Greater Global Anti-Graft Cooperation Raises Stakes for Institutions and Corporations

More cooperation in anti-corruption enforcement has raised the stakes for financial institutions and multinational corporations, a recent international fraud survey found. The report highlighted worldwide calls for greater transparency, at a time of increased geopolitical tension and heightened volatility in financial markets. The escalating threats of cybercrime, terrorist financing and more recently, the revelations regarding widespread possible misuse of offshore jurisdictions, have increased pressure on governments to act and companies to identify and mitigate fraud, bribery and corruption issues.

Specifically, EY's "14th Global Fraud Survey 2016: Corporate Misconduct – Individual Consequences," which covered 2,825 senior business leaders from the largest companies in 62 countries, found overwhelming support for enhanced beneficial ownership transparency. 91 percent of respondents recognised the importance of establishing the ultimate beneficial ownership of entities with which they did business. 

The report said that corruption levels were persistent with 39 percent of those polled saying it was pervasive in their country. Worse still, 42 percent of executives justified their unethical behaviour because of commercial competition pressure, and only 41 percent of chief financial officers surveyed were concerned that data privacy issues created complexity for cyber threat management. 

"Compliance professionals in Hong Kong need to remain vigilant regarding potential fraud, bribery and corruption risks. The findings highlight a number of different areas of potential risk that should be higher on the agenda of senior management, such as enhanced beneficial ownership transparency, a willingness by executives to justify unethical behaviour when under financial pressure and cyber security breaches. During a time of economic volatility is not the time for investment to be withdrawn from compliance teams and compliance programmes," said Chris Fordham, partner at EY in Hong Kong. 

He said firms needed to remain focused on dealing with fraud, bribery and corruption. "Particularly as we know that regulation will only increase locally and globally and we expect there to be increasing global cooperation in enforcement against corruption," Fordham said.

David Stulb, EY's global leader for fraud investigation and dispute services, said enhanced transparency was a focus of broad public interest, and urged business leaders to focus on securing a deeper understanding of their clients, partners and suppliers.

Increased transparency was, however, only one aspect of the solution to a problem that shows no sign of slowing. Overall, 39 percent of survey participants believed that bribery and corrupt practices were widespread in their respective countries, with little change from 38 percent in 2014 and in 2012. Some 32 percent of respondents also said they had personal concerns about bribery and corruption in their specific workplace.

Regulatory Coordination to Stamp out Graft

The report said regulators recognised the threat that bribery and corruption posed to an international financial system already under stress and "are increasingly cooperating across borders to hold individuals accountable for illegal acts". Such enforcement efforts appeared to be heavily supported by the survey respondents, with 83 percent agreeing that prosecuting individuals would help deter future fraud, bribery and corruption.

Still, 42 percent of respondents admitted that they could justify unethical behaviour to meet financial targets and 16 percent of finance team members below the position of chief financial officer said they could justify making a cash payment to win or retain business. 

Those responsible for compliance and ethics at the world's largest financial institutions and corporations seem to be facing a significant challenge if they are to keep their organisations clear from the scrutiny of prosecutors, with the US Department of Justice ("DOJ") and Securities and Exchange Commission ("SEC") and the UK's Serious Fraud Office ("SFO") eager to apply the Foreign Corrupt Practices Act ("FCPA") and the Bribery Act, respectively, to overseas malfeasance.

EY's survey also identified a perception in emerging markets that individuals responsible for corruption are not being held to account, with 70 percent of respondents in Brazil and 56 percent in both Africa and Eastern Europe believing that although governments are willing to prosecute, they are not effective in securing convictions.

"Increased levels of global cooperation between law enforcement agencies are making it harder for fraudsters and bribe-payers to evade prosecution. However, with respondents indicating that such misconduct is showing no sign of abating, companies continue to be exposed to major risks driven by the illegal actions of a small minority of employees," Stulb said. 

Better use of technology could be part of the solution. "More can be done to leverage forensic data analytics to manage these risks and improve compliance and investigative outcomes," he said.

There were also some positive indicators in markets where governments and regulators had attempted to crack down on corruption. In India, for example, where steps to increase transparency and crackdown on graft have been taken by the government, the number of survey participants who said bribery and corruption occurred widely throughout the nation fell from 67 percent in 2014 to 58 percent this year. In mainland China, 74 percent of local respondents said enforcement was effective — indicating the apparent effectiveness of Beijing's commitment to tackle corruption.

Whistleblowers and Technology Matter

The report showed that companies were frequently failing to take appropriate steps to respond and reduce their risk exposure in several key areas. For example, 20 percent did not identify third parties as part of their anti-corruption due diligence and, in the quest for growth, one in three did not assess country or industry-specific corruption risks before making investments.

Similarly, only half the firms surveyed used technologies such as forensic data analytics to identify and mitigate risks. 

Additionally, whistleblowers remained a critical source of information on alleged misconduct.

"According to this year's survey, 55 percent of companies have whistleblower hotlines in place. Regulators welcome such tips and in some jurisdictions, including the US, whistleblowers are offered substantial monetary rewards. Yet, such mechanisms are not always effective," the report said.

Survey respondents reported barriers to using such mechanisms. Eighteen percent said loyalty to colleagues would deter them from reporting occurrences of fraud, bribery and corruption. Similarly, 19 percent cited loyalty to their employers as a deterrent to report malfeasance. 

The problem is exacerbated in Asian and Middle Eastern cultures, where group solidarity is important and being seen as a snitch could quickly lead to one becoming a social pariah and unemployable in future.

"What we are seeing clearly is that some employees, with widely varying motivations, are prepared to misappropriate – or enable others outside the firm to have access to – the confidential data of their companies," Stulb said.

He said the balance between data privacy and security created further complications. "Dealing with such cyber and insider threats should be a top priority for management and boards. Yet, 59 percent of CFOs view cyber crime as a low risk – a perspective that deserves robust challenge," he said.


Ajay Shamdasani is a senior staff writer with Thomson Reuters Regulatory Intelligence in Hong Kong. He covers regulatory developments in Hong Kong, India and South Korea. He also writes about money laundering, fraud, corruption, data privacy and cybercrime.