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anti-corruption due diligence

Anti-corruption due diligence


The fight against corruption and Kant

It is interesting to still see folks claim that, because companies, senior managers, employees and contractors engage in bribery and corruption, it is all somehow the fault of the Foreign Corrupt Practices Act (FCPA) for not being effective. Such arguments hold about as much weight as asserting that speeding limits are ineffective because people choose to break the law and drive in excess of them. Those who argue that the FCPA is somehow ‘broken’ because people violate it miss the critical fact that, as long as there are financial rewards to be obtained, there are some people who will do almost anything to make more money.

As an insight into human nature, this isn’t too controversial. Laws such as the FCPA help to set a standard for conduct that makes it fairer and less opaque for all. Yet all parties have a role in compliance. Of course, it begins with senior management setting the proper tone that business will be conducted ethically and in compliance. Moreover, it must be more than simply a wink and a nod to such concepts – all the while rewarding those employees who always hit their numbers through promotions and financial incentives.

It can be reminded of all of this when reading a review of the new book, The Moral Economy: Why Incentives are No Substitute for Good Citizens in the Financial Times. The review was by Robert Armstrong and was in an article entitled, ‘When greed isn’t good’. Armstrong found one central thesis of the book to be, “that no market structure or contract is so well designed that it can eliminate all opportunities for bad actors to take unfair advantage of the credulous”. He goes on to observe that the book closely aligns to the imperative of the 18th century German philosopher Immanuel Kant.

These insights can be found useful when considering the roles that we all must play in the global fight against bribery and corruption. Of course, the government has a role to play in banning bribery and corruption and then enforcing that ban. Yet businesses also have a role to play by implementing best practice compliance programmes to adequately prevent, detect and remedy any transgressions in this ongoing struggle. When you can tie all this back to Kant, it makes it clear that modern legislative efforts to fight the global scourge of corruption have deep roots.


Due diligence for SME’s

Due diligence procedures can be both demanding and stringent. When these conditions are imposed by another company who requires full compliance in order to start trading, an SME may feel overwhelmed by the amount of resources required in order to do so.

This is particularly so when an SME is dealing with a multinational company. Nevertheless, developing robust compliance procedures to promote anti-corruption ethics will enable SME’s to minimise the risk of corruption and bribery whilst being compliant with international anti-corruption standards.

The benefits of due diligence for SME’s

It can be tempting for SME’s to feel that anti-corruption due diligence is an unnecessary burden but demonstrating that the business works on an ethical basis also has many benefits. Here are a few:

  • It can give the SME confidence to trade with third partners that are not involved in corrupt or unethical practices.
  • Prosecution and financial penalties due to non-compliance are minimised or totally avoided.
  • The risk of potential damage to reputation as the result of being implicated in corrupt, unethical trading is minimised.
  • Due diligence can open business opportunities by providing assurance that the company is ethical.
  • Due diligence can enable the SME to attract investment and expand.

Implementing due diligence

Due diligence does not have to be labour intensive and can be adopted by businesses of any size if the following steps are followed:

1. Research
Obtain organisation information on the third party and store it in management system, with details of the source. If the source is not credible, the data will be flawed.

2. Due Diligence Questionnaire
Create and issue an appropriate due diligence questionnaire template and issue to potential suppliers, distributors or other third-party companies. A follow-up process to manage the questionnaire responses also needs to be put in place.

3. Red Flags
Once the questionnaire has been returned identify red flags following a pre-agreed procedure and implement any appropriate control measures. At this point it may be necessary to reject the third party if they are deemed to be too great a risk, or it may be necessary to seek additional information/clarification on various issues.

4. Review
Develop a monitoring system to identify if and when any follow-up checks are needed.

5. Record
Document the process and the results so that the evidence and rational for decision-making is clear should an audit take place.

Commercial benefits from due diligence

The aim of anti-corruption due diligence is to protect the company from risk of corruption and money laundering, but it does not have to be at the expense of other business operations. Adopting due diligence may require an initial time investment but as can be seen from the process above, does not need to be unnecessarily complicated.

Once the system is set up, due diligence is comparatively easy to maintain and apart from offering reassurance to prospective customers or trading partners it can also result in commercial gain.