Nicholas Cameron, Head of Forensic at KPMG, says that companies across the Middle East need to face up to increasing anti-bribery and corruption (ABC) challenges.
Globalisation is posing greater challenges for anti-bribery and corruption (ABC) compliance than ever before. Two factors are key, according to a recent KPMG report. A growing number of governments around the world are tightening ABC regulations or introducing new ones.
Equally, as companies globalise operations, they are increasingly reliant on third parties to do business in parts of the world where there may be a higher risk of corruption. The global survey shows that companies are trying to rise to the challenge but clearly suggests that a great deal more needs to be done to create sturdy ABC compliance structures.
Despite greater efforts by leading companies across the Middle East to build ABC frameworks, it’s clear that there are still gaping holes. One problem area is the management of third parties. Another is that certain sectors have historically been susceptible to, and scrutinised by foreign regulators for, corruption issues, such as the pharmaceutical and oil and gas sectors.
Companies in both sectors often use distribution models and a variety of other agency agreements. There can also be a reluctance by some companies to strongly demand and monitor compliance by their third parties, due to the importance they play in ensuring access to the Middle Eastern market. Respondents to the KPMG survey admit it’s their biggest ABC challenge, and also admit they are not doing enough to develop a culture of compliance among either their employees or their vendors and other business associates.
The survey shows a sharp increase in the proportion of respondents who say they are highly challenged by the issue of ABC, compared with KPMG’s 2011 global survey. Despite the difficulty of monitoring business dealings with third parties, nearly half of the respondents do not clear out – or at least identify – high-risk third parties. Failing to put in place mechanisms to identify higher risk third parties and either weed them out before issues arise, or apply additional safeguards to monitor and mitigate the risks they pose, is a perennial issue for companies operating in the Middle East.
In order to create “slush” funds to pay bribes off the books, funds can be extracted through invoices from susceptible vendors, such as general trading companies, consultants and agents. The services supposedly covered by these invoices either do not take place or the value of the goods and services provided are worth far less than what was paid. Knowing which third parties might require additional scrutiny and controls is therefore an essential first step to controlling fraud and corruption issues.
Another relatively common ruse across the Middle East to extract value used to pay bribes is the abuse by sales teams of discounts and rebate schemes offered to customers. These impact the many companies who rely on local distributors and re-sellers to get their products to market. To compete for larger, more strategic customers, large consumer goods brands, including technology and pharmaceutical companies, often offer discounts and rebates on a selective basis to incentivise end customers, hoping to persuade them to select their brand and increase purchase volumes.
These companies trust their third party business partners (such as distributors and re-sellers) to pass on discounts to end customers. Discounts and rebates therefore can quite easily be justified internally by sales teams. Unfortunately, there may be insufficient monitoring to ensure that any discounts and rebates are actually passed on to the end customer by the third party. Instead, this additional value – provided in credit or free goods – can be used to pay bribes.
The survey also highlights that nearly two thirds of global companies indicated that mergers and acquisitions are part of their growth strategy but many respondents seem to be unaware of the consequences of failing to identify ABC risks during the acquisition phase. Many Middle Eastern companies also do not consider these risks or fail to realise the true impact a significant event may have, potentially exposing themselves to financial and reputational losses.
There have been a number of incidents where acquired Middle Eastern businesses experience dramatic downturns in revenues under new management. In one recent example, KPMG was engaged to review the performance of a recently acquired construction services business whose turnover suddenly declined following acquisition. The acquiring company was disturbed to find that the downturn seemed to be strongly connected to the previous management’s culture of paying bribes to win contracts.
The tighter compliance environment brought in by the new management prohibited such misbehaviour. As a result, the acquired company was no longer able to compete in a competitive marketplace. Had a more thorough ABC due diligence been conducted pre-acquisition, the transaction could have been aborted, or the price of the company negotiated to a more reasonable level.
Data analytics is an increasingly important and cost-effective tool to assess ABC controls but many respondents are not using it effectively. Even with better controls and stronger ABC policies, companies continue to fail to comply with the tougher regulations, and are fined heavily as a result. Much has been said about ‘tone at the top’, yet we continually see failings at middle and lower management level, which suggests that there is not enough focus on ‘tone in the middle’. Companies can have perfect ABC programmes but will continue to fall short if they do not improve the way they do business.
Rushika Bhatia Editor
Rushika Bhatia is one of the region’s leading commentators on business and current affairs issues. She is the Editor of SME Advisor magazine - the flagship title of CPI Business. She is passionate about infographics – with special emphasis on data, research and statistics. Rushika has a Bachelor’s Degree from Indiana University, USA and is also CIMA qualified.