The worst kept secret in business ethics

The 'revelation' that unpaid interns are employed on a widespread basis is one of the worst kept secrets in business ethics. These are not just the uncontrolled exploits of small owner-mangers. It is standard practice among many bluechips. Media, public relations and publishing firms are particular culprits. These are businesses where young people queue up for an entree. They are pretty safe office environments, so there is little fear of discovery through a work accident.

This is not just bad because it's illegal. It's socially regressive because it cuts off those from poorer backgrounds who can't survive on unpaid labour from the work experience so needed on a CV these days.  How about a statement from all our leading companies on their practices in this area on their CSR web pages?

GoodCorporation's Business Ethics Debates

Anti-corruption Due Diligence

The first GoodCorporation Business Ethics Debate of 2013 revealed that for many companies, anti-corruption due diligence is proving to be the most challenging aspect of implementing robust adequate procedures to comply with the UK Bribery Act.

Despite the lack of prosecutions to date, this presents a real problem for businesses. The behaviour of third parties has been a key aspect of Department of Justice prosecutions and the Rolls-Royce case suggests that it will also be a major issue under the UK Bribery Act.

The key problems were broken down into a number of areas:

Implementing a centralised due diligence process across autonomous divisions is a real challenge. Some companies feel they know what to do and have a good process that is working well in some areas, but rolling this out globally in a systematic way is proving problematic.

Culture clash: ABC due diligence is new for many organisations and in some cultures it is a struggle to convince colleagues of the need to do due diligence. This makes it essential to have proportionate systems that direct the due diligence to the third parties where there are genuine risks. It also requires a lot of ‘change management’ to convince colleagues and bring them on-board.

JV challenges: Some reported that while they had successfully completed adequate due diligence on suppliers, such a robust approach was harder to implement with JV partners where trust forms a key part of the relationship. Implementing checks without damaging relationships can be a major challenge.

Financial risk assessment: Some companies are assessing risk and due diligence needs according to the value of the contract – this in itself could be a high-risk approach. Due diligence must be proportionate to the risks identified and some very high-risk activities might be small in terms of value and therefore harder to spot.

Managing red flags: A number of participants commented on the fact that due diligence is not necessarily the hard part of the job. The harder part is applying the judgement needed when red flags are identified, in some markets and sectors red flags are bound to exist. The problem is how to put in place sensible monitoring and remedial action plans to bring the third-party up to scratch so that it can be safely engaged.

Logic checks: Some companies noted that due diligence can be too formulaic and lack any logic check. The important and obvious corruption risks can be missed by a due diligence questionnaire. It is more important to stand back and ask questions such as ‘where is the corruption risk with this activity?’ ‘What is the potential for kick-backs?’ ‘Is the contract structure creating more risks?’ ‘Do we really need to use a third party at all?’

Despite the many challenges that this element of adequate procedures presents, some companies reported that robust anti-corruption due diligence can be developed as a commercial opportunity. More customers will be looking to protect themselves by using suppliers with robust due diligence and ABC controls. A company can enhance its reputation therefore by having a robust process in place.

GoodCorporation confirmed that many organisations are struggling with anti-corruption due diligence. Part of the problem is structural: those responsible for compliance are physically remote from the sales and procurement teams that are appointing and using third parties on the ground. In addition, many companies are falling into one of two traps, either using databases to undertake a large process of ineffectual checks or doing more rigorous checks on too few third parties. Assessing existing as well as new third parties is also a real challenge, particularly as many larger organisations have tens of thousands of suppliers and in some cases these are inherited from merger or acquisitions and are therefore harder to find and check.

Developing a process to get this challenging area of anti-corruption due diligence right is clearly vital. Carefully designed decision trees can be invaluable, but few companies are using them effectively.  Decision trees help businesses to identify ‘the animals in the park’, what level of due diligence is proportionate and reasonable and what practical tools can be applied to each one.

Key third parties to check are:

¢  Sales agents and Intermediaries

¢  Joint Venture partners

¢  Permit/commercial agents

¢  New employees and contractors

¢  Recruiters of suppliers

Managing the ‘animals in the park’

Sales agents and intermediaries: Most companies know who they are, but care must be taken to ensure that ALL are properly identified and managed, including sub-agents and non-standard sales agents. These intermediaries present the greatest risk to companies and should be subject to the maximum due diligence in the form of questionnaires, client references, database checks and policy checks as well as certification and training.

A key area of risk, which is not normally considered as part of ‘due diligence’ is the remuneration structure, this should be realistic, proportionate and sensible – avoiding commission only structures wherever possible.

A number of organisations are consciously reducing the number of sales agents that they are using and bringing sales activities more in-house to control these activities more effectively and to reduce risks.

Joint ventures, acquisitions, long term partnerships: These all require the same type of full due diligence activities and GoodCorporation’s experience on the ground is that these types of structures can present the largest one-off ABC risks. Despite this most organisations are not doing ABC testing in newly set-up structures.

Permit/commercial agents: This is the hardest area to manage for three key reasons: there can be so many of them, they operate in high and low risk areas and there is no ‘one size fits all’ approach. The following steps are crucial:

¢  Be sure to know who they all are – a check list of all of the types of permitting and licence-getting activities is invaluable in this regard

¢  Risk-assess each one to place into high, low and medium risk hoppers (is it a high-risk activity? Is it a high-risk country? What is the volume and frequency of the activities?)

¢  Adopt a risk-based response e.g.

·       Inform of policy and ABC stance (all)

·       Inform in a contractually binding format e.g. PO or contract (all if possible)

·       Ask them to complete an annual certification (where higher risks exist)

·       Due Diligence Questionnaires and client references (for more extreme cases only)

·       Training in extremis

Recruitment of employees and contractors: A checking process is needed to review new employees and contractors for conflicts of interest and political connections. However this should be more easily managed through existing HR structures that provide a natural opportunity for checks. The problem that companies face is that they can get lost and lose sight of why they are carrying out this type of due diligence.

Recruitment of suppliers: Where intermediaries are used to help select suppliers, there are obvious corruption risks of bribes being paid by suppliers to be selected. This passive bribery risk falls outside the adequate procedures defence, but in some sectors can present an important risk.

Finally it was noted that due diligence is the beginning of the process not the end. It will require monitoring and remedial actions to ensure that risks are reduced. Few companies felt that they were doing enough and they are not alone. Despite the difficulty, it is a problem that businesses must solve, as the risk is great and the penalty for failure high. A good programme, however, can have genuine commercial benefits for the company. Companies must identify those who pose the greatest risk, possibly using decisions trees, put anti-corruption procedures in place to mitigate risk and conduct on-going monitoring to ensure continued compliance. It will take time to get right but is vital to any anti-corruption programme.

The problem with rules and regulation

As the Financial Services Bill makes its way through parliament in a bid to create a new framework for financial regulation in the UK, the debate over what that regulation should look like rumbles on. Despite the forthcoming reconstruction of the Financial Services Authority, it is still far from clear how this sector will be regulated. Before we even know how the revamped FSA will work, the British Bankers Association has been calling for a new watchdog to police the sector.

In preparation for its new role as the Financial Conduct Authority, the FSA has been inviting tenders for its skilled person’s panel. The FSA aims to have this panel in place by March, prior to its spilt into the Financial Conduct Authority and the Prudential Regulation Authority. These skilled persons will be called upon by the regulator as ‘external experts to undertake investigations in the banks’ should the need arise.

Such investigations have gone on in the past, usually conducted by the 'Big Four’ accountancy firms, with lawyers expressing frustration that the tender process was opaque and that it was hard to convince the FSA that they had the skills required to perform the necessary tasks.

Although the tender process is no longer opaque and provision has been made for smaller companies as well as large, the key problem is that the FSA will apparently recruit the same skilled persons that got us into the banking crisis in the first place. This is largely because of an insistence on prioritising FSA Handbook experience, over expertise in the regulation, measurement and monitoring of responsible business practices. How do we know this? Well companies hoping to be selected to tender needed to demonstrate extensive experience of “APER BCOBS, COBS, DISP, ICOBS, PSR, SSADM” and many more. In other words, any fresh eyes to review the banks are not welcome!

What the financial services sector needs above all is expertise in business conduct and responsible management practices, not skilled persons with an in depth knowledge of the FSA Handbook. As John Kay has repeatedly said in the Financial Times, “The core problem is that the banks have no intention of abiding by the spirit, rather than the letter, of any regulatory rules. Indeed they have developed profitable business in regulatory arbitrage – selling instruments that avoid regulatory burdens”.

Rules must be direct and simple with a focus on ethical behaviour rather than compliance and box-ticking. If the FSA wants to ensure that future regulation successfully prevents or at least minimises unethical and irresponsible conduct, its tender process should prioritise the measurement and management of responsible business practices ahead of exhaustive experience of policing its own rulebook.

Transparency International's Corruption Perceptions Index helps UK businesses fight corruption

Transparency International's Corruption Perceptions Index, published today, paints a very real picture of the business landscape where many UK companies operate. 

GoodCorporation works internationally to help businesses in their fight against corruption and we see examples of the risks they face almost every day. Inevitably, the greatest risks are in those countries whose governments turn a blind eye to, or worse, expect to receive payments for contracts or for the provision of services. 

Transparency's Corruption Perceptions Index is a useful tool as it confirms where corruption is most likely to occur and alerts businesses to the additional measures they need to take to avoid corruption.

In extreme cases, this may mean leaving the country, but increasingly businesses are fighting back and trying to put in place strong anti-corruption policies and controls. The UK Bribery Act is pushing businesses to take a much more active and public stance against corruption and hopefully this will start to have an impact on the ground. Many businesses are also identifying the fact that in the most corrupt countries, there is almost always a local outcry and anger about corruption. Businesses should recognise that their own anti-corruption policies and controls are not just about self-interest and avoiding prosecution but are also an important part in a wider fight against corruption.

Much of this increased activity has been driven by the UK Bribery Act and a rise in corruption prosecutions in Germany and the USA. The UK Bribery Act concept of 'adequate procedures' to prevent corruption is a crucial driver of change. It is pushing companies to take responsibility for what happens, rather than turning a blind-eye and outsourcing corruption to suppliers and intermediaries.  Many businesses are now seriously investing to protect themselves from the risk of corruption and need to be supported by government both nationally and internationally in their efforts.

Ethical challenges in the defence sector

The latest discussion in GoodCorporation's Business Ethics Debate series, held at the House of Lords, looked at the ethical challenges in the defence sector.

Clearly a high-risk area, it operates within the sort of perfect storm where corruption can flourish. It is a shrinking market. Growth will only come by moving into new countries, with all the governance challenges that this entails. There is consolidation and intense competition with the need to deliver shareholder returns still of paramount importance. Few shareholders, it was said, ask about corporate responsibility or transparency, they just want to know how the business will grow.

So how do defence companies create a strong ethical corporate culture against such a background and what are the benefits?

Business conduct guidelines and strong financial controls were said to be the two single most important elements in creating an ethical corporate culture.

The debate focused on corporate culture and looked at three key areas: Transparency, Regulation and Responsibility

Transparency

Although shareholders were said not to ask about transparency, risk ratings do improve when companies talk to shareholders about what they do in this area. Companies, it was felt, could do more to change shareholder perception on transparency. Greater transparency regarding business practices would improve relationships with shareholders and make those with NGOs less adversarial. However care should be taken to ensure that any published information will stand up to scrutiny and be more than just a box-ticking exercise. Are practices really robust and ethical or are they just presented as such?

One of the problems highlighted with transparency was the very confidential nature of defence contracts. It was also suggested that transparency alone would not prevent corrupt practices. Indeed, some questioned whether it could be effective at all. Enron, for example, was always transparent and lobbying in the US was cited as transparent, yet corrupt practices continue.

Smaller companies also struggle with transparency, as they don’t always have the resources to publish what they do and engage in the same way as larger multinationals.

Despite the problems, it was felt that transparency in the form of greater openness does provide a baseline from which to move the debate forward, both in the public domain and within an organisation. It was argued that although companies may not be able to be public about specific deals, they can and should be open about the way in which they conduct their business. This may be seen as mutually exclusive in some parts of the world, but there was confidence that with the right support, this attitude would change. Greater openness about the way in which a company does business through published statements, annual reports, engagement with stakeholders will go a long way towards tackling corruption.

Regulation

A number of questions were raised about regulation. Have regulators got the balance right between what they expect of companies, individuals and governments? Is there equal focus on suppliers? Do regulators place too many demands on corporations, expecting them to be the watchdogs on the world?

Defence companies have to compete in emerging markets where corruption is often rife and where businesses and governments operate to a different and often conflicting set of values. They also compete in an environment that can have a direct impact both on national security and the national economy.

Some felt that it was unreasonable to expect corporations to do all the hard work, putting pressure on governments to behave ethically and adopt a different set of values. But is it right to expect governments to do this and how should it be done? There was a comment that governments are often looking for the lowest cost and are not motivated by good practice or aware of what it should entail. 

The hope was that this will change. It was observed that there is a trend for more governments to outsource defence procurement. This will make defence purchasing less politically motivated, should raise standards and as a result, create a more level playing field.

Getting more governments to implement tough anti-corruption laws will also help level the playing field and the UK Bribery Act was welcomed in this regard, bringing the UK in line with the US, France and Germany.

It was suggested, however, that as many governments lack credibility in tackling corruption (and the UK was used as an example here), it was felt that organisations such as the International Forum on Business Ethical Conduct (IFBEC) could in fact, be more effective in supporting defence companies in tackling corruption and changing the culture in emerging markets.

Others felt that collective action through more partnerships was the answer.  Again, it was suggested that for IFBEC to succeed, it needs the right people in its organisation, to share best practice and establish a code of conduct that others will adopt. If companies, governments and organisations such as IFBEC could work in partnership, this would prove the most effective means of establishing ethical working practices and beating corruption.

Greater collaboration such as this, it was felt, provided a less colonial approach to changing values and would ultimately be more successful in creating an ethical trading culture.

Responsibility

The debate moved on to look at who should be responsible for implementing an ethical code of conduct.

It was agreed that boards must take overall responsibility for creating and implementing an ethical culture within their organisations and should be supported by an effective compliance function, relative to the size of the organisation.

To ensure that an ethical culture operates effectively and with full company support, there should be a cross-departmental ethics team. In addition all managers must take responsibility for the behaviour of those they manage. High-risk departments such as sales and procurement should be closely engaged, possibly through leading some of the anti-corruption training, to ensure that they feel as if their roles are supported rather than compromised. 

Michael Littlechild, from GoodCorporation concluded: “Business ethics should drive working practices and show how a company operates.

“From the work we do in this area, for defence companies and others, it is always very evident when there is a strong ethical message emanating from the top of an organisation. It is equally evident when that message isn’t there. Although certain processes may be observed, if there is no ‘tone from the top’, the understanding and real commitment will be lacking and this places companies at risk.

“Businesses, whatever their size, need to find an affordable way of implementing an ethical culture that goes beyond box-ticking. Top-level commitment to developing and implementing a robust, ethical code of conduct is essential.”

Watching out for whistleblowers

Businesses striving to establish an ethical corporate culture are encouraged to set up an effective speak-up system. Working on what is now a clearly established truth that misconduct damages corporate reputations, a good whistleblowing system can act as a company’s eyes and ears, providing an early warning system so that real reputational damage can be averted.

But the whistleblowing stories that have hit the headlines in recent weeks would indicate that all is not as it should be.  A UK government regulator was forced to apologise for making allegations about the mental heath of a whistleblower; a BBC Newsnight report revealed that the Financial Services Agency told a whistleblower never to contact them again; the same Newsnight report also revealed that whistleblowers in banks are routinely dismissed but not a single UK-based bank has been punished for this, despite the fact that such individuals are protected by UK law.

Confirming that retaliation is not uncommon, at least in the States, the US-based Ethics Resource Centre has published its 2012 Business Ethics Survey, which revealed that retaliation against workplace whistleblowers is rising sharply. More than one in five (22 per cent) of employees who reported workplace misconduct experienced some form of retaliation. This compares to 12 percent in 2007 and 15 per cent in 2009. Even more alarmingly, the incidences of reported retaliation were worse when misconduct was reported to a hotline or managers more senior than their immediate supervisor.

From these examples we can see two clear problems: retaliation against a whistleblower by their own organisation and inaction by regulators whose job it is to oversee a particular sector. Although quite distinct problems, their root cause would seem to lie in the feeling that following up on reported misconduct is more trouble than it’s worth, disrupting, as it inevitably does, the status quo and requiring effort for the reported problem to be resolved.

Given that the OECD, the United Nations and the Council of Europe all encourage whistleblowing as an important part of an effective anti-corruption framework, we should examine how and why these problems can occur.

From our experience of assessments of ethical conduct in a wide range of businesses around the world a number of important issues have emerged about whistleblowing:

1)     Advertise it. A whistleblowing line is useless if it isn’t promoted and isn’t known about – this might sound basic and obvious; but because of Sarbanes-Oxley many companies have established speak-up systems in order to comply, without any intention of making them work.

2)     Tailor-made for local markets. Whistleblowing systems work much better when they are championed and managed locally. All too often speak-up systems are seen as remote, head office activities which mean that employees are mistrustful and fearful about using them

3)     Get the name right. Whistleblowing in itself has a very negative connotation – encouraging people to raise concerns, speak-up and challenge are much better fits with a corporate culture than encouraging people to ‘blow the whistle’. Businesses where employees and contractors are encouraged to speak-up in their day-to-day work are healthier, safer and less prone to corruption. In other words, the best businesses will establish a well-managed speak-up system which is ultimately more effective than a so-called whistleblowing hotline

4)     Culture matters. And it’s not just the name, there is no question that whistleblowing works in some cultures and not in others. However as we see from the retaliation that has taken place, even in Anglo-Saxon environments where these types of systems are more acceptable, there can still be problems. In much of Western Europe, there is a strong dislike of whistleblowing and little commitment to making it work. In many Asian cultures it is almost impossible to get employees to call a hotline. Again, to overcome these problems, the best companies develop cultures where speaking up is part of everyday working life. This shifts the emphasis away from any negative connotations associated with whistleblowing, but ensures that a culture is created in which employees are encouraged to speak up about any malpractice or wrongdoing.

5)     Training is essential. Whistleblowing lines only work if employees are trained on how to use them. Encouraging employees to raise issues directly with line managers wherever possible is an essential part of this training. However teaching employees when it is appropriate to blow the whistle and empowering them to do so, is crucial

6)     Extend speak-up to outsiders. The most effective speak-up and whistleblowing systems that we have seen are those that are extended beyond employees to include contractors and first tier suppliers. By including them in the invitation to ‘speak up’, the company gives a strong message about the value it places on knowing what is happening on the ground and not ignoring issues if something is not right

7)     Take it seriously. Demonstrate through proper and fair investigations that the company treats the issue seriously. Many companies do not investigate issues properly. All too often they pass important issues back to the management (that has caused the problem) and ask them to handle and investigate the issue. A good investigation will of course allow local management to present its viewpoint, but it will also be evidenced based and non-judgemental.

8)     Manage well. Establish a clear management system for dealing with any problems, including when to report to regulators/authorities and how to manage any damage limitation should a serious problem be revealed which could have a negative impact on the company’s reputation.

Regulation such as the UK Bribery Act requires a company to be fully responsible and accountable for the activities not just of its own staff but for third parties acting on its behalf.  A speak-up system is an excellent demonstration of such accountability. However, for it to be a really effective, it needs to be properly managed with appropriate time, energy and focus at a senior level.  Done well, it is a simple but vital tool that can help reduce risk and protect reputation.

Ensuring that a business is run ethically, does it add value or cost?

GoodCorporation's second Business Ethics Debate to be held in Paris looked at whether or not business ethics can be said to add value to an organisation, or is it simply another cost that must be borne? 

In the introduction to the debate, it was suggested that those working in the fields of ethics and compliance have a need to demonstrate the commercial viability of their roles. Most of those present were, not surprisingly, of the view that ethics and compliance do offer added value.

However, the debate was divided as to whether this was the case for ethics alone. A vote at the start of the discussion revealed that above all, the majority felt that ethics was more of a preventative measure, necessary for the protection of a company's reputation.

Some did feel that if ethical business practices were properly and successfully implemented, they brought tangible business benefits and real added value.

It was also suggested that rather than being an added cost, business ethics was really all about the right way to do business. Viewed in this light, it was argued that ethics did not require a separate budget, as it was really a question of doing what was necessary to run a business but doing it ethically.

Corporate motivation and the role of a company were also discussed. While it was agreed that there were many organisations that consider ethics to be vital to the way they do business, there still remain plenty whose principle aim is to generate revenue and profits. Would such businesses be more interested in ethics if it could be shown to add commercial value? Similarly, from a consumer perspective, there are many who are more interested in the quality of the goods and services a company produces than in its ethical conduct. Would ethical conduct influence their purchasing patterns in anyway?

This led on to the question of marketing, with some suggesting that building an ethical reputation for a business can be a highly effective and in fact, cost efficient marketing tool.

Others were opposed to the notion of ethics as a form of economic model, preferring to see it more as a way of behaving and, more importantly, teaching others to behave. Ethical conduct, it was suggested, should be at the heart of an organisation, and should emanate from the Board down to all stakeholders and business partners.

Many felt that we are observing a tangible shift in favour of ethics. Suggesting that in a short space of time, debating the importance of ethics will no longer be necessary as implementing good ethical conduct will simply be regarded as the right way to do business. Not because ethics necessarily offers a truly quantifiable benefit, but because the cost of failing to do so, in terms of damage to both profit and reputation, is all too easily quantifiable.

Finally the debate examined the impact of ethics on customers and employees. Customers, it was felt, prefer to deal with an ethical business, even if that means paying a little more. As for employees, those in human resources noted that the ethical conduct of an organisation is a key motivating factor for new recruits, particularly younger employees who want to feel proud of, rather than embarrassed by, the organisations for which they work.

The GoodCorporation View

In the last few years it has become increasingly clear that there is a real business case for an ethics and compliance function. Clients are starting to 'screen' suppliers against their corruption policies, human rights, labour standards and environmental performance. This is particularly evident in construction, oil & gas and public procurement processes. As a result, organisations need to be able to demonstrate ethical behaviour and compliance with regulations. We see this trend growing strongly, particularly with anti-corruption compliance.

Our best clients can demonstrate a virtuous circle of ethical behaviour. An organisation that sets out to be values-driven and treat all stakeholders well, will keep hold of its staff, attract the best recruits, find itself recommended by clients and working with suppliers who strive hard to keep the organisation's business. This may be a subtle benefit, but it is nonetheless a genuine business case for ethical and values driven behaviour supported by a strong compliance function.

Conversely, clients that rely heavily on a compliance function that follows the letter rather than the spirit of the law, often struggle to create good cultures. Such a focus can create a culture that leaves all compliance to the compliance team, with no one taking responsibility for protecting the organisation's reputation. The reputational damage caused by this approach is hitting the headlines with increasing frequency.

GoodCorporation welcomes anti-corruption study

Corruption in the defence sector costs an estimated $20bn per annum. So Transparency International’s (TI) findings that two thirds of the world’s largest defence companies do not provide enough evidence of the steps they take to combat corruption is of real concern.

Mark Pymen, head of defence at TI and the lead author of the study, is right to say that the degree to which a company is willing to publish details of its anti-corruption safeguards is directly linked to the effectiveness of its anti-corruption effort.

Indeed, in its guidance on the UK Bribery Act, the Ministry of Justice states that “top level management commitment to bribery prevention is likely to include communication of the organisation’s anti-corruption stance.”

However, this is only step one. What is especially worrying about this report, particularly in a sector that has repeatedly and regularly faced charges of corruption, is that developing and publishing anti-corruption safeguards and policies is the easy bit. The real test of a robust anti-bribery and corruption (ABC) programme is the effectiveness of its implementation.

It is also worth noting that the report makes no reference to facilitation payments. These have always been illegal under UK law and remain so under the Bribery Act. The defence sector is particularly exposed to risks from such payments and independent research by GoodCorporation has revealed that 80 per cent of UK defence companies signed up to the UK Defence Industry Anti-Corruption forum have no published statement on facilitation payments.

From the work we do, including assessments in the defence sector, we know that there is often a gap between policy and actual practice.  In addition to developing anti-bribery practices and communicating a zero tolerance towards corruption, companies need to carry out regular checks to see how their ABC programme is actually working on the ground. 

Without this comprehensive level of knowledge, organisations cannot be sure that they have sufficient anti-bribery safeguards.  More importantly, without measuring the effectiveness of such a programme, they are unlikely to be able to demonstrate that adequate procedures have been put in place prevent corruption – the only defence if charged with failing to prevent bribery, the new corporate offence introduced by the UK Bribery Act 2012.

What is also worrying is the divide between large and small organisations. Here, as in other sectors, we have observed that large organisations, are more likely to have the resources to develop and manage the necessary practices and procedures to prevent corruption.  Many smaller organisations are finding this much harder, as they simply don’t have the resources to take adequate safeguards and could find themselves very exposed.

GoodCorporation is already working with a number of companies to develop robust Anti-Bribery and Corruption procedures. Transparency International’s anti-corruption index is a welcome initiative which could have a significant impact on raising ethical standards in the defence sector. We hope to see it embraced by the sector as a whole, with companies seeking to improve their grading year on year. 

Why failing to have an anti-bribery policy is a risky strategy

When the UK’s bribery laws were amended last summer, for the first time in over a century, it raised many questions about business practices. While the media focused on whether companies would still be able to take clients to Twickenham, most businesses were taking a careful look at their anti-bribery policies and asking the government what they would need to do to comply.

The main difference was the introduction of a new corporate offence of failing to prevent bribery. Under the new laws, UK companies are required to take proactive steps (adequate procedures) to stop bribery occurring anywhere in their organisation, including suppliers, third parties and intermediaries. A failure to do this could lead to company directors facing unlimited fines and a jail sentence of up to ten-years if they were prosecuted for corrupt practices.

The old excuse that a supplier may have ‘exceeded their remit’ in obtaining customs clearance or acquiring a permit will no longer form a defence. Moreover, this is the case not just under UK law, but also under US and most other European laws as well. In 2011, every Foreign Corrupt Practices Act or US Securities and Exchange Commission investigation involved the payment of bribes via third parties. Not only are companies that get caught in this way facing heavy fines, they are also subject to boycotts by other businesses and a subsequent loss of revenue.

It is clear that in order to be fully protected, UK companies should be conducting robust due diligence on suppliers, particularly those operating in high-risk areas. Freight forwarders carry out activities that are particularly at risk from corruption. The sector has already seen high profile prosecutions and companies losing contracts once corruption was discovered.

From the work that GoodCorporation has carried out in this area over the last ten years, we know that a failure to publish an anti-corruption statement is likely to indicate that little or nothing is being done inside the company to prevent bribery. Indeed, that is why the Ministry of Justice referred to the communication of anti-bribery policies in their Guidance, stating; “top level management commitment to bribery prevention is likely to include communication of the organisation’s anti-corruption stance”. Clearly, this should be one of the first things to check.

Concerned by the lack of publicly available information on anti-bribery policies and facilitation payments, GoodCorporation conducted research to see how many leading international logistics companies had published policies or statements.

The results were alarming. A third of companies had no published anti-corruption policy and more than half had no statement on facilitation payments.  

This places both the logistics companies and and their clients at risk from a successful prosecution should corruption be discovered, as without such statements their anti-corruption procedures could be deemed inadequate.

So how can companies using these services protect themselves?

¢  Assess the risk according to the nature of the goods being moved and the final destination

¢  In high-risk situations undertake due diligence on the service provider in the following manner:

¢  Check their published policies on bribery and facilitation payments via their website and other documents. If these cannot be found, alarm bells should start ringing

¢  Send a questionnaire requesting information on internal systems and controls (these would not be publicly available). In particularly high-risk areas, consider doing this in person

¢  Carry out spot-checks on procedures to ensure that policies are implemented on the ground

¢  Even if ethics statements can be found on the website or in tender documentation, ask for a contract to be signed agreeing to abide by your standards, particularly in relation to facilitation payments.

¢  Communicate your own-zero-tolerance policy on facilitation payments

With the Bribery Act making it easier for prosecutors to bring about charges, these weak processes in such a vulnerable industry are a cause for real concern. Freight forwarders operate in some of the world’s most ethically challenging environments, making logistics one of the areas most exposed to corrupt practices. Working with a company that is failing to actively tackle corruption is a high-risk strategy that should be avoided at all costs.

This article first appeared in LLoyds Loading List on August 20

A fine balance

David Green, the new head of the Serious Fraud Office, has confirmed that his organisation does not have corporate hospitality in its sights when it comes tackling bribery, and rightly so. Even last summer, the then Justice Secretary Ken Clarke confirmed that taking clients to Twickenham would not become a criminal offence once the Bribery Act was passed.

However, before businesses tear up their newly written gifts and hospitality guidelines: a note of caution. A Sainsbury’s buyer was jailed for four years this summer for accepting almost £5 million in bribes from a supplier, over £1m of that in the form of gifts and hospitality.

This included lavish holidays to Cannes and St Tropez, a £350,000 trip to the Monaco Grand Prix, hotel rooms at Claridge’s and a top of the range Aston Martin; all set up through foreign bank accounts and secondary businesses to mask the flow of money and protect a £40 million contract to supply the supermarket chain with potatoes. The cost of all this was written off in the supplier’s accounts as ‘team building’.

While no one would argue that team building in business is important, few would disagree that this was excessive, extreme and possibly pointless; the judge in the case concluded that there was no evidence that the account may ever have been in jeopardy.

So although it is clear from both the SFO and the Ministry of Justice that corporate hospitality in itself is not a major target for fraud prosecutors, companies nonetheless need clear systems and controls which are properly communicated, implemented and monitored to ensure their business is fully protected.

Guidance on the Bribery Act states that gifts and hospitality need to be proportionate and clearly designed to build business relationships rather than influence decisions.

Lawyers and consultants advising companies to end all forms of entertainment are missing the point. Businesses should be urged to develop a clear system that enables them to get the balance right. Encouraging a decision-making process that asks the right questions is a good starting point and properly implemented can offer companies the right protection. Entertaining at Twickenham or even the Grand Prix won’t land anyone in jail, unless of course it’s the tip of a much bigger iceberg.