What Companies Do Right (and Wrong) Fighting Bribery and Fraud in Emerging Markets

The enormous growth opportunities in emerging markets for large North American- and European-based companies come with significant risks – running afoul of international anti-bribery and fraud regulations chief among them. An overwhelming majority of firms (83 percent) have suffered major loss-making incidents in emerging markets over the last five years, according to a new FTI Consulting survey of 150 executives at companies with more than $1 billion in annual revenues.

The average loss per company over that time was $1.38 billion. The average cost per incident was estimated at $325 million.


The FTI Consulting survey revealed that there are stark differences between companies that effectively mitigate the risks of bribery and fraud in emerging markets and those that don’t. These differences matter to corporate results. Those in the survey we call leaders lost on average one-tenth as much (0.2 percent of total revenue) as did those we term laggards (2.2 percent). The FTI Consulting survey, and our interviews with senior executives of companies operating in those markets, explain why.

Culture Is Everything

In most developed markets, paying bribes either to win or to facilitate business has been long understood to be bad business. International laws such as the U.S. Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act leave little doubt that paying bribes is regarded as utterly unacceptable.

But in many developing economies, in Asia, Latin America, the Middle East and Eastern Europe, bribery often is a way of life, a business facilitator that’s not even thought of as corrupt. So-called facilitation payments are common in most emerging markets, making it hard for local managers to avoid paying them. If, for example, an inspector stops a truck, alleging that it’s overweight, and demands a “fee” to release it, the manager will be hard pressed to say no. The “fee,” of course, is a bribe.

The company and the manager are caught between a rock and a hard place. Refuse to pay the bribe, and that truck stays off the road, the business suffers or fails and the manager’s performance will be criticized. Pay the bribe, the delivery gets made, the manager is rewarded, but the company accepts a number of risks. The most frequently cited consequence for bribery and fraud by survey respondents is reputational harm (67 percent), followed by loss of revenues (56 percent) and then prosecution of the company (44 percent).

The Importance of Due Diligence

The key to avoid getting ensnared in the coils of bribery and fraud in emerging markets is to implement a culture of compliance, establishing (and sticking to) policies that are tailored to the local culture. And, of course, it requires conducting careful due diligence when partnering with third parties or hiring employees to staff subsidiaries.

Multinationals have numerous partners, and they’re growing increasingly reliant upon them. If a multinational’s joint venture partner gets into trouble, this will have an impact on the multinational. The FCPA and UK Bribery laws hold companies accountable for their partners’ actions.

Where companies frequently go wrong is a lack of due diligence in hiring local employees and managers, an error compounded by a lack of corporate oversight. Headquarters frequently does not spend enough time learning about the day-to-day realities of their overseas operations. Companies also forget that the contractors the local managers engage, and the subcontractors the contractors hire, also need to be vetted and watched. Otherwise, there’s no way of knowing who’s bribing whom and what’s happening down the food chain.

Of course, this takes time and money. Frequently, companies fail to invest enough resources in compliance. And not only are the resources allocated often insufficient, they may be poorly distributed. If, for example, a bank has large operations in Cordoba, Argentina, but its compliance team is in the U.S. or the UK, or even in Buenos Aires (where, perhaps, the restaurants are better) with just a few compliance officers in Cordoba, risks rise. Risk flows to where the money is. In short, companies need to place their compliance resources where their business is.

This lack or misallocation of resources extends to computer systems. IT systems for business units in emerging markets that are incompatible or disconnected from headquarters make it difficult to reconcile accounts in different jurisdictions, forcing companies to rely on manual, error-prone processes for review and reporting. That can invite fraud just as easily as an inadequate investment in compliance training.

What Leading Companies Do Right

When Arvind (his first name) was named Managing Director for a global leader in consumer and durable appliances to lead his company’s re-entry into the Indian market, he encountered a culture that paid “speed money” to do business, and made payments to inspectors “who always would find problems in routine operations and ask for small amounts ranging from $20 to $100 to ignore them.”

Arvind refused to pay. He went to the most senior official in the government’s Inspection Department and told him his company was good for India’s economy and was “committed to ethical business.” Arvind also assured the inspector that he had the backing of the company’s leadership which, in fact, he did.

While taking this position had an immediate and negative impact on the company’s short-term results, once Arvind and the company took that position, he said, “The inspectors stopped coming.” The risk of violating international law was averted.

This type of dialogue is emphasized by leading practitioners. In the FTI Consulting survey, these respondents rated “conducting continuous dialogue with local staff on compliance issues” as important seven times more than laggard companies did.

Leaders also emphasize the value of having the right people on the ground (people that knew the culture and were steeped in the company’s values), rating that as twice as important as respondents from laggard firms. Top-down compliance training that lacks empathy for local realities does not work.

It is as critical to have nationals leading or co-leading subsidiaries as it is to include anti-bribery language in supplier contracts and ongoing compliance training for contractors.

In Brazil, for example, successful companies build strict control systems for internal employees and outside entities such as resellers, distributors, customers, third-party service providers and so on. According to Renato Niemeyer, Chief of Tax Legislation in Roraima State, enforcing good governance practices with subsidiaries and third parties is the only way to avoid corruption, and these practices should include the consistent auditing of processes relating to invoicing and payment, human resources and outsourced contracts.

Strong Backing at Headquarters

While it’s important to vet people in front-line positions, mitigating the risks of bribery and fraud also requires strong backing from headquarters.

Ted Unton, a former Director at the Global Financial Compliance division at Bemis Company, a U.S. global manufacturer of flexible packing products and pressure-sensitive materials, said that Compliance Directors “need to have the support of the CEO and Board of Directors. I used to meet quarterly with our CEO and Chief Financial Officer and with the Audit Committee of the Board of Directors. I never had to call the CEO on an issue, but people knew I could, and that is essential.”

Unton pointed out that headquarters has the ultimate responsibility for compliance (it certainly is responsible to the U.S. Securities and Exchange Commission, for instance) but, he said, “You have to have people on the ground you can trust.”

Said another way: it pays to think globally and act locally.

Maintaining a strong compliance posture does not require an army of compliance officers. One person, if it is the right person, with the proper support at headquarters, can be enough.

Corporate Compliance Insights

24 July 2015