Corruption Focus Europe: Where the Real Risks Are

There is no shortage of studies highlighting the most corrupt places in the world to do business. Typically, though, most U.S. companies have little to no presence in the countries with the poorest marks—places like Somalia, North Korea, and Turkmenistan.   

Even just focusing on Europe, the trouble spots tend to be in countries where the majority of U.S. companies have not set up major operations. Consider, for example, places like Romania, Slovenia, and Croatia—all countries that received low to mediocre scores on Transparency International's Corruption Index. Yes, the corruption risks posed in those countries are important, but what U.S. companies really care about are the countries in which they're actually doing business that pose corruption risks.   

Following the European Commission's first-of-its-kind report on the state of anti-corruption programs across the 28 EU member states, we set out to conduct a country-by-country analysis of EU countries in which U.S. companies have not only a strong operational presence, but also that present bribery and corruption concerns.

Despite being the largest economy in the world, the second largest destination for exports of U.S. goods (behind Canada), and the largest for U.S. exports of services, Europe has a long way to go to curtail systemic bribery and corruption. “We are simply not doing enough,” Home Affairs Commissioner Cecilia Malmström said when the report was issued. “That is true for all member states; existing laws and policies are not enforced enough, and a firm political commitment to root out corruption still seems to be missing.”

Additionally, each EU member state has its own culture, language, and political and economic systems, says Paula Davis, director of compliance program operations, EMEA & APAC, at SAI Global. “This means that not only are there cultural differences impacting attitudes toward bribery and corruption, but also that political and legislative frameworks for dealing with bribery and corruption are at different stages of maturity.”  

Italy, Spain, and France

Italy, Spain, and France are three countries that received mediocre scores in TI's Corruption Index and also pose bribery and corruption risks for U.S. companies doing business in these countries. According to the TI Index, Spain scored 59 out of a possible 100, while France ranked slightly higher with a score of 71. Italy received a low score of 43.  

The European Commission report cited vulnerabilities in the public procurement process in all three countries as the biggest risk factor for corruption. “There is a lot of evidence of favoritism and governments having too much discretion in the way they use public funds, and the way they use public procurement contracts,” says Carl Dolan, director of Transparency International in the EU.

According to the 2013 Eurobarometer business survey on corruption, the majority of respondents in each respective country—Italy, Spain, and France—said corruption is widespread in public procurement managed by national authorities, and even more said corruption is widespread in public procurement managed by local authorities.

According to the report, the following practices are particularly prevalent in public procurement procedures in all three countries:

Collusive bidding;

Conflicts of interests in the evaluation of bids;

Unclear selection or evaluation criteria;

Specifications tailor-made for particular companies;

Involvement of bidders in the design of the specifications; and

Amendments of contractual terms after conclusion of contract.

Procurement fraud poses a major concern for U.S. companies, says Dolan. Many U.S. companies are finding that they're losing a lot of contracts as a result of corruption in public procurement, or because they're competing with companies that are allies with the government, he says.

As more U.S. companies look to do business with EU member states, where procurement fraud is a systemic issue, defining and developing a sound procurement process with robust controls, ranking and rating suppliers, and developing long-term relationships with major suppliers will go a long way toward reducing procurement fraud and lowering risk.

“Existing laws and policies are not enforced enough, and a firm political commitment to root out corruption still seems to be missing.”

—Cecilia Malmström,

Home Affairs Commissioner,

European Commission

The report further criticizes Spain and France for their overall lack of enforcement of corruption offenses. In Spain, for example, “almost 13 years after the entry into force of foreign bribery provisions, no individual or company had been prosecuted or convicted,” the report stated.

France similarly has a poor record of prosecuting international corruption offenses.  Since enacting an anti-bribery law in June 2000, France has initiated only 33 bribery investigations, which is a low number relative to “the size of the French economy and the exposure of French companies to the risk of transnational bribery,” the report stated.

United Kingdom

The United Kingdom has made great strides in anti-corruption efforts, with the passage of the U.K. Bribery Act in 2010. Even though the country's enforcement efforts continue to evolve, however, prosecutions are largely scant.

Widespread corruption in the financial sector is particularly concerning. “Notably, major banks accused of fixing interest rates has raised concern about the extent of regulation and enforcement of existing rules,” the report stated. It cited as an example the benchmark rate-rigging scandal involving the London Interbank Offered Rate (LIBOR), “which underpinned trillions of pounds worth of loans, mortgages, and financial contracts in Europe and the United States.” Out of the LIBOR scandal resulted billions of dollars in penalties against several banks.

For U.S. companies, the broader lesson brought to light by the global criminal investigation is the increased collaboration between the U.K. Serious Fraud Office and U.S. enforcement authorities. Andrew Ceresney, co-director of the Securities and Exchange Commission's Enforcement Division, made that point very clear, when he said during a recent speech at the International Conference on the FCPA that working closely with the SFO over the past several years has allowed the SEC and Justice Department to “better leverage resources and coordinate investigations,” he said.

As a general rule of thumb when doing business in the United Kingdom, U.S. companies should also take care to conduct thorough due diligence on their third-party relationships. “This is particularly important in light of the U.K. Bribery Act, which extends culpability to all parties carrying on business on behalf of a company,” says Davis. “Have a robust and consistent process in place so you can evidence the steps you have taken to understand exactly who you are doing business with throughout the lifetime of a business partnership.”

Dolan says another option for U.S. companies to consider is getting involved in integrity pacts, whereby a group of companies band together as part of a concerted effort to tackle corruption risks, and agree not to pay or accept bribes. “That pact is then monitored by an independent third party,” he says.

Addressing Corruption Risks in the EU

Paula Davis, director of compliance program operations, EMEA & APAC, at SAI Global, recommends having in place the following anti-corruption compliance measures when doing business in the EU:

Conduct regular risk assessments for all territories in which you do business.

Use this information to highlight gaps, define mitigating actions and generally shape your compliance program. Repeat your risk assessment regularly in order identify and address new risks emerging in an ever-changing market place.

Carry out and evidence thorough due diligence on third party relationships. This is particularly important in light of the U.K. Bribery Act, which extends culpability to all parties carrying on business on behalf of a company. Have a robust and consistent process in place so you can evidence the steps you have taken to understand exactly who you are doing business with throughout the lifetime of a business partnership.

Review your policies and procedures to make sure they reflect the risks to which your business is exposed. These need to be written clearly, avoiding complicated legalese so that employees understand their own obligations for abiding by them.

Carry out training for all employees. Bribery and corruption can be a bit of a gray area. For instance when does a gift become a bribe? When does legitimate corporate hospitality become excessive? Ensure your training focuses on day-to-day scenarios such as these rather than just telling your employees what the law says.

Have a reporting mechanism through which employees can confidentially report suspicions. If you have EU-based employees or agents, be aware that there are strict privacy requirements that will need to be met for these to be used in the EU, particularly the use of hotlines. Deep-rooted cultural aversion to the use of hotlines in some EU countries is something else you will need to be aware of if this is part of your reporting mechanism.

Source: Paula Davis, SAI Global.

Germany

Like the United Kingdom, Germany also has a strong track record when it comes to anti-corruption measures, and not just among EU member states, but also among the 34 member countries of the OECD Anti-Bribery Convention. “Only three countries actively enforce the OECD Anti-Bribery Convention—the United States, Germany, and the United Kingdom,” says Dolan.

Still, Germany is not without its corruption risks, particularly in the healthcare and pharmaceuticals sectors, the report stated. As part of the private sector, many entities in these industries fall outside the scope of anti-bribery provisions under Germany's anti-corruption law. For example, self-employed doctors who accept gifts or cash offerings from drug companies don't violate rules on bribery, the report stated.

From a practical standpoint, mitigating such bribery risks for U.S. companies comes down to employee training. “Bribery and corruption can be a bit of a gray area,” says Davis. “When does a gift become a bribe? When does legitimate corporate hospitality become excessive?”

Employee training should be focused not just on the laws themselves, but also on the day-to-day scenarios employees encounter, adds Davis. “By presenting them with real-life situations in which bribery could occur, you will enable them to recognize risky situations in the real world and know how to react to prevent bribery from occurring,” she says.

Netherlands

On the surface, the Netherlands is not a highly-corrupt country. In fact, it ranks eighth on TI's Corruption Index, and received a score of 83 out of a possible 100.

Still, low corruption doesn't mean no corruption. The country's lax enforcement of its foreign bribery laws still poses risks to U.S. companies doing business in the country.

According to the report, “criminal investigations into foreign bribery are rare.” This finding is supported by the OECD's Working Group on Bribery, which found that out of 22 foreign bribery allegations received by Dutch law enforcement authorities, 14 have not prompted an investigation.

The extent to which Dutch law enforcement authorities investigate foreign bribery laws affects, overall, more than 2,100 North American companies in a cross-sector of industries that have established operations in the Netherlands. According to the Netherlands Foreign Investment Agency, some of the largest global companies that do business in the country include Boeing, Cisco Systems, Coca-Cola, Dow, FedEx, Heinz, Nike, Starbucks, Timberland, and many more.

Lax enforcement creates challenges for compliance officers of U.S. companies with operations in the Netherlands who want to implement global approaches to ethics and compliance. “Nothing gets the attention of a company more than an enforcement action,” says Pam Verick, a director with Protiviti and leader of its anti-fraud practice.

The more enforcement activity that we see in the countries in which U.S. companies operate, Verick says, the greater amount of attention, and buy-in, those compliance programs will receive from local employees in that country.