Emerging Markets Were Making Headway with Integrity and Ethics. Then COVID-19 Variants Hit.

COVID-19 variants are surging through emerging markets — and threatening to upend years of progress in the fight against fraud, corruption and cyberattacks.

A recent report from EY’s Forensic and Integrity Services found that 44 percent of respondents in emerging markets say that reporting misconduct has become easier in the past three years. But with recent surges of COVID-19 cases in many regions, this progress may erode. Just under two-thirds of respondents acknowledged it is difficult to keep up integrity standards amid rapid change and fluctuating markets.

The EY Global Integrity Report 2020 reveals that 63% of global respondents believe that businesses operating in emerging markets are likely to be impacted adversely by the current disruption and impact of the COVID-19 pandemic. Find out more:https://t.co/mlw5R8P3ei pic.twitter.com/qrBbbdSQ7B

— EY MENA (@ey_mena) April 18, 2021

Many Countries that Avoided Initial Outbreaks Are Seeing Cases Surge

While new global cases of COVID-19 are falling, many countries that contained outbreaks throughout 2020 are experiencing out-of-control spikes spurred by new, more infectious variants. Nearly half of new daily cases are reported in India. Thailand, Cambodia and Malaysia have also seen rapid rises. While Brazil’s and Peru’s third waves appear to have flattened, the two countries recently reached the respective third and fourth highest per capita death rates, according to the Johns Hopkins Coronavirus Resource Center.

To compile its Global Integrity Report – Emerging Markets Perspective (PDF download), EY surveyed 1,700 employees (ranging from hourly workers to board members) at large companies in 21 emerging market countries. Responses date from the early months of 2021, both before and amid COVID-19 third waves. Corporate Compliance Insights reached EY Forensic and Integrity Services Partner and Head of India and Emerging Markets Arpinder Singh to learn more.

CCI: To begin at 30,000 feet, there are signs indicating that corporate cultures of ethics in emerging markets have recently improved. Over half of respondents say both that their leaders frequently communicate the need to maintain integrity and that their standards have improved in the past three years. At the same time, periods of disruption — such as that brought about by the COVID-19 pandemic — tend to invite lapses in ethics and integrity. As an expert in this field, what is your general outlook?

Arpinder Singh: The last couple of years have seen ethics and integrity gradually gaining importance for many corporate leaders. This trend is also corroborated by the findings of the “EY Global Integrity Report — emerging markets perspective,” where 55 percent of respondents in emerging markets stated that their management frequently communicated the importance of operating with integrity. In comparison, 49 percent of respondents expressed this sentiment globally. That said, the rate varies significantly across countries from 25 percent in UAE to 57 percent in South Africa and 66 percent in India.

However, the disruption caused by the pandemic led to an increase in the risk to ethical business conduct, especially as organizations and stakeholders face added financial and operational pressures. Remote working conditions, business and supply chain disruptions and restricted operations and oversight have increased the opportunity for fraud, and can make it easier to rationalize misconduct. It is essential that corporates be mindful of the ongoing situation and cognizant of these challenges, which can act as deterring factors to maintaining organizational integrity. They should have a cautious outlook, but at the same time take definite steps to improve the overall culture of ethics and integrity of the organization. With the resurgence of the pandemic and resultant restrictions being reintroduced across many regions, organizations should consider revisiting internal controls and policies and recalibrate their approach to counter integrity challenges. The extended remote-working arrangement may impinge organizational ability to effectively monitor compliance and governance mechanisms, so proactive efforts should be taken to detect and deter unethical conduct and practices.

It is encouraging that most respondents say their leaders frequently discuss the need to maintain a strong ethical culture. But at the same time, if we can paraphrase one of your points, talk is cheap. In particular, you write that management should back up what they say “by setting visible examples” and maintaining clear key performance indicators (KPIs). Are there any specific ‘visible examples’ or KPIs you would identify that highlight this point?

Management must lead from the front and establish a strong tone at the top, supported by regular communication. This will not only highlight their commitment to prioritize integrity, but also serve as a reminder for employees and other stakeholders of the importance of ethical behavior. Amid the ongoing uncertainty caused by the pandemic, companies should drive clear and consistent messaging through various channels that is supplemented through formal programs and regular training modules. Standard operating procedures (SOPs) and policies for everyone across the board should also be implemented with minimal overrides. Leaders should also have a zero-tolerance approach for any misconduct, and individuals should be held accountable for their actions. These measures will reinforce the fact that ethics and integrity are important because practicing them is the right thing to do; they’re not just regulatory requirements. This will build trust with customers and set the organization apart from the competition.

Some of the key, visible examples management can outline, demonstrate by example and implement are as follows:

• Rejecting business gains or a project attained through unethical methods;
• Setting up regular training programs on ethical behavior (or dealing with compliance) by themselves participating in it – to send the message of importance and seriousness of the program;
• Making sure that proactive reviews of process, transactions and systems, etc. are undertaken regularly;
• Instituting an independent and impartial whistleblowing program that is run by a third party with oversight by an independent firm;
• Declaring gifts or entertainment received and rejecting those that are beyond the regulatory limit;
• Opening the whistleblowing hotline and reporting to customers and suppliers/vendors along with employees;
• Ensuring that company funds are used for official purpose and not for personal expenses or other non-approved expenses; and
• Ensuring business contracts with third parties are based on merit and not personal favoritism. Conflict of interest checks should be conducted to assess possible linkages with any employees.

The landscape of whistleblower culture painted by the report is very striking. A full 50 percent of Kenyan respondents say they fear for their physical safety when considering reporting an ethical lapse. The figure drops to 17 percent in Malaysia, but it’s still significant. This appears to speak to a widespread culture that goes beyond individual companies. Is it a hard sell to say that it’s in a company’s best interest to provide leadership on this front when even 17 percent of people fear violent retribution for speaking out? Do you believe that companies themselves can provide meaningful change amid this culture?

A robust whistleblowing mechanism and well-defined policies should be part of the leadership’s key agenda in setting the right tone at the top. It is imperative for organizations to understand the significance of having a whistleblowing mechanism and reciprocate it without relegating it to a “tick the box” exercise. Several legislations, such as the Companies Act of 2013 in India, has made it mandatory for listed companies to have a whistleblowing mechanism. Effective implementation of the mechanism requires the leadership to encourage discussions with employees across various levels as well as to have provisions to receive feedback about the overall conduct of the organization.

As per ACFE’s 2020 Report to the Nations, tips/whistleblower complaints has been an important detection tool and one of the most common ways to uncover fraud, misconduct or unethical business practices. Fostering an environment where employees feel secure and comfortable voicing their concerns can facilitate a culture of integrity and openness and build the trust in an organization. Keeping such complaints anonymous and confidential is of utmost importance for the safety of the whistleblower while the allegations are being investigated. To further encourage a healthy environment, organizations can outsource management of the whistleblowing hotline to a reputed third party to handle the complaints independently and to avoid any pre-conceived notions around lack of trust or bias.

The companies’ responsibility encompasses not only implementation of policies and procedures, but also spreading awareness about these initiatives, communicating the steps being taken. Additionally, it is also essential to remember the principle that one is “innocent until proven guilty.” The alleged perpetrator should not be victimized and no details about the complaint(s) as well as the violator(s) should be disclosed before the investigation reaches a clear and impartial conclusion, backed by strong evidence to corroborate the complaint. This safeguards the interest of both the whistleblower and the individual(s) under investigation.

The topic of cybersecurity seems to be opposite that of whistleblowing. Emerging markets, in fact, lead developed markets in every metric you surveyed for. Is this surprising to you? What do you make of this result?

Organizations from any country can be victims of cybercrime. Emerging market countries may be more prone to cyberattacks and even be frequently targeted by cybercriminals because these regions are aiming toward an increasing level of digitization. However, the cyber preparedness and response may be on the lower side. One reason behind the higher number of attacks in these regions may be that emerging market countries are at a relatively nascent stage as compared to the sophisticated and well-guarded systems of the developed countries.

The EY report reflects the sentiments of senior executives’ opinions in their preparedness to combat the risk of cybercrime and ransomware attacks. Fifty-five percent of respondents from emerging markets stated that their organizations offered training for employees on what they can do to help protect against data security breaches, and only 45 percent of respondents from developed countries did so. But the result is still not that promising for either of the regions, especially considering the rising cost of cybercrime. This further indicates the pressing need and requirement of a strong cyber incident response and preparedness and rapidly spreading awareness about cybersecurity.

One-fifth of the global respondents (21 percent) stated their organizations suffered major cybersecurity breach in the preceding year. The result for developed countries was 19 percent, while 23 percent from the emerging markets confirmed that they have suffered a major data loss event. So, while emerging markets may have fared well in some aspects of cyber preparedness, it is still an uphill battle for many corporates across the world.

To wrap up, businesses in emerging markets are currently facing a host of challenges. You conclude your report writing that “[n]ow is the time to create long-term value through integrity.” One might imagine a good number of business leaders apprising their situation right now saying, “It would be great to improve our ethics culture, shore up our whistleblowing channels and improve our cybersecurity strength, but there are more pressing issues I need to deal with.” What would you say in response to that viewpoint?

The disruption caused by COVID-19 has most businesses struggling with day-to-day operations, cash flow, workforce and several other issues. Overlooking compliance, governance and integrity amid the chaos would be an easy option – a shortcut for many. Superseding controls and SOPs, oversight on only key areas and even (willful) violations may be deemed acceptable practices in these unprecedented times. However, purpose-led organizations with a clear vision for the future will strive to embed integrity at the core of their businesses. This is important not just to aim at the minimum level of regulatory compliance, but also to really forge a sustainable, ethical and competitive business. Building trust among stakeholders through an integrity-led approach can really elevate the business so it can thrive in the post-pandemic world.

A key consideration for companies will be to become cognizant of the new threat landscape, which may present several new avenues or opportunities for misconduct. This may also mean a sharp crackdown in the form of regulatory penalties for organizations that err on the compliance front. Volatile times like the present can make corporate integrity a true differentiator and create winners in the long term.