Riga conference lecture 021111 2

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					Corruption costs, risky situations,
and anti-corruption programmes

         Riga, November 2nd 2011

                     by

            Arvid Halvorsen
                  Adviser
      Transparency International Norway
                    AGENDA


1. Introduction

2. Corruption damages

3. Corruption forms and risks

4. Business relation risks

5. Anti-corruption programmes
1. Introduction
                        Corruption -
                   terms and expressions

   Bribery                     Improper advantage
   Favouritism                 Grand/gross corruption
   Nepotism                    Petty corruption
   Trading in influence        “Corruption by greed”
                                “Corruption by need”
   Connected crimes:           Facilitation payments
       Extortion               “Speed/grease” money
       Fraud
                                Private-public corruption
       Embezzlement
                                Private-private corruption
       Theft
       Money laundering        Passive / active corruption
       Tax evasion             Supply side / demand side
       Insider trading
                   Corruption –
              business ”justifications”


• It is necessary in order to be competitive

• It is necessary for developing the business

• It is necessary for securing the business

• It is a good investment
                  Global trend
Descreasing operating space for corruption, and
increasing risk of discovery –

 Converging legislation

 Stricter laws

 Increasing enforcement

 Pressure groups stepping up activities

 Fewer places to hide

 More companes requiring anti-corruption measures from
  their business relations
2. Corruption damages
                         Corruption -
                          damages

 to societies:                     to citizens:

   Lack of public trust                Fosters other crimes
   Loss of political legitimacy        Lack of legal protection
   Disrespect for rule of law          Human rights abuses
   Institutions erode                  Poverty increase
   Trade and investment                Goods & services that are:
    hampered                              higher cost
   Economic development                  bad quality
    hindered                              unsafe
   Bad development projects
       Corruption damages to companies

 Reputation:                           Financing:
   Unattractive as business partner      Unattractive to investors
   Unattractive as employer              Unattractive to lenders

                                        Legal:
 Value:                                  Criminal liability
     Bid uncertainty                     Civil liability
     Wasted bid expenses
     Increased project cost            Cost:
     Extortion / black-mail                Fines
     Black-listing                         Disgorgement
     Share price drop                      Compensation
                                            Lawyer fees
             Corruption –
  consequences for involved employees

 Demotion

 Termination of employment

 Bad references for new job

 Criminal prosecution

 Fines

 Imprisonment
                       International law -
                          conventions

• OECD Convention on Combating Bribery of Foreign Public Officials
  in International Business Transactions (1997)
  - Latvia not participating

• Council of Europe Criminal Law Convention on Corruption (1999)
  - Entered into force for Latvia in 2002

• Council of Europe Civil Law Convention on Corruption (1999)
  - Entered into force for Latvia in 2005

• UN Convention against Corruption (2003)
  - Entered into force for Latvia in 2006
             International law
USA’s Foreign Corrupt Practices Act (FCPA)
• Established in 1997.

• Model for many other countries:
   –   “improper advantage”
   –   “obtain or retain a business advantage”
   –   extra-territorial reach
   –   “books and records” provisions
   –   internal control requirements

• Criminalises corruption committed by anyone in any country,
  if the act is connected to the USA in any way.

• Shortcomings:
   – Only for bribing foreign public officials, but ……….
   – Permits facilitation payments, but ……………..
3. Corruption forms and risks
             Corruption forms and risks

• Bribery

• Facilitation payments


• Political contributions

• Charitable contributions

• Sponsorships

• Gifts, hospitality and expenses

• Conflict of interest

• Use of tax havens
                               Bribery


 The most common form of corruption is bribery.
 Bribery occurs in many forms and disguises.

  One definition of bribery:

  The offering, promising, giving, accepting or soliciting
  of an advantage as an inducement for an action which is
  illegal or a breach of trust.

  (Transparency International’s Business Principles for Countering Bribery)
                      Examples of bribes

   Cash                     Promise of business

   Cash equivalents         Free use of equipment and facilities

   Expensive gifts          Kick-backs

   Gifts with conditions    Free or discounted services

   Lavish hospitality       Free or discounted goods

   Expense coverage         ”Loans”
       The nature of Facilitation Payments
 FPs are demanded and paid to secure routine actions

 The payer has legal rights to the service without paying

 The receiver has no legal right to payment


•   Mostly demanded by public officials

•   Thrives in complex and non-transparent beuraucracies

•   The demander usually has low salary and a lot of power

•   Small amounts compared with the consequence of not paying

•   Demands may come from personal initiative, or are ”institutionalised”

•   Paying will encourage escalation

•   The distinctions between FP, extortion and bribery are not always clear

•   FPs are illegal in many countries
    How to deal with Facilitation Payments?

•   Policy that forbids FPs, or a plan to avoid/eliminate

•   Risk analysis: Where and how does it occur?

•   FPs should never be volunteered, but resisted

•   Consultation with superior on how to handle a demand

•   A ”way out” is needed in case of physical threat or other severe consequences

•   Processing incidents in organisation to learn and decide actions

•   Reporting incidents to police

•   Working with peers

•   Correct book-keeping of any FPs made
                    Political contributions –
                      how to reduce risk?

•   An option is not to allow political contributions

•   Be aware of possible conflict of interest and private gain

•   If the donation can be seen as an attempt to influence a decision, then avoid it

•   Contributions should be made to an organisation, not to a person

•   Decision process to pay should involve more than one person

•   Motivation, evaluation and decision should be documented

•   Contribution should be covered by written agreement and receipt

•   Employees should be informed of any political contributions

•   Political contributions should be communicated externally
             Charitable contributions –
               how to reduce risk?


As for political contributions +

…ensure that:

   – charity organisation is not used as a front by a public official

   – key personnel of the charity are not holding positions with the
     authorities

   – key personnel of a charity are not holding positions in a business that
     has connections with the company
                    Sponsorships –
                  how to reduce risk?


As for political and charitable contributions +

…ensure that:

   – nobody receives personal return favours, except if:

       • small values (such as event tickets)

       • to several people

       • transparent
            Gifts / Hospitality / Expenses –
                  how to reduce risk?

•   Modest in value and frequency

•   Appropriate circumstances

•   Transparency

•   No obligations or expectations created

•   Same principles for giving and receiving

•   Same principles in all countries (be aware of local value)

•   Gifts and hospitality of value: Proper recording in the accounts

At last, but not the least:
• Extreme care during contract bidding, evaluation and award (and afterwards)
                    Conflict of interest –
                    how to reduce risk?
 Conflict of interest situations facilitate corruption

• Conflict of interest mostly occur with:
   –   Purchasing
   –   Contracting
   –   Sales
   –   Business development
   –   Recruitment

• Precautions:
   –   Deal with potential conflict of interest situations up-front
   –   Ensure transparency
   –   Decisions should be taken by others than the person involved
   –   Exit from the affected activities within the company
   –   Exit from the conflicting outside interest
   –   Document the handling of cases
                       Tax havens -
                    how to reduce risk?
 Tax havens facilitate corruption

  Tax havens offer:
   – No tax
   – No transparency

• Used for:
   – Legitimate purposes
   – Criminal transactions

• Be careful if:
   – Business partner is registered in a tax haven
   – Transaction via a tax haven is a requirement from the business partner
4. Business relation risks
                   Business relations

• Subsidiaries

• Partly-owned companies

• Joint ventures and consortia



• Agents

• Contractors and suppliers

• Customers

• Merger and acquisition targets
                       Business relations --
                       How to reduce risk?
To reduce risk of legal complicity:

• Carry out INTEGRITY DUE DILIGENCE before the relationship starts:
    –   in cooperation with IDD object
    –   without the IDD object’s knowledge
    –   open sources search
    –   in-depth investigation by a consultant

• Ask for your anti-corruption programme to apply to the business associate

• Demand an anti-corruption programme of a minimum standard

• Anti-corruption commitments in the contract

• Termination clause in contract (in case of corrupt behaviour)
                 Business relations --
                Examples of ”red flags”
• A history of bribe paying suspicions or convictions

• Poor corporate governance, lack of anti-corruption system

• A public official owns a significant part of the company

• A company manager owns a significant part of a competitor

• Unwillingness to disclose identity of owners

• The company is black-listed

• Close association with politicians, competitors or criminals

• Suspicious contract conditions; use of tax havens
                 Business relations --
                Dealing with ”red flags”

• Terminate the relationship

• Continue investigation and evaluation in more depth

• Confront the business associate with the findings

• Give the business associate opportunity to explain

• Help the business associate to fix the problem

• Continue the relationship, but implement risk mitigation plan
      Subsidiaries and part-ownerships –
             How to reduce risk?
Subsidiary:
A legal entity fully owned and controlled by a parent company

Partly-owned company:
A legal entity jointly owned by several

Joint venture:
An unincorporated cooperation, where rights and obligations of the partner
companies are regulated by contract

Principles:
•   Parent company anti-corruption programme should apply when it has
    full or majority ownership, voting control, or operating control.
•   A minority owner should influence partners to implement anti-corruption
    programme for the jointly owned company/venture.
•   A minority owner should exit if the programme or performance are inadequate
    and cannot be sufficiently influenced.
                    Agents –
     What is their role and what is the risk?

•   Agents are entities or persons who are contracted by a company to act on its
    behalf to assist with sales, business development, or government relations

•   Agents are often used for legitimate reasons

•   Agents represent companies, but may be unfamiliar with the company’s anti-
    corruption standards and with anti-corruption legislation

•   In some cases, companies have used agents to bribe on their behalf

•   In many cases, agents have bribed without the company’s knowledge

•   Companies are prosecuted for bribes paid by agents
                      Agents –
                examples of ”red flags”

• The customer requests that a specific agent is used
• Agent has little experience with the company’s line of business
• Agent has little experience with the type of work he is contracted for
• Agent resides in a different country
• The country of the agent or the project scores low on TI’s CPI
• Agent is associated with criminals
• Compensation requested is dis-proportionate to the amount of work
• High success fee requested for obtaining results
• Agent asks for payment in advance, to another person, or country
• Agent asks for additional payments to ”close the deal”
                       Agents –
                   How to reduce risk?
• Integrity due diligenge before engaging

• Always written contract

• Concrete description of tasks and objectives

• Reasonable compensation for work and achievements

• Anti-corruption and termination clauses in contract

• Sign-on to company’s anti-corruption programme

• Anti-corruption training

• Audit rights

• Close monitoring
              Contractors and suppliers –
                 how to reduce risk?
• Robust procurement procedures, with focus on:
    –   Security and confidentiality
    –   Conflict of interest avoidance
    –   Competitive bidding
    –   Clear responsibilities
    –   Checks and balances
    –   Anti-corruption requirements

• Integrity due diligence
• Anti-corruption criteria in pre-qualification and tender evaluation
• Anti-corruption requirements in contract
• Supplier declaration covering anti-corruption
• Supplier anti-corruption requirements towards sub-suppliers
• Visits, inspections and audits
                   Customers –
       what are the risks and how to reduce?

• Reputation risk of being associated with a corrupt customer. Also,
  complicity risk exists if:
   – Supplier is actively involved in customer’s bribery
   – Supplier benefits from customer’s bribery
   – Supplier’s goods/services/compensation are involved in customer’s bribery

• Risk reduction:
   –   Exchange of anti-corruption programme information
   –   Anti-corruption and termination clauses in contract
   –   Integrity due diligence (IDD)
   –   Avoid customers with serious ”red flags”

• Selective / prioritised IDD approach:
   – Customers with doubtful reputation
   – Repeat / long term / large volume customers
   – Companies from countries which score low on TI’s CPI
            Mergers and acquisitions –
               how to reduce risk?


• Acquisitions:
    – Integrity due diligence on acquisition object
    – Questionnaire, open source, IDD consultant
    – Covering assets, activities, owners, management, business partners


•   Mergers:
    – Same approach on all companies involved
5. Anti-corruption programmes
What is an anti-corruption programme?


The Programme is the whole of an enterprise’s anti-bribery
efforts including values, code of conduct, detailed policies
and procedures, risk management, internal and external
communication, training and guidance, internal controls,
oversight, monitoring and assurance.

(Transparency International’s Business Principles for Countering Bribery)
            Why is a programme useful?


• Decreases risk of corrupt acts occuring

• Protects company against corrupt acts committed
   –   deliberately
   –   reluctantly
   –   erroneously
   –   accidentally

• Creates a platform for legal and ethical decisions in the
  company

• Builds company culture, pride, loyalty and work motivation
          Why is a programme useful?

• Protects company market value
• Builds investors’ and lenders’ trust
• Limits business disruption
• Prevents distraction of management focus
• Protects and improves the company’s reputation
• Prevents criminal prosecution of company and employees
• Increases ability to attract and retain talented employees
• Reduces expenses and losses
           Transparency International
    tools / guidelines / research (www.transparency.org)

    Business Principles for         Corruption Perceptions Index
     Countering Bribery (BPCB)        (CPI)
    BPCB – SME Edition
    BPCB Guidance Document          Global Corruption Barometer
                                      (GCB)
    ”Protect your Business”, TI-
     Norway handbook
     (www.transparency.no)           Bribe Payers Index (BPI)
    ABC – Anti-bribery checklist
    Six step implementation         Integrity Pact
     process
    Self-evaluation tool            Global Corruption Report 2009
                                      (Corruption and the private sector)
Developing an anti-corruption programme -
          programme elements
• Values

• Risk assessment

• Code of conduct / Code of ethics

• Written rules and guidelines

• Training

• Information and reporting

• Whistle-blowing

• Controls and auditing
        Programme implementation


– Commitment from the top

  •   The Board of Directors should commit to an anti-corruption policy

  •   The top management should leave no doubt about the
      seriousness and priority of the programme

  •   Management should through speach, writing and action
      demonstrate a strong ethical leadership
           Programme implementation
• Organisation involvement
  – Consultation with employees to ensure necessary depth of
    ownership and commitment

  – Person/group to administer the programme – independent of
    business line organisation


• Training programmes
  – Include entire organisation, but consider relevant risks

  – Lectures and e-learning

  – Dilemma training creates engagement and common
    understanding – contributing to a good company culture
            Programme implementation

• Accountablity and consequences
  – All employees to be made responsibility
  – Sanctions if breach of rules

• Internal controls and auditing
  – A robust financial control system prevents and detects corruption

• Investigation of incidents
  – Interviews, review of contracts and payments, analysis of financial
    data, review of e-mails and files
  – Illegal acts to be reported to police
           Programme implementation
• Whistle-blowing
  – Managed by independent staff unit reporting to CEO or Board

  – Opportunity to report anonymously

  – Open to employees (+ business relations and general public ?)

  – Confidentiality, adequate protection and fair handling of individuals

  – Whistle-blowing should be encouraged

  – Must not provoke retaliation

  – All cases to be brought to conclusion

  – Debriefing of individuals involved

  – Filing of cases and initiation of improvement actions
           Programme implementation

• Information and communication
  – Internal and external communication about the programme
  – Annual report and company web-site
  – Managers’ internal reporting to superiors:
     •   Implementation progress for anti-corruption programme
     •   Self-assessment of risks and practices
     •   Compliance statement


• Programme review and adjustment
  – Review suitability, adequacy and effectiveness
  – Independent assessment and external review
  – Implemention of improvements

				
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