Anti-Corruption Practices Survey Highlights Challenges Facing Companies

Like the earlier surveys, the Deloitte Survey shows that increased enforcement is heightening company executives' attention to anti-corruption measures. Whereas in 2004 the Securities and Exchange Commission (“SEC”) and the Department of Justice (“DOJ”) prosecuted only five Foreign Corrupt Practices Act (“FCPA”) enforcement actions, in 2009 and 2010 the SEC and DOJ prosecuted 40 and 74 actions, respectively. Deloitte Survey at 3 (citing Gibson, Dunn & Crutcher LLP, 2010 Year-End FCPA Update). Additionally, eight of the ten largest FCPA settlements occurred in 2010. Id.

Despite this rapid increase in the number of enforcement actions, relatively few executives ' only 29% ' were “very confident” of the effectiveness of their company's anti-corruption policies and procedures; in contrast, 13% of executives admitted being “not confident” about their company's anti-corruption program. Id. at 7. The Deloitte Survey suggests that this lack of confidence may be a result of executives' concern over the many sources of potential corruption. Seven separate sources of corruption were rated by at least 20% of executives as posing “significant risk” to their companies. Id. Executives' top three concerns were the use of third parties (52%), customs clearance and importation of goods (36%), and entertainment related to government business/relations (30%). Id. at 7. Rounding out the top seven concerns for executives were bribes (27%), gifts to foreign officials (24%), expenses for travel and lodging of foreign government officials (21%), and facilitating payments (20%). Id.

Also, and not surprisingly, the July 1, 2011 effective date of the U.K. Bribery Act (Bribery Act, 2010, c. 23 (Eng.)) appears to be driving concerns among company executives. Of particular concern to companies was designing an effective policy to prevent facilitating payments, also called “grease” or “expediting” payments. Although the FCPA permits facilitation payments for routine government actions to which the payer is entitled, the U.K. Bribery Act prohibits them entirely; given the extraterritorial reach of the U.K. Bribery Act, many companies are revising their anti-corruption policies to forbid these payments. Deloitte Survey at 6. Still, only 47% of companies prohibited facilitating payments altogether, while 36% of companies allowed such payments with pre-approval, and 5% of companies allowed such payments with no restrictions. Id. Moreover, of the companies at which facilitating payments are permitted, 53% placed no restrictions on the amount of such payments. Id.

Respondents in the Deloitte Survey identified many of the same key issues facing their anti-corruption efforts as were identified by respondents in the Ernst & Young and KPMG surveys. For example, the Deloitte Survey found that, more than any other issue surveyed, executives considered identifying and managing third-party relationships to be a significant challenge for their companies' anti-corruption compliance programs. Id. at 8. Moreover, 52% of all executives surveyed considered the activities of third-party vendors to pose a significant risk to their company's anti-corruption efforts. Id. at 7. Unsurprisingly, given the myriad third-party vendors used by large companies (defined by Deloitte as those with $1 billion or more in reported annual revenue), many more executives at large companies perceived third-party activities to be a risk than did executives at small companies (those with less than $1 billion in reported annual revenue) ' 63% of large-company executives responded that use of third parties posed a “significant risk,” whereas only 33% percent of small-company executives did. Id. at 8.

At the same time, only 41% of companies regularly conducted due diligence on third parties in foreign countries (Id. at 10), and, despite the fact that companies generally included provisions in third-party contracts requiring vendors to comply with the company's anti corruption policies, just 9% of companies conducted “very detailed” monitoring of third parties to ensure such compliance, and 44% did not monitor third-party compliance at all. Id. at 12.

Given the significant cost potentially associated with in-depth monitoring of third-party vendors, Deloitte has recommended that companies take a risk-based approach, monitoring in detail third parties engaged in situations or countries that pose a high risk of corruption. It recommends monitoring all other third parties on a regular basis in a less intensive manner, and sampling a few third parties for more intensive monitoring each year. Id.

More Training

The Deloitte Survey found companies facing difficulties surrounding training of, and awareness of anti-corruption policies among, employees. Seventy-three percent of companies reported providing anti-corruption training, with varying levels and approaches reported:

• 64% of companies reported training select employees, based on their potential exposure to activities susceptible to corruption;
• 50% of companies reported training all international employees;
• 44% of companies reported training all domestic employees;
• 34% of companies reported training their board of directors; 80% of large-company boards of directors received training, and only 32% of small-company boards of directors received training; and
• 26% of companies reported training third parties. Id. at 5, 13.

The earlier Ernst & Young and KPMG surveys found that, despite positive trends in the development of formal anti-corruption policies, improving awareness of compliance programs among executives and rank-and-file employees remained a challenge at many companies. For example, the Ernst & Young survey found that, between 2009 and 2011, awareness of compliance policies decreased significantly, suggesting that policies are not adequately publicized within companies and training programs might be slipping. The Ernst & Young survey also found that 43% of those surveyed could not identify to whom they could report concerns of impropriety.

The finding in the Deloitte Survey that only 29% of executives felt very confident that their company's anti-corruption program would prevent and detect corruption activities (Deloitte Survey at 7), and the findings in the Ernst & Young and KPMG surveys of low rates of employee awareness of compliance policies, suggest that companies may be deficient in the manner in which information about anti-corruption policies is delivered to employees. Specifically, while 90% of executives reported having a company anti-corruption policy, only 45% of those were stand-alone policies. Id. at 1. The Deloitte Survey recommends that the most effective way of improving attention to and awareness of a company's anti-corruption program is to devise and promulgate that program as a stand-alone anti-corruption policy, rather than a program subsumed within a larger company code of conduct. Id. at 1.

Worries About Emerging Markets

Finally, the Deloitte Survey noted company executives' particular concern over the potential for corruption in emerging markets. Forty percent of executives reported that managing cultural norms in different countries was a significant challenge to their anti-corruption programs, though only 57% of companies reported having tailored their programs to countries deemed to pose a high corruption risk. Id. at 18. The statistics regarding concerns for business operations in the BRIC countries (Brazil, Russia, India and China) are noteworthy: 55% of executives were concerned about the potential impact on their business of corruption in China, 43% were concerned about the potential business impact of corruption in Russia, 39% were concerned about the potential business impact of corruption in India, and 26% were concerned about the potential business impact of corruption in Brazil. Id. Moreover, executives were more concerned about the impact of corruption in BRIC countries now than they were three years ago. Id. at 19.

All three surveys found that many employees, even those responsible for anti-corruption compliance, believed that unethical behavior is tolerated in many countries, and, in some, is unavoidable for companies trying to do business there. Paul R. Berger, Sean Hecker & Jane Shvets, E&Y and KPMG Surveys Shed Light on Anti-Corruption Trends, FCPA UPDATE at 4 (June 2011), www.debevoise.com/newseventspubs/publications/detail.aspx?id=027aee9f-9006-4037-8195-6da0c6a55c00; KPMG Survey at 18; E&Y Survey at 10. The Ernst & Young survey found that 81% of those responsible for business in emerging markets believed that bribery and corruption are inherent in business in their country; the KPMG survey found that 70% of executives stated that there are places in the world in which it is impossible to conduct business without engaging in corruption.

Conclusion

These anti-corruption surveys provide valuable insight into the attitudes toward anti-corruption programs from those on the “front lines.” The Deloitte Survey's findings ' especially when taken together with the similar Ernst & Young and KPMG surveys from earlier this year ' provide a high-level, but helpful, view into the issues and challenges facing companies as they try to adapt to new anti-corruption laws and to more vigorous enforcement by governments around the world. Moreover, the surveys provide insight into the challenges companies face as they try to apply those new regulatory and enforcement realities to the increasingly important business environment presented by emerging markets.

Paul R. Berger is a partner in the Washington, DC, office of Debevoise & Plimpton LLP and Michael T. Leigh is an associate in the firm's New York office. They are members of the Litigation Department and White Collar Litigation Practice Group. The authors may be reached at [email protected] and [email protected].

One of the Big Four accounting firms ' Deloitte ' has released a survey of anti-corruption, anti-bribery, and anti-fraud practices and trends at companies around the world. Deloitte, Anti-Corruption Practices Survey 2011: Cloudy With a Chance of Prosecution? (2011), www.deloitte.com/us/pr/anticorruptionsurvey2011 (hereinafter “Deloitte Survey”).

Two hundred and seventy-six executives were surveyed regarding their companies' anti-corruption compliance practices and policies, their attitudes about those measures, and their concerns about anti-corruption trends and issues facing their companies. Deloitte's findings both build on findings in similar surveys conducted earlier this year by Ernst & Young and KPMG and highlight additional trends and issues of concern to global companies. See Ernst & Young, European Fraud Survey 2011: Recovery, Regulation and Integrity (2011), www.ey.com/GL/en/Services/Assurance/Fraud-Investigation—Dispute-Services/European-fraud-survey-2011–recovery–regulation-and-integrity (hereinafter “E&Y Survey”); KPMG, Global Anti-Bribery and Corruption Survey 2011 (2011), www.kpmg.com/UK/en/IssuesAndInsights/ArticlesPublications/Pages/global-abc-survey-2011.aspx (hereinafter “KPMG Survey”).

Increased Concern

Like the earlier surveys, the Deloitte Survey shows that increased enforcement is heightening company executives' attention to anti-corruption measures. Whereas in 2004 the Securities and Exchange Commission (“SEC”) and the Department of Justice (“DOJ”) prosecuted only five Foreign Corrupt Practices Act (“FCPA”) enforcement actions, in 2009 and 2010 the SEC and DOJ prosecuted 40 and 74 actions, respectively. Deloitte Survey at 3 (citing Gibson, Dunn & Crutcher LLP, 2010 Year-End FCPA Update). Additionally, eight of the ten largest FCPA settlements occurred in 2010. Id.

Despite this rapid increase in the number of enforcement actions, relatively few executives ' only 29% ' were “very confident” of the effectiveness of their company's anti-corruption policies and procedures; in contrast, 13% of executives admitted being “not confident” about their company's anti-corruption program. Id. at 7. The Deloitte Survey suggests that this lack of confidence may be a result of executives' concern over the many sources of potential corruption. Seven separate sources of corruption were rated by at least 20% of executives as posing “significant risk” to their companies. Id. Executives' top three concerns were the use of third parties (52%), customs clearance and importation of goods (36%), and entertainment related to government business/relations (30%). Id. at 7. Rounding out the top seven concerns for executives were bribes (27%), gifts to foreign officials (24%), expenses for travel and lodging of foreign government officials (21%), and facilitating payments (20%). Id.

Also, and not surprisingly, the July 1, 2011 effective date of the U.K. Bribery Act (Bribery Act, 2010, c. 23 (Eng.)) appears to be driving concerns among company executives. Of particular concern to companies was designing an effective policy to prevent facilitating payments, also called “grease” or “expediting” payments. Although the FCPA permits facilitation payments for routine government actions to which the payer is entitled, the U.K. Bribery Act prohibits them entirely; given the extraterritorial reach of the U.K. Bribery Act, many companies are revising their anti-corruption policies to forbid these payments. Deloitte Survey at 6. Still, only 47% of companies prohibited facilitating payments altogether, while 36% of companies allowed such payments with pre-approval, and 5% of companies allowed such payments with no restrictions. Id. Moreover, of the companies at which facilitating payments are permitted, 53% placed no restrictions on the amount of such payments. Id.

Respondents in the Deloitte Survey identified many of the same key issues facing their anti-corruption efforts as were identified by respondents in the Ernst & Young and KPMG surveys. For example, the Deloitte Survey found that, more than any other issue surveyed, executives considered identifying and managing third-party relationships to be a significant challenge for their companies' anti-corruption compliance programs. Id. at 8. Moreover, 52% of all executives surveyed considered the activities of third-party vendors to pose a significant risk to their company's anti-corruption efforts. Id. at 7. Unsurprisingly, given the myriad third-party vendors used by large companies (defined by Deloitte as those with $1 billion or more in reported annual revenue), many more executives at large companies perceived third-party activities to be a risk than did executives at small companies (those with less than $1 billion in reported annual revenue) ' 63% of large-company executives responded that use of third parties posed a “significant risk,” whereas only 33% percent of small-company executives did. Id. at 8.

At the same time, only 41% of companies regularly conducted due diligence on third parties in foreign countries (Id. at 10), and, despite the fact that companies generally included provisions in third-party contracts requiring vendors to comply with the company's anti corruption policies, just 9% of companies conducted “very detailed” monitoring of third parties to ensure such compliance, and 44% did not monitor third-party compliance at all. Id. at 12.

Given the significant cost potentially associated with in-depth monitoring of third-party vendors, Deloitte has recommended that companies take a risk-based approach, monitoring in detail third parties engaged in situations or countries that pose a high risk of corruption. It recommends monitoring all other third parties on a regular basis in a less intensive manner, and sampling a few third parties for more intensive monitoring each year. Id.

More Training

The Deloitte Survey found companies facing difficulties surrounding training of, and awareness of anti-corruption policies among, employees. Seventy-three percent of companies reported providing anti-corruption training, with varying levels and approaches reported:

• 64% of companies reported training select employees, based on their potential exposure to activities susceptible to corruption;
• 50% of companies reported training all international employees;
• 44% of companies reported training all domestic employees;
• 34% of companies reported training their board of directors; 80% of large-company boards of directors received training, and only 32% of small-company boards of directors received training; and
• 26% of companies reported training third parties. Id. at 5, 13.

The earlier Ernst & Young and KPMG surveys found that, despite positive trends in the development of formal anti-corruption policies, improving awareness of compliance programs among executives and rank-and-file employees remained a challenge at many companies. For example, the Ernst & Young survey found that, between 2009 and 2011, awareness of compliance policies decreased significantly, suggesting that policies are not adequately publicized within companies and training programs might be slipping. The Ernst & Young survey also found that 43% of those surveyed could not identify to whom they could report concerns of impropriety.

The finding in the Deloitte Survey that only 29% of executives felt very confident that their company's anti-corruption program would prevent and detect corruption activities (Deloitte Survey at 7), and the findings in the Ernst & Young and KPMG surveys of low rates of employee awareness of compliance policies, suggest that companies may be deficient in the manner in which information about anti-corruption policies is delivered to employees. Specifically, while 90% of executives reported having a company anti-corruption policy, only 45% of those were stand-alone policies. Id. at 1. The Deloitte Survey recommends that the most effective way of improving attention to and awareness of a company's anti-corruption program is to devise and promulgate that program as a stand-alone anti-corruption policy, rather than a program subsumed within a larger company code of conduct. Id. at 1.

Worries About Emerging Markets

Finally, the Deloitte Survey noted company executives' particular concern over the potential for corruption in emerging markets. Forty percent of executives reported that managing cultural norms in different countries was a significant challenge to their anti-corruption programs, though only 57% of companies reported having tailored their programs to countries deemed to pose a high corruption risk. Id. at 18. The statistics regarding concerns for business operations in the BRIC countries (Brazil, Russia, India and China) are noteworthy: 55% of executives were concerned about the potential impact on their business of corruption in China, 43% were concerned about the potential business impact of corruption in Russia, 39% were concerned about the potential business impact of corruption in India, and 26% were concerned about the potential business impact of corruption in Brazil. Id. Moreover, executives were more concerned about the impact of corruption in BRIC countries now than they were three years ago. Id. at 19.

All three surveys found that many employees, even those responsible for anti-corruption compliance, believed that unethical behavior is tolerated in many countries, and, in some, is unavoidable for companies trying to do business there. Paul R. Berger, Sean Hecker & Jane Shvets, E&Y and KPMG Surveys Shed Light on Anti-Corruption Trends, FCPA UPDATE at 4 (June 2011), www.debevoise.com/newseventspubs/publications/detail.aspx?id=027aee9f-9006-4037-8195-6da0c6a55c00; KPMG Survey at 18; E&Y Survey at 10. The Ernst & Young survey found that 81% of those responsible for business in emerging markets believed that bribery and corruption are inherent in business in their country; the KPMG survey found that 70% of executives stated that there are places in the world in which it is impossible to conduct business without engaging in corruption.

Conclusion

These anti-corruption surveys provide valuable insight into the attitudes toward anti-corruption programs from those on the “front lines.” The Deloitte Survey's findings ' especially when taken together with the similar Ernst & Young and KPMG surveys from earlier this year ' provide a high-level, but helpful, view into the issues and challenges facing companies as they try to adapt to new anti-corruption laws and to more vigorous enforcement by governments around the world. Moreover, the surveys provide insight into the challenges companies face as they try to apply those new regulatory and enforcement realities to the increasingly important business environment presented by emerging markets.

Paul R. Berger is a partner in the Washington, DC, office of Debevoise & Plimpton LLP and Michael T. Leigh is an associate in the firm's New York office. They are members of the Litigation Department and White Collar Litigation Practice Group. The authors may be reached at [email protected] and [email protected].