conceptual: human

CONCEPTUAL: HUMAN

Anti-Corruption Compliance Corruption Risk Assessments and Analysis of red flags

Michael Harris

Thomson Reuters

18th March 2013

TOPICS FOR DISCUSSION

• Are you told what you want to hear? Third Party verification

• Finding the red flags

• Monitoring your business environment: Perpetual Programs

• Foreign Public Officials: What is your business? PEPs?

• What are companies doing now where Due Diligence is concerned, in China and HRJ’s?

• Checking Individuals vs Companies

• Taking a Risk Based Approach

CORPORATE OVERVIEW

• World-Check was originally created to address the Swiss financial industry’s Know-Your-Customer (KYC) and risk-reduction requirements.

• 10 years later more than 5,000 institutions use World-Check in more than 162 countries

• FTSE 100, 250, Eurotop 500 and Fortune 500 Companies are clients

• 49 of the 50 largest financial institutions in the world are clients

• 9 of the top 10 insurance, 17 of the top 20 law firms

• More than 200 enforcement and regulatory agencies in 90+ countries rely on World-Check

• Grew to over 500 Staff, 17 locations, 63 Languages

• Now owned by Thomson Reuters, Governance, Risk and Compliance division

Drivers for ABC Due Diligence

• Foreign Corrupt Practices Act (FCPA)

• UK Bribery Act

• OECD Good Practices Guidance

• Egmont FIU Network

• FATF

• Reputational Risk

• Ethical Business Practices

• Good business practice

FCPA Enforcement

Purpose of Due Diligence Work

Anti-Bribery and Corruption (ABC) Compliance

Proportionate Procedures

Top-Level

Commitment

Risk Assessment

Due Diligence

Training

Monitoring & Review

Indirect Bribery

• Indirect bribery involves paying or receiving a bribe

through a third-party.

Third-parties or business associates include:

1. Clients/Customers

2. Joint Venture/Consortium Partners

3. Contractors/Suppliers/Vendors/Distributors

4. Agents/Introducers/Intermediaries/Consultants

AVON

Avon • The Facts

• Payments of Bribes for operations in China

• Costs-past, present and future.

• Suspension of key employees

1. President

2. Chief Financial Officer

3. Top government affairs executive of Avon's China unit

4. (Former) senior executive in New York who was Avon's Head of Internal Audit.

LESSONS LEARNED

• Who is a foreign governmental official

• Doing business in China

– Chinese regulations on gifts and travel

– Totalitarian State

– Post Hayward

• Pressure for travel and entertainment – Guanxi

THE PROSECUTORS’ VIEW

The Prosecutors View • What resources were appropriated for Due Diligence?

• How do I know the risk assessment was objective?

• Were risks in the Boardroom addressed?

• How was risk examined at vendor/agent level?

• Was culture and attitude measured (tone from the top)?

Third Party Risk Assessment

Low Risk Norway/Canada

Medium Risk Malaysia/South

Africa

High Risk Venezuela/

Ukraine

Low Risk Consumer

Services, Retail

Medium Risk Pharmaceuticals/

Telecoms

High Risk Oil & Gas,

Extraction,

Defense

Are the principals

behind the

company Foreign

Public Figures?

Will the business

involve gov’t or

public contracts?

Is a gov’t license

required for the

operation?

Are the third

party goods and

services mission-

critical?

Does the

supplier deal with

proprietary info,

IT systems,

security

services,?

High Risk

Medium Risk

Low Risk

Exposure to

Public

Officials?

Relationship

Type Risk Rating Business

Sector Location

Example 1 – Malaysian Partner



Africa


Ukraine

Low Risk Consumer

Services, Retail


Telecoms


Extraction,

Defense

Are the principals

behind the

company Foreign

Public Figures?

Will the business

involve gov’t or

public contracts?


required for the

operation?

Are the third

party goods and

services mission-

critical?

Does the

supplier deal with

proprietary info,

IT systems,

security services,

advanced

payments

High Risk

Medium Risk

Low Risk

Exposure to

Public

Officials?

Relationship


Sector Location

Example 2 – Canadian Retailer



Africa


Ukraine

Low Risk Consumer

Services, Retail


Telecoms


Extraction,

Defense

Are the principals

behind the

company Foreign

Public Figures?

Will the business

involve gov’t or

public contracts?


required for the

operation?

Are the third

party goods and

services mission-

critical?

Does the

supplier deal with

proprietary info,

IT systems,

security services,

advanced

payments

High Risk

Medium Risk

Low Risk

Exposure to

Public

Officials?

Relationship


Sector Location

Top Countries for EDD Screening

Jurisdiction of 3rd Parties

China

India

Russia

Indonesia

Brazil

Hong Kong

United Arab Emirates

Malaysia

Italy

South Korea

Thailand

• 70% of all countries fall into “higher-

risk” categories according to

industry standards.

• In 2012, US regulators issued fines

to companies engaged in corruption

in Russia, Brazil, China, Mexico,

Poland, Italy, India, among others.

• Affected industries include

Pharmaceuticals, Insurance,

Manufacturing, Technology, Medical

Devices, and Finance.

Enhanced Due Diligence (EDD)

Basic Elements of a Background Screen

• Sanctions and other Compliance Database Screening

• Adverse Media/Internet Search for Reputational Assessment

• Confirmation of Subject Company Status

• Identification of Beneficial Owners/Shareholders

• Identification of Company Directors/Executives

EDD Challenges in High Risk Jurisdictions

• Higher risk jurisdictions tend to have less transparency

in terms of publicly available data sources.

• Information that is legally obtainable may need to be

retrieved manually or by request.

• Research methods and best practices may vary from

region to region and will likely required special skills and

experience.

• Information may be in local language.

Positive Transparency in Higher Risk Areas

Required Information Online Online + Offline

Registry Documents 61% 80%

Disclosure of

Shareholders 42% 63%

Disclosure of Directors 44% 69%

UBO Identification Project

Recent pilot for a Major Client:

• 200 Western European privately-held companies.

We were able to identify on 54 UBOs in first round

of filings retrieval.

• Second round we managed to identify an

additional 64 in a second round.

• UBO identification costly, time-consuming, and

unpredictable.

Positive Transparency in Higher Risk Areas

• Organizations such as the World Bank and IFC are

supporting transparent disclosure of corporate data

to facilitate due diligence.

• China, India, Russia offer ownership information

online. Brazil is partially online, but needs to be

retrieved by someone with a Brazilian National ID.

• Information is generally available in Eastern

Europe, South America, and Asia.

• Rwanda and Liberia recently launched online

registry retrieval portals including shareholders and

directors.

Challenges in Higher Risk Areas

• Offshore jurisdictions continue to be barriers: Caribbean,

Cyprus, Mauritius, Panama, Delaware.

• Mexico remains the most challenging emerging markets

economy with a de-centralised registry system and

security concerns affecting access to information.

• Central America, Africa, and the Middle East tend to

have the poorest levels of transparency. Shareholders

not even available in South Africa.

Challenges in Higher Risk Areas

• Countries where ownership and directorship information

were previously available are ushering new rules limiting

the disclosure of information: Hong Kong and Mainland

China.

• In 2012, Azerbaijan signs new law limiting the disclosure

of corporate information.

• Cumbersome retrieval processes require in-person

requests and manual searches: Indonesia, Ukraine, and

parts of Africa.

DETERMINING REPUTATION

• Is the Partner a State Owned Entity?

• Identify the Individual’s involved i.e. Shareholders, beneficial owners and

influential management

• Identify their track record.

• Are they Politically Exposed and what does this mean?

• Criminal Records?

DETERMINING GOVERNMENTAL TIES

• Zheng Xiaoyu, former director of State Food and

Drug Administration executed in July 2007 for

accepting RMB 6.5 million for corruptly approving

medicines.

Not all PEPs are bad. Augment results with local

searches. Use Intelligence Database.

• Chen Tonghai, former Sinopec chairman

sentenced to death with a 2 year reprieve in July

2009 for accepting RMB 28.7 million in return for

awarding contracts.

DETERMINING QUALIFICATIONS

• Market Intelligence – Source Opinion

• Civil Litigation Searches

• Local Language Media Reports & Press Opacity

• Websites and Blogs

• Current;

• Former;

• Non/lost prospects or failed tenders or proposals.

Our Methodology…

Business Intelligence

KNOW THE ANSWERS

• Does the company exist?

• Do you know who owns it?

• Where is the office and who manages it? Physical office location?

• How long has it been in business?

• Is it owned or managed by entities connected to political figures?

• Is it newly incorporated, i.e. has it been established solely for your

deal? Phoenix Operation?

• Is it established offshore? Who are the UBO’s?

• Are the principals criminals or money launderers?

• Are they a risk to your reputation and your business?

• What is their track record?

• Do they pay or accept bribes in the normal course of their business?

PROTECT YOURSELF FROM ASSOCIATE CORRUPT PRACTICES – DUE DILIGENCE

• Publicly accessible does not equate to easily accessible

• Standards of Public Information in China (for example) are excellent – mountains of data

• Understand local informational peculiarities, stay on the public side of the line and aim for the best coverage possible

PROTECT YOURSELF FROM ASSOCIATE CORRUPT PRACTICES – DUE DILIGENCE

• It is possible to get a comprehensive read on a company’s track record but you have to know where to look

• China and HRJ Expertise

• Any program has to be perpetual

• Role of Internal Audit – Monitoring Business Environment

DIRECTORS / PARTNERS – WESTERN BUSINESS EXECUTIVES ..PERCEPTION

• “I was convicted twice in Australia for possession of drugs in the 1990’s”

• “I certify I have never been disqualified as a Director of any Company”

• “ I certify I am not currently involved in any litigation or investigations”

RECIPROCAL CONTRACTUAL UNDERTAKINGS: DUE DILIGENCE

• Rules of thumb:

– Your Right to Audit – announced and non announced.....think about the

time of year

– Site Visits – Surrounding Areas, 3rd Party in Country..

– Security

RECIPROCAL CONTRACTUAL UNDERTAKINGS

• Rules of thumb:

– Do they practice what they preach

– Ongoing processes – Perpetual Programme

– Key Points: What is your relationship / Extension of your company =

Reputation:

– Channel 4: Dispatches, BBC Panorama, Global Witness – When it all goes

wrong.....

CONCLUSIONS

• Getting it wrong is now serious

• Focus on Key Risk Areas: HRJs, Partners, JV’s

• Risk Based Approach

• Risk Assessment – Fully Documented

• Due Diligence – Fully Documented

• Any program has to be On Going – not one off

• A FTSE 100 Feedback on the Bribery Act

QUESTIONS? MICHAEL HARRIS Email: [email protected] Web: www.world-check.com

THANK YOU