Monthly Archives: September 2014

Bribery’s Other Victim: The Families

Bribery’s Other Victim: The Families

In my post  Deterrence, You Had me at Being Caught, I shared my own experience with respect to incarceration and how that related to the oft-discussed issue of criminal deterrence. I concluded “The impact of saying good bye to a wife and children knowing that your only remaining contact will be in a visiting room for an extended period of time is nothing but traumatic. Trying to “coach” my children through their college and grad-school application processes via time delayed e-mails and limited phone calls, was difficult at best. “

“Using up phone minutes before the end of a month knowing you won’t get to hear the voices of loved ones until they renew next month was a gut-wrenching experience. It is not worth it, not even close. I never thought I would get caught, ever, and had fourteen and a half months to think about “being above the law” while major life events for my family passed with me as a spectator from afar. Think about it, please.”

As I hope those concluding paragraphs demonstrate, bribery is about people, people who confront risk, and people, who like myself, rationalized “bribery” and faced real consequences. Bribery incorporates greed, temptation, illusions and distortions, which are all part of human emotion and decisions. Today, as part of elevating the personal dynamic of bribery, which I see very much missing from the compliance “debate,” I invited fellow blogger Lisa Lawler for an interview.

Q: Hi Lisa: Thank you for sharing your views with the anti-bribery and compliance community. Why don’t you tell us a little about yourself?

Hi Richard, and thank you for having me as your guest. When I first began my own long and grueling process of becoming a white-collar wife there were no resources and no one to help guide me along the way. As a result, like other white-collar wives, I began to live my life in the shadows of shame and the isolation was at times, nearly unbearable. I am “seven years in” now, as us white collar wives say, because women and children do “time” right alongside their husbands and fathers, and I am now far enough down the road in my own recovery to share my story and hopefully help others. I began to blog about my experience in hopes of drawing out other women who are in need of support. My blog, thewhitecollarwivesclub.blogspot.com has helped to flush out other white-collar wives and has led me to develop a closed Facebook support group called The Secret Lives of White Collar Wives. I have developed an additional tool for women called the White Collar Wives Survival Guide to be published on line in the near future. My book, House on Fire: A Cautionary Tale is near completion and I hope to see that published as well in the near future.

Q: Lisa, we read a great deal these days about white-collar criminal enforcement, both from a personal and corporate perspective. The compliance blogs are populated with articles on criminal deterrence, but I have not seen anything that addresses “the family.” For those family members who are left behind, after a period of incarceration begins, what does it all mean?

The fallout of white-collar crime has far reaching tentacles, each armed with tiny atom bombs that obliterate everything they come in contact with. Families are often left in financial ruin and are forced into lives of great uncertainty. The once solid ground they based their lives upon is gone. A mother who has traded her prime earning years to stay home, give up her own career, and care for the family is now faced with having to support the household. We live in a time where the job market is highly competitive and as such requires a highly skilled work force. How can a woman whose work as a homemaker, (acknowledged as one of the toughest and most underpaid professions), possibly compete with highly skilled workers? She can’t. When a head of household is imprisoned for white-collar crime their family not only potentially loses all monetary assets, (if anything remains after legal costs and having no incoming revenue), but they also lose the lives and relationships they’ve spent a lifetime building.

Q: What about the children?

Children suffer in the extreme when a parent is incarcerated no matter how long or short the sentence. It is a shocking event for them and depending on the length of the sentence, children may be forever scarred.   They have to live with the knowledge that a parent they once looked up to is now a common criminal who didn’t care enough about them to do the right thing. They cannot hide from the public’s scorn as they have to attend school every day, play sports and interact with their peers. In many cases kids are taunted and bullied by their classmates because of the sins of their fathers.   This kind of catastrophic event causes children to shut down. Their development can be delayed and their mental as well as physical health can often be compromised. A long sentence means that a child may lose a parent for the entirety of their formative years. Parenting from prison is not what any child deserves or should ever have to endure.

Q: If you could sit down with someone who is struggling with business decisions in terms of ethical choices, what would you say?

If you get caught and you are incarcerated you will miss your family terribly. Remorse and regret are your constant companions. The facility you have been placed in may be hundreds of miles from your home and family. Keeping in mind that most marriages do not survive the consequences of white-collar crime, are you prepared to go it alone in prison? In so many cases, as I have seen, you will be incarcerated without your family there to support you, or even there for you upon your release. If your family does stand by you, is it their responsibility to accommodate you by uprooting their lives and following you from one prison designation to the next? There is a limit to what one can and or should have to endure.

Q: Given that this blog pertains to overseas bribery, what might you add?

I can absolutely see that for those operating and traveling extensively overseas, as you have discussed during your own career, that there could be the additional rationalization that bringing some extra cash home gives you a better than good chance of appeasing the family. Why? Because the wife has been doing the majority of the child rearing while you’ve been wining and dining your way around the world! You’ve missed countless track meets, soccer games, birthdays, etc. Wouldn’t a long summer trip to Hawaii, (that you otherwise could not afford), make up for the weeks and months you’ve been away? Or perhaps there’s enough money now to upgrade to a bigger home, boat, vacation house and or a new car?

I can totally see that rationalization, but please abandon this deception because the truth is your family would rather have less of everything than less of you if you’re caught and put behind bars. Maybe the level of corruption risk where you work, and I am sure that some territories are worse than others, is just too high given the importance of family. You must ask yourself if the financial gain is worth risking your personal sovereignty or your family’s solvency.

Q: Anything you might want to add as a “final word of caution?”

The bottom line is this: If you are willing to place your family in economic and emotional ruin in exchange for your own personal gain and the illusion that you are “doing it for your family,” then prison might be the right place for you. White-collar crime isn’t something that is done FOR the family; rather it is done TO the family. Your family depends on you to go out into the world and do to the right thing because you are ethically bound to hold your family’s best interests above all else.

So, think of this as I relate to your rationalization of “no witnesses”: The next time you are in a secluded room in an overseas locale with your agent and the talk turns to corruption, please think of your family as being right there with you in the room. If you make that deal then they are making it right along with you. Consider the fact that when confronting a corrupt discussion, your family’s welfare is literally at stake. And Richard, while you point to the numerous papers about how foreign bribery victimizes entire societies, which is unquestionably true and tragic, I hope that our Q and A reminds readers that foreign bribery has another victim: the families. Thank you.

Corruption Prevention in South Africa

Corruption Prevention in South Africa

As part of my outreach to bring in the perspective of others who confront corruption on the front lines of international business, I decided to start a series of interviews from those who have expertise in their home countries with respect to corruption risk.  Today’s Q and A is with Jonathan Le Roux, CFE, who is a Fraud Prevention Specialist in South Africa. I plan to follow up on this interview with other South African perspectives, including political and in-house compliance viewpoints.

Q: Hi Jonathan, perhaps you can tell us about yourself and your background?

I have over 20 years experience spread across Internal Audit, Operational Risk and Fraud Risk Management and have served in several capacities as Internal Auditor, Fraud Prevention Consultant, Director, Head: Operational Risk and Audit to name a few.

I have also operated largely in the Financial Services / Insurance and Banking Sector, following by the Professional Services and Information Technology Sector respectively

I am a Certified Fraud Examiner and extremely passionate about bringing Fraud Prevention back into popularity and this is why the Fit4Fraud brand is so important for people to become more aware about fraud.

Q: So, in a general sense, what is the current state of corruption and compliance in South Africa?

They say that South Africa is the land of opportunity and I truly believe this, but I am just not sure who is seizing this opportunity though.

 I see many young entrepreneurs or small business starting up in South Africa, but legislation, competition and funding are critical stumbling blocks that are not easily overcome, especially as a start-up.

We have some of the best legislation and compliance in the world here, but compliance becomes a tick-box exercise while various other illegal acts arise like ‘fronting’ continue to grow. In South Africa, most company investment or business is based on adherence to receiving a B-BBEE (Broad-Based Black Economic Empowerment) certification, so some common “fronting “examples is where they claim that their secretaries, gardeners, drivers, etc are directors in order to fradulently qualify for contracts.

So, in essence those companies place ‘token’ people on paper to comply with the representation, whilst in reality, nothing has changed, this but a paper fraud to get away with the legal requirement and continue to run a business.

Q: Are there some recent examples of this dyanmic which you can share?

As I look close to home, our President Jacob Zuma and his ‘little’ dwelling in Nkandla that has cost the taxpayer R216million, (US$ 19 million) which is slightly off the initial estimate of R27 million (US$ 2.4 million), is now being firmly blamed and placed on the architect and some officials…. But not the President?

Further to this, previous ‘spy-tapes’ that were suppressed back in 2009, that resulted in the decision to withdraw corruption charges against President Jacob Zuma just before he was elected as President, are now being allowed to be viewed for possible reinstatement of the corruption charges…some 5 years later.

There has also been the arresting here in Johannesburg of Organized Crime fugitive Radivan Krejcir who is on charges of murder, money laundering and other associated crimes. Then, we also have the Oscar Pistorius (Bladerunner) trail here, where he was found not guilty on pre-meditated murder charges on Friday, 12th September 2014.

Q: So what is the relevance of this?

Simply put, if you have power, access to funds, ability to delay the judicial process indefinitely and to influence, you can be protected for extended periods of time (or at least until the opposition or State can’t financially continue to support your case anymore) from charges of corruption, fraud, money laundering and even murder.

With one of the best Constitution’s in the world, coupled with compliance acts and laws which are regarded to be on par with what the global legal fraternity has to offer, etc. South Africa still has its challenges and problems. In other words, even with our regulations, there is much work to be done in order to combat fraud, corruption and associated money laundering activities

When true accountability is lacking and leadership is ‘situation dependent’, it is reassuring to know that we have people such as our Public Protector Advocate Thuli Madonsela who represents courage beyond belief. People like Thuli Madonsela are here on the front lines to serve the interests of the people. She has served the public and probed many cases of corruption, maladministration, etc. and has been the receipiant of flack several times for just doing her job.

Q: So what are the possible remedies, first, from a governance perspective?

There is a glimmer of hope and light here, but even recently, the CEO and CFE of the Public Protector’s Office has resigned, which makes me wonder if there is political or other pressure being placed on the Public Protector’s office to ‘pull in the reigns’ on Public Protector Advocate Thuli Madonsela? Those events are highly concerning and show there are still significant institional impediments to fighting fraud.

With South Africa ranking at 72nd out of 177 countries on the Corruption Perceptions Index 2013 Survey (Transparency International) with a score of 42/100, it does not bode well that we are perceived to be so corrupt. But in-county and international perception is reality, whether we believe it or not.

The survey further shows that 90% of those in Sub-Saharan Africa scored below 50% on this survey, where Botswana is ranked the best at 30th with a score of 64/100. And South Africa is just 932 kilometres (579 miles) or 1hour and 16 minutes away by plane! Thus, one can’t blame it on “the region.” The problem belongs to us.

Solutions can’t be placed on one person – like Advocate Thuli Madonsela. We all need to do out part and get involved in our communities, our regions, our companies. We need to start holding people accountable and voicing our dissent when public or state employee ethics and/or levels of integrity are questionable. 

Q: So what can be done?

I guess like all things, it starts with individual efforts before greater ones can succeed.

I started a fit4fraud campaign on the 3rd September 2014 and I had 13 days to get support!

The fit4fraud (prevention) campaign was created to harness 100 supporters to start to think about fraud proactively. This has been an interesting exercise, but eventually over 110% of support was received. See link here.

The interesting bit of this is that it was communicated daily (several times) on LinkedIn, Twitter and Facebook to prominent radio stations, radio DJ’s, politicians, anti-corruption networks, etc and a handful clicked to support this initiative. From statistics seen on some tweets, over 140 people viewed the tweet but maybe one or two actually supported it.

Furthermore, out of all the political parties that this was tweeted to, only ONE gave their support and said it was a great initiative. No other comment, support or feedback was obtained from any other political party.

So there is hope out there. It might not be a surge of support (yet), but am hopeful, that even the smallest of efforts – in the beginning – will yield results in the long-term.

Q: What would you advise those wanting to do business in South Africa to think about in terms of corruption? And, for those on the front lines, who are tasked with business development, and who are the most likely to face corruption risk, what would you share with them?

It comes down to researching and planning. Research what you want to invest in or develop in South Africa, then speak to various sources within the public and private sector to gauge a true view of the realities ‘on the ground’ in South Africa.

 Where possible, do not rely on or speak to one person. There should be several players or stakeholders involved in majority of deals, not just one person. Furthermore, there should be no request for fees or commission or payments of any sort, so treat any such requests with much doubt. The only time a fee might be charged is when a Tender Document is requested, but this normally a few hundred Rand (US$10)

Beyond this, it is always good to get in touch with those governance bodies like the IIA, ACFE, SAICA, etc. amongst others who have auditors, accountants and fraud examiners to shed more light on the current economic and fraud climate in South Africa.

On the 19th September2014, the South African Police Services (SAPS) released their crime statistics and the only good news heard was that Commercial Crime (where fraud is reported) shows a 13.61 % decrease compared to the previous year – down by 12,460 cases to a reported number of 79,109 cases. But is this a true reflection of ‘winning the war’ on fraud-related crime or is it just a reflection of people not reporting cases as in previous years. That remains to be seen.

How can people find you?

I am but a click and a flight away, but you can find me on the following social platforms by linking on any of the below:

Website

LinkedIn

Twitter

Although I am based in Johannesburg, South AfricaI do travel if you need me to come to you. I always welcome the feedback of others, andI can provide further information and assistance or at least point you to the right sources where you can make an informed decision. Given the challenges I have described, a local, independent, source of information is critical before making investment decisions.

Yours in fraud-fitness

Jonathan

 

When Bribery Pays, People Bribe

When Bribery Pays, People Bribe

As Alison Taylor (Senior Managing Director, Control Risks) stated in a recent Forbes Article, “Compliance and Risk: Clearing the Org Chart Hurdle, “the traditional preventative approach to risk management is proving inadequate in the face of regulatory complexity, volatility and an environment of constant change.” Indeed, based on recent reporting and enforcement issues with respect to foreign corruption, substantial compliance challenges remain for those who seek to maintain and grow their international business in public and state owned sectors. The recent GSK fine in China provides a relevant context, as reported by Andrew Ward in the Financial Times, when he wrote “the verdict and $488M fine brings an end to a 15-month investigation …that has plunged GSK’s Chinese business into turmoil and caused broader damage to the company’s reputation.”

In responding to the geo-political complexities and “new anti-corruption enforcement realities,” which Ms. Taylor discusses, multinationals should consider adopting a “holistic perspective that embeds consciousness of risk into every part of the business.” While she focuses upon five levels of organizational analysis as part of that platform, my attention is on the “interpersonal level,” as “understanding how employees are motivated and rewarded, and how these incentives are communicated and understood,” remain paramount.  Why start there? As stated in an article of the Association of Psychological Science (APS), “Honesty Requires Time (and Lack of Justifications)” by Shaul Shalvi, Ori Eldar and Yoella Bereby-Meyer, “several independent lines of research suggest that people’s automatic tendency is to serve their self-interest-even if doing so requires acting dishonestly.” In other words, as confirmed by the Shalvi piece, among others, and in my own experience, people will very much behave as they are compensated.

The “Interpersonal”

Thus, in this post, I will use a number of compelling academic articles relating to incentives and ethical behavior, as well as my own real-world perspective, in order to elevate the importance of Ms. Taylor’s “interpersonal,” when looking at corruption risk. As  US District Judge Rakoff once stated, “companies do not commit crimes; only their agents do” and when it comes to foreign bribery, at the front lines of international business, there is a bribe being paid by someone, who at some level, thinks that it is the “right thing to do.” Perhaps that decision is based on personal (profit) gain, or thinking that it provides “benefit to the company” by increased business, or perhaps both. But if we keep coming back to the default “people who bribe are not behaving within corporate or ethical norms, and are but rouge employees,” then we are never going to truly embrace Ms. Taylor’s holistic approach to anti-bribery compliance, for at the basic level, we are not attempting to understand the forces which might impact corrupt behaviors at the field level.  

How can the field of compliance hope to promote compliant behaviors to those who operate in high risk environments without first understanding the pressures which they face, and how they might react to those pressures? If the goal is to create and army of corporate citizens who can operate in regions with the worst reputations for integrity, while embracing a moral and professional revulsion to corruption, then isn’t it critical to understand what forces they might encounter, and what options they might consider as available in their responses?

As I always share in my posts, none of my perspectives are an attempt to justify bribery. When I engaged in bribery, I knew what I was doing was illegal, and offer no excuse. Ultimately, I paid the price for my conduct through the loss of liberty. Thus, my attempt here is to again elevate the thinking at the front lines of international business, which relate to emotions and temptations that I rarely see addressed in the “compliance debate.”

As Steve Kerr stated in his HBR articleDo Your Company’s Incentives Reward Bad Behavior,” “a company must determine what managers and employees believe they are being encouraged to do and not do.” Mr. Kerr also cautions companies to make sure you’re not “inadvertently providing rewards for behaviors you’re trying to discourage.” As I have shared before, when organizations speak to the “means” of anti-bribery compliance, while the bonus plans, especially in high risk areas, speak to a “win above all else” mentality, to those at the front lines, compliance becomes “bonus prevention.” When means and ends point to competing goals, compliance and bonus become a zero-sum game, as both cannot be delivered to management. When that occurs, those in the field now ponder “what does management really want, compliance or sales?”

As Mr. Kerr shares in his book Reward Systems, Does Your Company Measure Up (2009, Harvard Business Press), “when designing a competent measurement system, one must often choose between attributes that are desirable but inherently contradictory.” And as Mr. Kerr states, when you get those rewards wrong it almost “always produces expensive, and unwanted results.” As Ms. Taylor shares, when rewards and desired behaviors, especially in the context of anti-bribery efforts, are not in alignment, the implicit modus operandi can become “do the deal, and fend the compliance team off with a tick the box approach.” When that occurs, “risk tends to be within a silo, and the metaphor of the blind man and the elephant applies.” For those at the front lines who face this dilemma, and for those who are responsible for helping them to manage risk, this is a strategy executed with great peril.

Where does it all start?

An airplane does not take off from a runway without first starting at the terminal, so perhaps looking at the chronology of corrupt thinking might be useful.

As Francesca Gino (with Lisa D. Ordonez, and David Welsh) stated in a recent HBR article  “How Unethical Behavior Becomes Habit,” when looking at recent business scandals, both on an individual and collective basis, they concluded, “the ethical behavior of those involved eroded over time.” From my perspective, when you have front line international sales teams in highly corrupt regions, where small bribes are prevalent and where compensation is linked to aggressive growth forecasts, you have a environment ripe for rationalizing bribery, albeit slowly but surely. As Gino, et al maintain “rationalizing minor indiscretions inevitably influences how they (employees) view progressively worse behaviors and may lead them to commit bigger offenses.” In addition, as they state, and worthy of emphasis “people who are faced with growing opportunities to behave unethically are much more likely to rationalize this conduct than those who are presented with an abrupt change.” Add to this dynamic the Shalvi, et al, research that “people cheat to the extent that they can justify their unethical behavior to themselves, ” and again, it is an environment ripe for the evolution and the  rationalization of corrupt behavior. But it all starts somewhere, and from my perspective, it often starts small.

Organizations that ignore these perils, and keep the “rotten apple” script in the top desk draw for when the crisis hits, are not doing anything to help those in the field who are confronting risk, and who may be struggling to reconcile their bonus structures and compliance training. As Susan S. Silbey shares in a Sloan MIT Faculty Newsletter, “Rotten Apples or a Rotting Barrel,” ”professional and corporate misconduct derives, at least in part, from features of the organizations and social settings in which they take place.” Thus, when you have international teams in high-risk areas, who face a myriad of corruption risk, including the proliferation of requests for small bribes, and whose compensation is tied to individual financial performance, as Ms. Silbey states “those situations and settings provide both the opportunities and incentives for misconduct.”

As Shalvi states, “in tempting situations, people’s automatic tendency is to serve their self interest, even when such behavior requires lying” but with the addition that “only with time to deliberate can people correct this tendency.” In fact, as he concludes “people can behave in an ethical way-they just need time (and lack of justifications).” So, how do we get there? Perhaps a re-think of aggressive quarterly forecasts in high risk regions, linked to lucrative incentive plans,  might be warranted,  as to give front line personnel “time to deliberate” when confronted with corruption.  Perhaps the C-Suite should yield to Shalvi’s research, by providing their front line business teams with  ample time to engage with compliance personnel when confronted with bribery,  and to realize that “yielding to temptation” is no longer in their self-interest or necessary for corporate survival.

In conclusion, as Gino (I already ordered her book Sidetracked) states “unfortunately, the assumption that unethical workplace behavior is the product of a few bad apples has blinded many organizations to the fact that we all can be negatively influenced by situational forces.” As I think all of the authors referenced in this post agree upon, and to quote Gino “environments that nudge employees in the right direction, and managers who immediately identify and address problems, can stop ethical breaches before they spiral out of control.” As Ms. Taylor states, while the current compliance norm might be broken,  and what should replace “it is not yet clear,” her “holistic perspective” with a focus on behavioral models as represented in this post,  is indeed both warranted and timely.

Bribery at the “Sharp End.” Lessons from the field.

Bribery at the “Sharp End.” Lessons from the field.

To many, an understanding of corruption, bribery  and compliance comes from the field of regulators, auditors, investigators and attorneys. Each one of these practices brings an important perspective and set of compliance “goggles”  to assist those on the front lines of business who are most likely to confront corruption, as well as to those who are tasked with providing anti-bribery and compliance tools.  It is not often that one hears of  “real-world” perspective and experience with respect to anti-bribery, corruption and compliance issues. Thus, it was a pleasant surprise, after posting “A Tale of Two Sentences,” when I received an e-mail from Pinset Masons Partner Barry Vitou, about an upcoming UK conference which will address the dynamics of international corruption, enforcement and cooperation.

Accordingly, on October 23rd, 2014 I am pleased to be presenting (via video feed) through a Q and A with Mr. Vitou, at the Pinset Masons Regulatory Conference (link here). As stated in www.thebriberyact.com, Pinset Masons “figure people want to understand the mindset of the prosecutor, what their peers are doing when it comes to compliance and learn from other businesses who, shall we say,  have more experience than most of compliance…and in some cases non compliance (allegedly).”

The morning session, will consist of “key note speakers from law enforcement and in house counsel of global companies who will share with us their insight and perspectives.” The key-note speaker is David Green, Director, Serious Fraud Office, and who was a signatory to my own “Immunity from Prosecution” in the UK prior to his SFO appointment. Mr. Green will be joined by other speakers who are all recognized leaders in the field of anti-bribery compliance, from both the public and corporate sectors.

As announced, “Richard Bistrong will join the speaker line up at this year’s Regulatory Conference after our breakout sessions in the afternoon. Mr Bistrong was a former international sales executive and FBI/UK co-operator who pleaded guilty to bribery offenses and served 14 months in a US federal prison. Mr Bistrong will share his experiences and insights ‘at the sharp end’.”

Accordingly, in what I am sure will be an engaging and challenging interview with Mr. Vitou, I hope to share some of my observations and experiences which remain relevant in both the UK and US, with respect to enforcement and compliance efforts. Having faced a near carbon-copy prosecution in the US and UK, I can reflect  that the degree of enforcement cooperation between both countries, “from the sharp end,” is indeed a reality.

I also hope to share that for many international business executives who operate on the front line of international commerce, that bribery, especially the issue around small bribes, which Mr. Vitou has written about, can become a default behavior. Such conduct can become “rationalized,”  especially as those in the field of international business come to confront bribery in the context of compensation, the illusion of “no-victims” and in the environment of “no-witnesses.” Instead of a traditional presentation, I am confident that the exchange with Mr. Vitou will most definitely bring these issues “to life” through a lively exchange of perspectives. When I asked Mr Vitou for his own perspective on our session, he stated “Businesses need to understand the risks they really face, how to reduce them and what prosecutors think of those who don’t. We don’t often hear from the person at the sharp end who paid the bribe and how and why they did it. Richard, you add this important dimension through your insight and thoughts. Business should listen.”

Third Parties and the Red Flags You Don’t See*

Third Parties and the Red Flags You Don’t See*

Recently, I was reading a White Paper by Dun and Bradstreet titled “Anti-Bribery and Corruption Compliance for Third Parties: Is an off the shelf product enough?” (link here) As the D&B paper points out, “the risks of insufficient third-party diligence have never been greater,” to which I totally agree; however, the question remains, what are the solutions? In this article, I will use the D&B White Paper as a companion guide in discussing third party compliance gaps that I have observed in my own international sales experience. Furthermore, I hope that by discussing these real world perspectives, that compliance professionals and practitioners might see these examples as relevant to their own compliance programs.

As a preface, let me share that the discussion here concerns the difficulties that a corporation or audit entity would most likely encounter when trying to investigate, assess and/or vet a third party which has corrupt intent, and that such intermediaries will often surround themselves with a “ring of lies” which is difficult to expose. Such third party suppliers will often use corrupt means during the on-boarding process, especially when confronted with a corporate entity that is making an honest attempt to execute on due-diligence. While I agree with D&B that exposing that risk “is difficult if not impossible to achieve by purchasing an off the shelf product alone,” I see room for growth in terms of understanding how those intermediaries are attempting to evade and manipulate traditional assessment and vetting protocols.

What do I care, it is not my law

First, we should understand and appreciate that for many third parties, the mentality is “I am not covered” by US and other international anti-bribery acts, so the thinking remains “sure, I will sign anything, as long as I get the agreement.” In other words, it is a “it is not my law,” or worse, “it is not illegal here” mindset. That is a dangerous situation for all involved; such agents are willing to sign affidavits and representations knowing that they have no intention to comply with the law, and that is not the kind of dynamic which normally gets exposed via questionnaires or self-assessments.

A ring of lies

As the D&B paper states, “companies can’t simply rely on paper thin assurances by employees, distributors, or customers,” when it comes to third party transactions, and that “they need to look at the surrounding circumstances of any payment to adequately assess whether it could wind up in a government official’s pocket.” The challenge to that statement is that when it comes to a corrupt third party, it is difficult to make that assessment; such entities will attempt to surround themselves with a “ring of lies.” These deceptions have a number of components, which I will describe, and which are difficult to pierce from an assessment perspective.

The greatest object in the way of a reliable third party risk assessment is when the “internal business sponsor,” as labeled by D&B, is in collusion with the third party in order to assist the agent in circumventing standard assessment protocols. Such collusion can take the form of having the internal business sponsor complete the self-assessment (including additional “coaching”), as well as conspiring as to what financial tools are available in order to transfer necessary funds for a corrupt payment. These types of conversations are difficult to track, and in large organizations, which are managing a multitude of vendors in high and low risk regions, the risk is even greater.

When you have an internal business sponsor and a third party surveying financial tools which can be used corruptly, such conversations can include the use of discretionary discounts, marketing allowances, expense reimbursement, the transfers of samples, or even the use of “scope of work, “ and “after sales agreements,” to facilitate a corrupt transaction. Such discussions are not always on a “grand” basis, but can occur repeatedly, with low financial amounts, to avoid detection. In a discussion I had with a corporate compliance professional he said “what keeps me awake at night is that while some events which occur day in day out, may seem minor, when they become common place and shared among international personnel, it can end up as a significant problem.” Also, as I have shared in the past, such conversations and plans take place far from the C-Suite, usually, with no witnesses present.

My own conclusion is much along the lines of D&B, where they assert that “traditional approaches to managing diligence around third parties, including reliance on off the shelf products alone…have not proven sufficient in preventing bribery.” I think when you look at the “circle of lies” that can often surround a corrupt third party, adding on the mentality of “it is not my law,” and the potential collusion with an internal business sponsor, that a substantial risk which is difficult to detect can exist under the best of due-diligence intentions.

As D&B states, the onboarding process presents the greatest opportunity to develop a practice that prevents “diligence to be bypassed.” Thus, a more thorough and narrative examination of the third party, including the history of the particular market sector (was corruption in that sector in the past?), and a view of the internal business sponsor relationship, might be a guide to a more robust gate to keep out those who may irreparably harm a company through corruption and bribery.

*this article first appeared in Corporate Compliance Insights and is reprinted  and edited with their permission.

EY Fraud Survey & Compliance Fatigue. Do as I say not as I do.

EY Fraud Survey & Compliance Fatigue. Do as I say not as I do.

A few weeks ago I postedEY Global Fraud Survey: “Depressing,” yes, surprising, no” and shortly thereafter, Philipp Kloeber, Consultant at Ernst & Young, Melbourne, Australia (LinkedIn profile here) was kind enough to refer me to the EY paper “Overcoming compliance fatigue, Reinforcing the commitment to ethical growth.” My reaction to this work is that it is reflective, well thought out and extremely thorough in its methodology (2,700 executives across 59 countries); however, my conclusion remains, “depressing yes, surprising, no.” However, there are significant issues that the EY Survey elevates, which while some might think as having nothing to do with foreign corruption,  from my perspective are very much inter-related, not to mention perilous for all involved.

The paper addresses “compliance fatigue,” as representative of the “easy gains and quick wins for the compliance function,” but that “further progress from here is likely to be difficult.” As stated in the Executive Summary “the survey results provide a warning to boards of directors that compliance efforts may be losing momentum,” due to the trend that those companies which have an anti-bribery/anti-corruption (ABAC) policy has “increased by only 1% over the past two years.” In addition, “a persistent minority has yet to take even the basic steps toward an effective compliance program.” In more statistical terms, “one in five businesses still do not have an ABAC policy,” and “less than 50% of respondents have attended ABAC training.” Among C-Suite respondents, only 38% attended ABAC training and only 30% participated in an ABAC risk-assessment.

Wait, more depressing, yet unsurprising, findings:

  • “ABAC training is less likely to occur in jurisdictions where there is a higher perceived risk of bribery.”
  • “Sales and marketing executives are the least likely of all our respondents to be included in risk assessments, despite being exposed to and aware of significant risks.”

I appreciate the elevation of those dynamics, as having written about the need for compliance personnel to listen to those at the front lines of international business in order to better understand the risks and challenges they face. As I have shared, the more disturbing those conversations may be, the better they are, as you “can fix what you know.” Driving down rules and procedures to front line business personnel without their participation and “buy-in,” will be viewed as nothing more than a set of rules and procedures. Without a true ethical commitment to anti-corruption whereby field personnel are brought into the ABAC process at the inception, those at the front line will see policy as coming from “those who don’t know what we face.”

 Fraud is Fraud

Now, lets leave the world of ABAC for a moment to look at what I consider to be a significant and related trend with respect to the Survey’s findings. According to EY, “executives at senior levels are as likely to justify certain questionable or unethical acts as their more junior colleagues.” Of particular note, “CEOs are more likely to justify it than other colleagues.” As the report well states, “the risk posed by these individuals acting unethically have the potential to cause the most serious damage to their organizations.” Details?

  • “CFOs are more likely than any other role to justify making changes to assumptions relating to valuations and reserves to meet financial targets.”
  • “General counsel respondents are more likely than others to justify backdating contracts to meet financial targets.”
  • “Sales and marketing respondents are more likely to justify introducing more flexible return policies to meet financial targets.” (In sales speak, we used to call this “stuffing the channel.”)

So, what does any of this have to do with foreign bribery and anti-corruption? How about EVERYTHING (emphasis added, in case you missed it) Let me put forth a few scenarios referencing the above. I ask, what messages are those at the front line of  international business  receiving when C-Suite executives:

  1. Encourage, authorize or in fact direct the shipment of product (to record a sale), knowing that a significant percentage of the product will be returned in a subsequent financial period?  This often happens at the end of one fiscal quarter, and the product is returned in another fiscal quarter.
  1. Refuse to write down obsolete inventory of which front line personnel know very well the details, as they are well aware of  what constitutes salable product.
  1. Delay writing down bad debt, again, with the front line personnel usually “in the know.”
  1. Authorize the shipment of product to third parties, such as freight forwarders, warehouses, etc, just to record a sale, when the financial terms and documentation needed to contractually finalize the sale are not yet complete.

I asked Scott Killingsworth, Partner, Bryan Cave,  and author of “ ‘C’ Is for Crucible: Behavioral Ethics, Culture, and the Board’s Role in C-Suite Compliance,” (link here) about this dynamic.  Scott commented, “This reminds me of the Economist’s 2013 global survey of financial services executives, half of whom were in the C-Suite. Almost everyone (91%) said that at their company, “ethical conduct is just as important as financial success.” But at the very same time, a majority said that “it is difficult to make career progression at my firm without being flexible on ethical standards.”

Furthermore “the cognitive dissonance between these statements is staggering, but we have this amazing ability to compartmentalize “ethics” or “compliance” from “business” when we are aiming at a business goal. All it takes is a plausible business reason and many of us are ready to condone and justify misconduct. In the case of the Economist study, we find such a reason in the response to another question, where 53% agreed that “being too rigid over ethical standards will make my firm less competitive.”

In other words, as Scott maintains, the Economist survey demonstrates that “ethical conduct is just as important as financial success, as long as it doesn’t get in the way of the firm’s financial success – if it does, being ethical can hurt your career.” In addition, “Senior executives are carefully watched by their subordinates, and in a workplace with a weak ethical culture, this message about priorities echoes down the ranks quite clearly.”

I totally agree,  and when it comes to “weak ethical culture,” these trends, which some might characterize as “accounting fraud,” are absolutely inter-related to bribery and corruption. When front line personnel know that C-Suite engage in such conduct “to make the numbers,” (often, field personnel are involved by having to call customers to arrange  shipments, agree to the returns,  etc.) and in publicly listed corporations, where this dynamic repeats every quarter, what is the message? When such individuals and teams, especially those in high-risk (corrupt) areas confront requests for small bribes, and corrupt transactions, how do you think this impacts what I have called “rationalizing bribery?”

I asked Walt Pavlo, Forbes contributor, who has written extensively on white collar crime issues, for his perspective. Walt stated, “Many businesses manage their financial results each month, quarter and year. The purpose of doing this is that executive management believes it presents their company in the best light, just like photo-shopping makes people appear in their best light.” Furthermore,  “the problem is, neither of these reflect reality. So when a salesperson sees the company taking shortcuts on financials, something like a bribe no longer looks like a bribe, but a solution.” As he concludes, “the way companies handle bad news or challenges, is fairly reflective of how its people will handle them.”

As if the front line challenges were not great enough, this elevates yet another component of the “perfect storm of rationalizing bribery” which I did not consider prior to reading the EY Survey. The newest addition is the “hey, it’s not like the home office is any power of example.” This is not an attempt to justify illegal conduct, but these are serious issues that impact the thought process of those at the front lines of international business, and not often considered or even acknowledged by compliance professionals. Furthermore, as the Survey states, not only are executives exposed to risks, but also they have “an apparent willingness to take them.” Over one third (on average) of C-Suite personnel felt the following would be justified “to help a business survive.”

  • Offering entertainment to win/retain business.
  • Personal gifts to win/retain business.
  • Cash payments to win/retain business.

And we wonder why the wave of anti-bribery enforcement does not seem to be waning? In addition, the averages for C-Suite respondents on the above were HIGHER (emphasis added) as compared to the entire respondent group. Again, is this an attempt to lay responsibility for individual illegal conduct at the front door of the C-suite? Absolutely not, and I speak through the experience of accepting responsibility, pleading guilty to bribery, and consequential incarceration. However, as the Survey states “if senior management is not significantly engaged, significant risks may not be effectively managed or addressed.” Furthermore, “it is difficult to convince your business that fraud, bribery and corruption compliance are serious issues if senior executives are not seen to be doing what they are telling their teams to do (emphasis added).”

In other words, corporate edicts of “don’t bribe” on one hand, accompanied by “who can you call to ship a bunch of product, even if it gets returned next quarter,” on the other, deliver the same message: rules are made to be broken. The Survey concludes with, “fraud, bribery and corruption are unlikely to disappear.” Agreed. And my compliments and appreciation to EY for raising awareness of how C-Suite behaviors can have such a tremendous impact (positive or negative) on front lines of international business through the  “power of example.”

Corruption, Risk and Business Strategy. Which one manages the others?

Corruption, Risk and Business Strategy. Which one manages the others?

Since I stared writing about issues relating to compliance at the front line of international business, I have found myself looking more and more at the role of business strategy as a significant foundation of anti-bribery compliance. It seems that with every enforcement action comes the to-be-expected rogue employee corporate statement “we don’t tolerate corruption, this was the work of (insert how many people engaged in bribery).” With few exceptions, such as the Chief Medical Officer of GSK who stated to Reuters that GSK might need to build a new sales model designed to “eliminate sharp marketing practices,” (link here to my post on GSK),  I have yet to hear a corporate pronouncement that says, (in so many words) “our business model is broke, and such corrupt behavior is an unintended consequence, we are going to fix it.”

As I started blogging about this subject, came an introduction by Charlie Helps, Senior Adviser at DAC Beachcroft LLP’s Governance Advisory Practice (link here), to Alan Kennedy, Author, The Alpha Strategies. At Charlie’s recommendation, I read Alpha, and having been a participant in numerous strategic planning sessions, with “top-shelf.” (read: high cost) facilitators, I was immediately impressed by the Alpha Model, just as I was unimpressed by previous “strategic planning” initiatives, which resulted in no meaningful change other than a number of action items which through attrition, melted away with strategic issues unaddressed. Sound familiar?

So, I asked Alan if he would not mind joining me for a Q and A, as perhaps providing value to those corporations and field level business groups that are confronting the dynamics of business strategy and corruption at the front lines of business. (the full Q and A is available via PDF by linking here).

RB: Hello Alan, and thank you for participating in this Q and A.  So, first, what is the Alpha Strategy?

AK: Thank you for your kind words Richard, and the chance to speak to your audience. The Alpha Strategies is a new book on strategy, its structure and communication. It is available online, http://amzn.to/15xWVsQ.  We start by defining “strategy” as a choice of action rather than the more popular definition as “value creation” or “competitive advantage”. Using our simple definition, it becomes possible to see that there are 8 “choices” common to every business, be it for-profit or nonprofit. In other words, strategy can be seen as a system. The system consists of 8 strategies and 3 types of strategy.

RB: As I shared in my intro,  having to sit through what seemed like endless meetings with expensive facilitators who were supposed to make a dramatic impact on strategic thinking, only to have those concepts “melt away” over time, marked with a return to the “the normal,”  what makes Alpha different?

AK: What makes the Alpha model different is that it enables an understanding of the current strategy system of a business or nonprofit. Conventional approaches to strategic planning proceed immediately to tackle new strategy development after a cursory review, at best, of an organization’s current state. The conventional approach assumes that decision-makers already understand how existing strategy is being implemented and the challenges implementation is facing. But here’s the troublesome thing. Study after study shows this is simply not the case.

Boards and management do not understand current strategy! In the absence of a deep knowledge of existing strategy, strategic planning will fail. How can planners properly identify which strategies might need changing? What’s more, no one can explain the rationale for the proposed new strategies because they cannot relate them to the existing strategies. This means the strategic plan dies, unread and forgotten, in some folder on the shared drive while folks in the business lines get on with doing what they were doing before the new strategic plan came out. Or as you say, “all returns to normal”. Our model avoids this flaw by focusing first on the structure of the existing strategy system, not on strategy development. Once the existing system is well understood, it becomes much easier to identify the external factors most impacting the system.

RB: That makes a great deal of sense, after all, how can you know where you are going, if you don’t know the current state of affairs. Also, it would seem that if there is a fundamental flaw in strategy, including one that promotes or tolerates corruption, and you don’t take a look at current strategy, it goes undetected.

So, where does risk, in general, fit into the Alpha model?

AK: A relevant question, at a time when Boards are struggling with how to provide proper oversight to risk from issues such as cyber attacks, corruption, disruptive technologies and the looming prospect of protracted low growth. We take the position that risk is one of the 8 strategies found at the core of any business or nonprofit. As such, risk becomes a strategy to be managed. That’s the first difference with how we look at risk.

RB: I am not sure I understand?

AK: Conventional thinking tackles risk as an event beyond anyone’s control. This thinking completely disconnects risk, being an unacceptable event, from strategy, being choices of action. Since choices of action are the source of all risk, conventional thinking makes risk management very problematic. Consider this. A typical risk workshop today starts backwards with an identification of every possible risk that could impact the business. And then those risks are prioritized. But based on what, we ask? Our risk workshop begins with an identification of specific strategies. Once those strategies and the activities being undertaken to implement them are well understood, then it is possible to look at the risks attracted by each choice of action.

RB: So, what of corruption risk?

AK: With respect to your question on the “risk” of corruption, it is a risk typically associated with sales or procurement; thus, we would want to first understand how the sales folks are actually executing the sales process in their assigned territory and the challenges they face. This would yield the basis for understanding the risks they face, in this case, the risk of corruption.

RB: That is an interesting observation. I have seen all too often where they are disconnected. In other words, management sets the business strategy, globally or regionally, and says “execute.” Oh, and also, “here is how we are going to compensate you for achieving plan.” Then comes the “and don’t break the law,” with whatever compliance practices, training and documentation might be in place. What I don’t hear is someone raising a “red-flag” and saying “slow down, that growth strategy in a region x with the associated compensation plan is actually putting us in a position where executing strategy and not breaking the law are in potential conflict. “

What about culture and values? We can’t have a conversation about strategy without paying homage to the “tone at the top.” Where does that fit within Alpha?

AK: I think you are exactly right about culture and values coming straight from the top. To understand the culture of any firm, we identify its dominant strategy or Alpha. The connection between culture and strategy is that culture reflects accepted behaviors. Strategy, being the choice of action, is what determines the behaviors that will be acceptable. As for values, I think the term is synonymous with expectations. Imposed expectations are the driver of all strategy implementation. Thinking back on your focus on corruption, you can easily see how imposed expectations (a.k.a. “values”) impact corruption risk. How often in your career did you hear the chilling directive: “Just get it done! Make those numbers. I don’t want to know the details or how you do it!”

RB: Indeed! I can’t help but ask one final question, in all your experience, what is the single most common and consequential mistake that you see companies making when engaging in the strategic planning process?

AK: Without question, from what we see, the most common mistake in strategic planning is failing to understand the current strategy system already in place. This leads to uninformed decision-making on changing strategy. The real problem is that there is no common definition of strategic planning. And the definitions that are typically offered are so academic and vague that they offer no real guidance as to what constitutes a strategic plan. We define strategic planning as a review of the current 8 strategies being implemented. Once that is known (and we have yet to see an organization able to reach easy agreement on current strategy until after a lot of discussion). Only then it is possible to identify specific external forces impacting performance of each of the strategies. It is the conclusions drawn on the likely impact of external forces that drives the need to consider changing strategy. Folks are regularly told by the so-called experts “You need a strategic plan.” The reality is, there is already a strategy system in place and being implemented in every company, whether or not there is a written plan in place.

The question should be “Do you understand your present strategy system?”

RB: I think that is a great way to end, and I wonder how many organizations ever really look inward and to see where that system might be in fact a foundational “red-flag” in terms of corruption risk. So, for those who want more Alpha, how do they find you?

AK: Thank you, Richard for the opportunity to speak to The Alpha Strategies. akennedy@gibsonkennedy.com, @strategyscribe www.thealphastrategies.com