’s best interest;
- Promoting the use of qualified outside oversight to maintain objectivity and integrity;
- Greatly reducing the incidence of poor-quality, off-spec or non-compliant work (or goods), or project irregularities, and the potential liabilities that result from such transactions;
- Preserving the organization’s reputation in the public’s eye;
- Strengthening the company’s ability to conduct business transactions with governments; and
- Averting bad press and public distrust.
DATELINE: AFGHANISTAN (MAY 2012) — An ex-USAID contractor that worked as a procurement officer for the Afghanistan Small and Medium Enterprise Development project was sentenced to three years in prison and fined $10,000 for bribery.
Better Enforcement, Tighter Controls
In the past several years, a major focus has been placed on upholding anti-corruption laws worldwide, resulting in an influx of highly-publicized cases, record fines and notable prison sentences. Key developing trends in enforcing FCPA laws, in particular, show a dramatically stepped-up level of prosecutions of companies and individuals, and a vastly increased level of fines:
- Investigative approaches and techniques are growing increasingly proactive and aggressive and will result in more indictments and more trials.
- Whistleblower bounty provisions have been fine-tuned to attract more tipsters.
- The prosecution of individual defendants is now a top enforcement priority.
- Law enforcement agent specialization will permit effective industry-specific enforcement.
- A widening of the demand side of the enforcement net to ensnare bribe recipients and those middlemen who assist them.
- A congressional push to mandate debarment of governmental contractors found to be FCPA violators.
- Policies aimed at encouraging compliance by offering meaningful consideration to companies with robust compliance and ethics programs.
- The expansion of multi-jurisdictional cooperation worldwide.
As reported by Bloomberg Law Reports (“Another Landmark Year: 2010 FCPA Year-In-Review and Enforcement Trends For 2011” by T. Markus Funk, Perkins Coie)
These positive trends bode well for both shareholders safeguarding their investments and companies intent on maintaining a high degree of integrity in the ongoing quest for international market penetration and new business development.
Instituting an Effective Integrity Program
In the world of anti-corruption, the best defense is, of course, a strong offense. Corporate good governance begins with a strong and well-executed compliance program. Therefore, corporations should institute and promote a “zero-tolerance” anti-corruption policy which includes a controls-based, detailed approach to fraud and corruption that is fortified by internal training programs and broad-based integrity awareness campaigns. Such programs, then would include:
- An effective overall compliance plan which has been developed with the assistance of outside counsel and is easily monitored and updated to conform to changing technology and new legislation;
- A formalized code of ethics that is presented and adhered to by the entire company;
- The creation of an “anti-corruption culture” within the entire company;
- The establishment of direct internal corporate reporting systems and the personnel to effectively oversee and administer them;
- Ongoing and regular checks and audits of the company-wide system; Evaluating and modifying the compliance plan and internal controls to make sure they are defendable on both a global and local level.
- Appropriate and consistent disciplinary processes to deter irregularities;
- Early detection of potential violations;
- Voluntary self-referral and whistleblower reporting systems; and
- Remedial actions to address past cases of corruption.
Here are suggested initiatives which are designed to strengthen the company’s key internal and external control mechanisms, procurement and financial management practices, while increasing the transparency and effectiveness of the organization’s operations.
Reporting, Bookkeeping and Contracting
Proper accounting and reporting provisions, as dictated by the FCPA, require corporations covered by the provisions to make and keep books and records that accurately and fairly reflect the transactions of the corporation and to devise and maintain an adequate system of internal accounting controls. Key measures here include:
- Establishment and implementation of robust financial controls, making sure that relevant staff are made aware of the controls and measures in place;
- Ensuring basic records of all financial and contracting records are maintained, and supporting documents are archived;
- Documenting clear procedures for reporting fraud to the proper authorities within the company.
The subsequent recording of all instances of suspected and confirmed instances of fraud will help the company spot emerging patterns, identify areas of risk, measure losses and build an evidence base if fraud has occurred.
The company must properly account for all payments made to government officials, which includes any “facilitating payment” to expedite routine government actions such as to issue a license or permit, to process a visa, to provide services like mail delivery, security services, or utilities services, provided the payment is not prohibited by local law.
(As the UK Bribery Act and most local county laws prohibit all facilitating payments, the company should generally refrain from such payments. However, should a facilitating payment become necessary, a written approval from corporate counsel should first be obtained.)
All standard bidding documents should contain language that clearly alerts bidders that documents submitted in support of bid proposals may be subject to independent verification by the company or its representatives, and that failure to authenticate a claim will result in the bidder’s disqualification from the bidding process and debarment from future business.
DATELINE: RESTON, VIRGINIA (JUNE 2012) – A company based in Reston, Virginia that provides design, installation, maintenance and other services at nuclear and fossil fuel power plants, has agreed to pay an $8.82 million criminal penalty to resolve violations of the Foreign Corrupt Practices Act (FCPA). The company allegedly paid bribes to officials employed by a state-owned nuclear power plant in Lithuania, to secure contracts to perform services for the plant. To disguise the scheme, the bribes were funneled through several subcontractors located in the U.S. and abroad. The subcontractors, in turn, made repeated payments to high-level officials via check or wire transfer.
Outside Agents: The Area Most Prone to Abuse
To avoid being held liable for corrupt third-party payments, the company should exercise due diligence and take all necessary precautions to ensure that business relationships have been formed with reputable and qualified partners and representatives. Due diligence is an integral component of integrity violations, backed by technical support and outside advice from counsel.
Such due diligence may include investigating potential foreign representatives and joint venture partners to determine if they are in fact qualified for the desired position, whether they have personal or professional ties to the government, the reputation of their clientele, and their reputation with local bankers, clients and other business associates.
Businesses should train outside agents regarding all corruption and anti-bribery laws and consider adding requirements for compliance with these laws in all contracts with outside agents.
- Tight controls should include the exclusion of providers where there are reasonable grounds for deciding they cannot be entrusted with public money. The organization should also interview questionable providers rather than relying solely on paperwork and certificates.
- Take preventive measures to lessen the overall role of agents or conduits, thereby reducing opportunities for kickbacks.
- Maintain a database of debarred and questionable third-party individuals, organizations and other entities to simplify the due diligence process before contracts are awarded and to prevent contracts from inadvertently being awarded to such entities.
- Review and revise contracts used to engage translators and interpreters to include language on adherence to the highest ethical standards of the company’s anti-corruption policy.
- Implementation of ISO 37001:2016 Anti-Bribery Management System Certification to demonstrate adequate procedures for preventing bribery.
Education and Communications Initiatives
Best-practice corporate anti-corruption programs integrate an effective communications program that informs, educates and offers a variety of outlets and resources that employees can utilize to instill a universal code of business conduct and ethics, acquire information and expose irregularities. These programs emphasize the importance of working together and call upon every staff member of the organization to collaborate and become vigilant in preventing fraud and corruption in every aspect of their job.
Aside from informing and educating, effective communications programs adequately define the role and obligation of each staff member in preventing fraud and corruption in their specific areas of responsibility.
Here, in no particular order, are some examples of best-practice solutions that can be integrated into a corporate good-governance program:
- Conduct regular presentations, seminars or workshops pertaining to the organization’s anti-corruption policy for business delegates, board of directors and key outside representatives. Such presentations raise awareness on such issues as spotting red flags for bribes, how to prevent fraud and corruption in consultancy contracts and project implementation and improving governance in various industry sectors.
- Clearly define what tools your organization has to fight fraud and corruption and identify mitigating measures that could be incorporated in operational and procedural processes to prevent integrity violations. Provide regular and mandatory anti-corruption orientation seminars to educate, create awareness and demonstrate the tools available to conduct due diligence to minimize the risk of integrity violations.
- Regularly provide case studies from past company experiences and publicized cases involving corrupt practices.
- Align Human Resource policies and procedures with fraud and financial crime issues. These anti-corruption adequate procedures should be integrated into company-produced policies, principles and guidelines manuals.
- Set out clearly defined roles and assignments of due diligence responsibilities for staff, including segregation of duties and delegation of financial responsibilities with appropriate report-back procedures.
- Initiate open forums to discuss best practices, shared knowledge, methodology; Websites and intranets are tools that work best to facilitate such info sharing.
- Set up an integrity email reporting system for reporting allegations of fraud and corruption. Effective reporting systems allow for anonymity via a separate web-based email account for communications.
- A similar “reporting hotline” can be made available for employees to report concerns about questionable or improper accounting of financial matters and unethical, illegal or unsafe business practices. Such systems allow anonymous reporting via a toll-free phone call and are available worldwide 24/7. This enables employees to report concerns without fear of retribution or retaliation.
- Produce web-based e-learning modules to educate new and existing staff. E-learning modules provide an excellent feedback system that adequately monitors the level of understanding among corporate staff.
- Compile a “Frequently Asked Questions” section on the company intranet as a rapid resource and quick reference for employees to access when integrity issues arise.
Through the proper establishment, administration, adequate procedures incorporated with implementation of ISO 37001 and communication of a company-wide anti-corruption program the business will not only mitigate the monetary and legal damages associated with fraudulent, collusive or coercive practices, it will be capable of properly defending itself in the court of law (and the court of public opinion) when such allegations arise.
ABOUT THE AUTHOR
Zafar I. Anjum, MSc, MS, CFE, CII is Group Chief Executive Officer of CRI Group (www.crigroup.com), a global supplier of investigative, forensic accounting, Anti=Bribery and Anti-Corruption Solutions, integrity due diligence and employee background screening services for some of the world’s leading business organizations. A member of the Dubai International Financial Centre, CRI safeguards businesses by establishing the legal compliance, financial viability, and integrity levels of outside partners, suppliers and customers seeking to affiliate with your business. CRI Group maintains offices in Dubai, Islamabad, Lahore, Karachi, Manila, Riyadh and the United Kingdom.
Zafar I. Anjum, MSc, MS, CII, CFE, CIS, MICA, Int. Dip. (Fin. Crime)
MABI, MIPI. Group Chief Executive Officer
Corporate Research and Investigations Limited
2nd Floor, 5 Harbour Exchange Square
South Quay, London E14 9GE,
T: +44 207 6861415
M: +44 (0)7588 454959