"How does a multi-national company (MNC) address the issue of bribery and corruption in the fast growing but highly complex emerging markets? Is there a level playing field available for companies, which take an ethical stand against paying bribes for winning business? There are no straightforward answers to these questions, and managing in this environment requires the tenacity to stick...
"How does a multi-national company (MNC) address the issue of bribery and corruption in the fast growing but highly complex emerging markets? Is there a level playing field available for companies, which take an ethical stand against paying bribes for winning business? There are no straightforward answers to these questions, and managing in this environment requires the tenacity to stick to long-term goals."
Emerging markets like India, Brazil and China offer much opportunity to multinational companies experiencing negative or no growth in the sluggish mature markets. There are considerable prospects in these markets, including an explosion of demand, but these are embedded in an unprecedented environment of constant change and spiralling complexity. The business and regulatory scenario in these countries is tough and isn't expected to improve in the immediate future.
Managing a mature vis-á-vis a rapid-growth market involves exceedingly different dynamics. The former has already reached a certain level of maturity in its regulatory environment and business practices to address bribery and corruption risk, whereas in the latter, regulatory environment is weak, and corruption is more widely considered "business as usual" and rarely punished.
The 12th Global Fraud Survey1 by Ernst & Young highlights that bribery and corruption risks remain widespread, with emerging markets particularly vulnerable. While globally, 39 per cent of respondents reported that bribery or corrupt practices occur frequently in their countries; in Brazil, that share of responses reached a whopping 84 per cent and in India 70 per cent. Respondents from Eastern Europe indicated that businesses in their region are least likely to have a compliance or internal audit function. Similarly, opportunities in China are not without risk-prevalence of state ownership, high levels of bureaucracy and inconsistent application of laws and regulations all contribute towards corruption compliance challenges.
Extraterritorial regulations - compounding challenges for MNCs
More than the local laws in the developing countries, such as Prevention of Corruption Act, 1988 (PCA) in India, MNCs have to worry about laws such as US Foreign Corrupt Practices Act (FCPA) 1977 and the UK Bribery Act 2010 (UKBA), which have extraterritorial reach. The aggressive enforcement by US regulators, record fines, increased focus on prosecution of individuals and foreign corporations, combined with the targeting of specific industries ("sector-wide sweeps") have forced companies to constantly challenge their existing anti-bribery policies and processes. That exposure is greatly magnified now with the new UKBA which came into effect on 1 July 2011. Even though there has been only one prosecution under this act, that too of an individual for domestic bribery of a non-commercial nature, it is considered as perhaps one of the most far reaching anti-bribery legislations till date.
What makes emerging markets risky?
Three main grey areas which make business risky in emerging markets relate to third party relationships, facilitation payments and corporate entertainment.
"Arpinder Singh is the Leader of Ernst & Young's Fraud Investigation & Dispute Services practice in India. He has an extensive experience of 18 years, working in India and the US. Arpinder is the President of Mumbai Chapter (India) of The Association of Certified Fraud Examiners (ACFE)."
Third-party risk: In a new market, a company must work with multiple suppliers, intermediaries and agents, who may themselves depend on a web of second-tier third parties, creating a complex network to manage. The UK Bribery Act states that where a bribe is paid by an "associated person", i.e., employee, agent or subsidiary (as defined in Section 8 of the act), and with intent to benefit the company itself, the company will automatically be guilty of a criminal offence. In short, business may be held responsible for what associated persons do for them. It has also become increasingly clear that the ignorance of laws does not absolve senior management of their liabilities for the activities of their local subsidiaries and agents.
Corporate hospitality: The level of "established norms" in some countries may be "extravagant" and at risk of being perceived as intended to have a "direct impact on decision making". The key issue here is when does influence become inducement? A simple rule that a company in doubt can follow is to stay away from extending gifts or entertainment at the time of contract negotiation.
Facilitation payments: Such payments, also called as "grease payments" are allowed under FCPA, but are prohibited under UKBA. In fact many payments that meet the FCPA's narrow definition of facilitating payments may be illegal in the local country where they are made: for instance under PCA in India, such payments are prohibited.
"The 12th Global Fraud Survey by Ernst & Young highlights that bribery and corruption risks remain widespread, with emerging markets particularly vulnerable. 39 per cent of respondents reported that bribery or corrupt practices occur frequently in their countries; in Brazil, that share of responses reached a whopping 84 per cent and in India 70 per cent."
Common pitfalls-how to overcome these?
Blanket compliance such as low-threshold hospitality registers or untargeted training can be wasteful and may not provide the protection businesses need. However, it would be a mistake to take no action. So what are some of the essential things that a company can do for building and implementing an effective anti-bribery and corruption policy?
Acknowledge: Different risks exist for different divisions and geographies-one size fits all approach is not effective.
Be alert: Constant updating about current bribery risks in a country, sector, transaction, business opportunity and business partnership.
Right approach: Action taken on policies and procedures should be proportionate to the risks faced and the complexity of nature, location and scale of commercial activities.
Define 'zero tolerance: Clearly communicate what this means for the business.
No ambiguity: Provide clear guidance on gifts, hospitality, political and charitable donations, and demands for facilitation payments.
Due-diligence: Conduct a systematic risk assessment of third parties-undertake site visits, public domain information searches and local interviews to collect information on the identified vendors.
Tailor-made training: Continual training processes need to be in place, which are relevant, reflect the issues and day-to-day problems employees are likely to encounter and guide them effectively on addressing them.
Dynamic approach: Make adjustments as business risks change.
Lastly ensure 'speak up' channels like hotlines are available.
Burden of proof
In a realistic scenario, there is no foolproof protection against bribery and corruption risks in the emerging markets. However, a company may, in a litigious scenario, defend itself by proving that it had adequate procedures in place to prevent bribery. The first step in this direction would be to ensure high levels of transparency in business conduct. Secondly, a steadfast long-term view will encourage a company to resist the pressure or temptation to win business via unethical means. During challenging times, the stakeholders will know that while the company may face loss of business in the short term, the decision to remain ethical will help in sustainable and clean long-term growth.
Disclaimer–The information is intended to only provide a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice.