with co-authors Paul Nash and Arturo del Castillo
A Region-by-Region Analysis
Organizations around the world are increasingly facing a diverse range of fraud-, cyber- and security-related challenges across a variety of sectors. The 10th edition of the Kroll Global Fraud & Risk Report (The Kroll Report) found that as compliance professionals are increasingly focused on areas such a cyber security and regulation, the areas traditionally covered by the compliance department such as bribery and corruption are still in heavy need of attention. The Kroll Report findings crystallize the need for multidisciplinary approaches if organizations are to better manage their risks going forward and offers real-world examples and case studies to help compliance professionals combat risk.
The 10th edition of the Kroll Global Fraud & Risk Report (The Kroll Report) addresses the diverse range of fraud-, cyber- and security-related challenges that organizations are facing around the world and across a variety of industry sectors. Businesses reported all-time high incidence levels of fraud (84 percent), cyber (86 percent) and security (70 percent) incidents, indicating that in an ever-converging global economy, opportunity often comes with risk.
As compliance professionals are increasingly focused on areas such as cybersecurity and regulation, this year’s GFRR survey found that areas traditionally covered by the compliance department are still in heavy need of attention. The Kroll Report cited that incidence of bribery and corruption had increased from 15 percent in 2016 to 21 percent this year, moving from 10th place to 5th place on the list of types of fraud experienced. Looking back further to the 2015 survey results, we can see that reports of bribery and corruption have almost doubled over the last two years, increasing from 11 percent.
Bribery and corruption seems to be on the rise, but companies are also getting better at detecting it. And, from a regulatory perspective, governments around the world are stepping up to tackle the issue.
Europe, the Middle East and Africa
Several European countries, including France, Germany, Ireland and Slovakia, have recently introduced or proposed to establish new anti-bribery and corruption laws.
In the U.K., the past year has seen significant progress by the Serious Fraud Office (SFO) in successfully using the Bribery Act to investigate and prosecute multiple cases. Of particular note is the use of U.S.-styled deferred prosecution agreements (DPAs) in several high-profile cases. One in particular that involved a major engineering firm, which had to be approved under the supervision of a judge, marked the culmination of a four-year investigation into bribery and corruption across seven jurisdictions including Indonesia, Thailand, India, Russia and Nigeria. The corporation’s U.K. settlement amounted to GBP 497 million, with separate agreements with the United States totaling USD 170 million and Brazil for USD 25 million.
The focus on anti-bribery and corruption prosecutions by the SFO demonstrates that both small/medium-size enterprises and large corporations are under the spotlight, and in many situations, bribery by U.K. corporations is taking place overseas. As a result, corporations are placing renewed focus on developing robust compliance systems to assess bribery risks across their global operations, which is directly affecting investment decisions in developing markets.
Further developments are afoot in the U.K. with the forthcoming Criminal Finances Bill, which establishes a new corporate offense of failure to prevent the facilitation of tax evasion and introduces Unexplained Wealth Orders, which promises to be a powerful tool in the fight against corruption.
In China, the sweeping anti-corruption campaign over the past five years has been the centerpiece of the Chinese government’s domestic policies. The successful prosecution of more than 200,000 government officials for corruption has helped solidify the popular support of the current leadership.
Historically, there have been very few successful Foreign Corrupt Practices Act (FCPA) enforcement actions for violations of anti-corruption provisions relating to China. Proving the act of corruption can be challenging, jurisdiction barriers often cause issues and obtaining evidence of government officials receiving bribes is notoriously difficult. However, now that China has stepped up its own efforts to investigate corruption in both public and private sectors, some of the schemes that have been well hidden for years may be exposed.
Elsewhere in the APAC region, bribery and corruption are constantly named as two of the largest risks facing companies. On the positive side, Indonesia’s Corruption Eradication Commission (KPK) is becoming increasingly effective, recently making arrests in the well-publicized E-KTP corruption case, which had resulted in a loss to the state of over USD 140 million; the Philippines’ president Duterte was elected on a mandate of tackling endemic corruption; Malaysia’s Anti-Corruption Academy wants to establish itself as a regional center of excellence on anti-corruption issues; the Thai military government has promised to “eradicate” corruption; and the new Vietnamese leadership has lately made a number of high-profile arrests on corruption charges.
In practice, however, some might question whether governments in the region act in a politically neutral manner. Although independent, the KPK is still seen by many as politically biased. Duterte’s anti-corruption stance has morphed into something more nationalist and populist, and the systematic dismantling of government institutions is likely to fuel corruption in the longer term. The recent arrest of Vietnamese officials on corruption charges was felt by some observers to have been driven by political rivalry at the highest levels. The Malaysian agencies have been criticized in their tackling of the 1MDB scandal: Despite international pressure, Malaysia’s attorney general declared in mid-2016 that there was no evidence of fraud. Thailand, despite its introduction of new anti-corruption laws in 2016, dropped from 78 to 101 in Transparency International’s 2016 Corruption Perception Index, placing it equal with the Philippines and 11 places below Indonesia.
North America and Latin America
Despite the controversies at the beginning of 2017 about the future of FCPA enforcement, it has already been a busy year for FCPA investigations. Since the beginning of 2017, there have been disclosures of 38 new FCPA-related investigations being conducted by the U.S. government.
One of the largest bribery investigations in recent years has been “Operation Car Wash,” carried out by the Brazilian authorities in coordination with several foreign regulators. The investigation against Brazilian contractor Odebrecht and its petrochemicals subsidiary, Braskem, spotlighted a complex and sophisticated scheme of corruption, resulting in fines of USD 2.6 billion payable to authorities in Brazil, the United States and Switzerland and heralding a genuine change in the prosecution of bribery in Latin America.
The revelation that Odebrecht paid bribes in 11 other countries – nine in Latin America and two in Africa – has turned the case into an international story. The Odebrecht case shows that corruption is often not simply a matter of illegal payments. In the global economy, corruption happens through complex financial mechanisms. Odebrecht officials shipped cash across the globe – from one shell bank account to the next – en route to politicians’ pockets in more than a dozen countries.
Bribery, like other crimes, occurs when an individual has (a) motivation to do it, (b) opportunity to do it and (c) the ability to rationalize their actions from a moral perspective. Removing any of these elements can stop the crime from taking place. In the case of bribery, the removal of one’s opportunity to commit such crime is generally the easiest element to eliminate. Companies should be prepared by optimizing their anti-bribery and corruption programs, putting strong defenses in place and being ready to detect and respond to situations before they have a serious detrimental impact on the business.
In today’s digitalized and globalized markets, navigating the global regulatory landscape and managing vast internal and third-party networks may seem unusually complex. But anti-bribery and corruption risk and the issues stemming from maleficence are anything but unusual in today’s global risk environment. This in fact is the new norm in the global economy, and it demonstrates the increasing demands placed on global businesses to have a code of conduct in place and understand precisely who they are working with and what their activities are, no matter how distant an employee or supplier may seem from day-to-day operations. Given the costly and wide-ranging repercussions that companies suffer from incidents, the imperative has never been greater to focus efforts on effective preparedness, response and remediation measures. However, the convergence of a global economy, complex digital connections and perennial human factors means that many risks are no longer solely a fraud, cyber or security problem. Rather, the findings crystallize the need for multidisciplinary approaches if organizations are to better manage their risks going forward. The Kroll Report offers real-world examples and case studies to help compliance professionals combat risk. Additionally, Kroll will be publishing its annual Anti-Bribery and Corruption Report (ABC Report) in partnership with the Ethisphere Institute in May for readers who would like to dive deeper into the topic.
Kroll’s Global Fraud and Risk Report can be downloaded here.
If you would like to receive a copy of our upcoming ABC Report, register here. Download the 2017 ABC Report and you will automatically receive the upcoming edition.