Bribery, Corruption Rising, Increasing Regulatory Response

MBA (6/9/2008 ) Palaparty, Vijay
One in four executives reported an incident of bribery or corruption in the past two years in the 10th Global Fraud Survey from Ernst & Young LLP, New York. Growing bribery and corruption concerns have created stronger regulatory enforcement.
As companies expand globally, competition also increases. Those that fail to recognize responsibilities under anti-bribery laws and regulations expose themselves to risk.

“Corruption is a big issue and is about fair, or more pointedly, unfair competition,” said Mike Savage, partner with Ernst & Young. “It’s also about civil society, which looks at it offensively. Increasingly, we are going to see stronger movements globally around corruption. We see that in several contexts. Global conventions are an effective way to move countries in their fight against anti-corruption. There is a common global standard among legislation. These conventions are also effective because they have two phases: the first focuses on bringing in or enhancing legislation; second it’s about implementing the legislation and equipping enforcers.”

The survey also revealed that one in four executives had been put under pressure to pay a bribe. Furthermore, one in five executives believed they lost business to a company who was paying a bribe.

Dale Kitchens, leader of the fraud and investigations team within Ernst & Young's fraud investigation and dispute services practice, said companies are moving from a reactive environment to more active prevention strategies. “There is an acknowledgment that came from the survey that management understands more of the risk,” he said.

Kitchens also said that regulators are increasingly taking issues proactively to companies in the same business space when an allegation arises. “We’re seeing global cooperation among regulatory agencies to help pursue various claims," he said.

Sixty-seven percent of respondents reported that they felt regulatory enforcement increased over the past year. Michael Stavridis, partner at Ernst & Young, said the Foreign Corrupt Practices Act has been particularly effective. “The FCPA is a global standard,” he said. “It’s the most consistent and uniformly applied standard and though it’s a piece of U.S. legislation, it has extra-territorial application.

Stavridis said the FCPA also has broad definitions of what constitutes corruption. “It has the set the standards for anti-bribery statues worldwide,” he said. However, two-thirds of respondents reported low-level awareness of the FCPA.

The 10 largest fines paid for corruption and bribery totaled $175 million, Savage said. “One of the things we see as impacts on business from bribery or corruption allegations is the concept of fines and penalties—taking money away,” he said. “Similarly business is about growth. So posing limitations on business from entering into new markets limits growth along with the ability to increase profits.”

“Organizations become nervous and their ability or desire to explore and entering new markets is impaired,” Stavridis said. “As a result of allegations, they lose confidence to grow. Even if it’s not a direct impediment, the confidence is battered and sets them back on their growth strategy.”

Savage also said compliance costs rise once a problem is discovered because of remediation control, advisors and distraction of management attention.

“It’s a perfect storm to get caught in,” Kitchen said. “Focus on risk of bribery and corruption especially in acquisition situations. It shouldn’t prevent doing business but go on with eyes open and assess risk appropriately.”

Savage advised businesses to revisit practices in more “remote” regions of business operations and be comfortable with those practices.

“It’s a difficult area to get it all right,” Stavridis said. “Organizations should not be overwhelmed.”