White-collar crime: Sign of the crimes

Hard times are encouraging employers to take a blasé attitude towards unethical business practices, and companies need to keep a tight rein on risk management to avoid ever-more severe penalties. By Jim McCurry

With the economic ­climate giving rise to an increase in unethical behaviour, some leading companies are taking drastic action to get to grips with bribery and corruption risks.

One organisation announced an amnesty programme recently ­whereby employees could come forward to share their own understanding of questionable practices without fear of termination or claims of ­damages from the company. The company was ­careful to add that it could make no such promise regarding criminal prosecution.

Business leaders find themselves within a vice-like squeeze. As the recession bites, an alarming tolerance towards the use of unethical or illegal business practices to survive the downturn seemingly prevails. At the same time public support for more aggressive regulatory enforcement is leading to greater resources and renewed ­confidence among regulators.

Demonstrating a commitment to ethical business conduct in the face of increased ­levels of bribery and corruption poses a ­serious challenge to management.

For corporate officers and independent directors, the potential reputational and financial damage from a bribery and ­corruption incident increases the need for proactive measures to mitigate the risks.

Corporate officers and independent ­directors are also faced with a rapidly evolving enforcement landscape. Most telling is the US Department of Justice’s (DoJ) acting assistant attorney-general Matt Friedrich’s statement in connection with the Siemens settlement in December 2008. “We are now working with our foreign law enforcement colleagues in bribery investigations to a degree that we never have previously,” said the statement. “In the past, in a case of joint jurisdiction between the US and another country, it was typically the case that only the US prosecution would succeed. That is now significantly less likely to be the case.”

With increased enforcement over the past six years, the US Foreign Corrupt Practices Act (FCPA) has become a de facto standard for many. The DoJ and Securities and Exchange Commission continue to enforce the anti-bribery provisions of the FCPA on US-listed corporations and citizens, while other regulatory regimes are becoming much more active and successful in ­prosecutions.

‘Acceptable’ unethical practices

It is hardly surprising that the regulators are on red alert given that we are in an environment where corporate fraud is not only on the rise, but is also considered acceptable.

The findings of Ernst & Young’s (E&Y) latest European Fraud Survey, which ­canvassed 2,200 employees in corporates across 22 European countries, showed a disappointing tolerance of unethical behaviour.

Nearly half of respondents think it is acceptable to engage in unethical business behaviour, from paying cash to win business (25 per cent) to gifting individuals in return for business (24 per cent).

And the UK fared no better: 63 per cent of UK respondents expect corporate fraud to increase over the next few years, while 70 per cent say that management is likely to cut corners during the downturn.

Changes to UK laws and enforcement

Although UK employees may fear the worst, some significant legal and regulatory ­developments have taken place.

A draft bill on bribery was introduced to target both the payer and receiver of a bribe – failure to prevent corporate bribery could lead to up to 10 years’ imprisonment.

This bill has been given some weight following the decision by Richard Alderman, head of the Serious Fraud Office, to boost the size of the anti-corruption investigation team by more than 50 per cent. The early results of this new focus were a £2.25m fine issued to Balfour Beatty to settle bribery allegations over a £100m overseas contract.

The Financial Services Authority has also increased its focus on this area, fining Aon £5.25m for failing to take reasonable care to establish effective systems to counter the risks of corruption.

The E&Y survey shows that many ­welcome this stronger intervention, with two-thirds saying they want to see ­governments enforce rules more ­stringently, while 70 per cent say their company ­directors should be held personally liable for fraud that occurs on their watches.

The cost of corruption

Bribery and corruption investigations divert corporate officers’ and independent ­directors’ time away from the day-to-day running of companies, while running an investigation could cost millions.

The investigation at Siemens is an extreme example of the burden of a large-scale corruption investigation: 1,750 ­interviews and 800 informational meetings were held with employees in 34 countries and 38 million transactions were analysed from the accounting system, resulting in the review of 127 million accounting entries related to those transactions.

But it is the shift in emphasis to hold management accountable for errant employees that threatens directors.

Although increased pressures to pay bribes and engage in corrupt practices may be an inevitable reality of the recession, the emergence of widespread tolerance ­portends an ominous inevitability. ­Proactively managing these risks now by focusing on high-risk operations and ­transactions in ‘red flag’ accounts can ­provide a fresh assessment of compliance with a company’s anti-bribery and ­corruption policies and the evolving ­regulatory requirements – and can help ­prevent the vice from closing shut.

Jim McCurry is a partner in the fraud investigation and dispute services practice at Ernst & Young