Anti-Corruption Compliance Swiss-Israeli Chamber of Commerce - - PowerPoint PPT Presentation

• Dr. Mark Livschitz

Anti-Corruption Compliance

Swiss-Israeli Chamber of Commerce Zurich, February 25, 2010

Anticorruption – why bother?

CH IL

Hightech components producer Weapons manufacturer Ministry of defence

$

Risks for CH parent (1)

Punishment for bribing a foreign official Punishment of individuals involved, incl. D&O criminal culpability Punishment for money laundering Punishment of legal entity Forfeiture of proceeds

Risks for CH parent (2)

Tax evasion for both company; aiding & abetting by individuals (bribe is not tax-deductible) Tax fraud for individuals (deducting bribe creates false balance sheet) Possibly forgery

• f documents,

e.g. if balance sheet is used to

• btain credit

facility

CH IL

Hightech components producer Weapons manufacturer Ministry of defence

$ $ $

Looking at ML risks

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Revenue 20 Salaries Suppliers Dividends Machines Swiss parent‘s bank account:

Why a problem for the Swiss parent?

D&O culpability of senior group management May extend across borders (depending on ambits of responsibilities) Intervene against ML/bribery where known/taken into account Prevent corruption/compliance (where typical business risk) through appropriate compliance measures

Criminal culpability for legal entity (for ML and foreign bribery)

Individual

• ffence within

enterprise through D&O culpability Individual

• ffence is

typical business risk Lack of appropriate compliance structures conducive to individual crime Punishment: fine up to CHF 5 M Result: serious impact on goodwill, possibly debarment etc.

• utside

Switzerland

CH IL

Hightech components producer Weapons manufacturer Ministry of defence

$ $ $

Risks for the Israeli supplier

Israel has ratified OECD anti-bribery convention in March 2009

• revenue from supply of components

might be seized and as the case may be, forfeited and shared with CH authorities

Israel will grant MLA to Switzerland

• CH might request MLA also relating to these

individuals (gathering of evidence)

• Lack of good faith might entail punishment

under Israeli law (for aiding and abetting, or ML), and for aiding and abetting under Swiss law

Did Israeli producer‘s staff act in good faith re: absence of bribery?

Where do covert corruption risks hide in my enterprise? On indirect bribery…

Indirect bribery treated exactly like direct bribery, i.e. acts by intermediary will be imputed to principal Indirect bribery is e.g.

paying a purported agent, business consultant

• etc. high commissions based on phantom

agreements paying a real agent excessive commissions so that beyond fees for real services, he receives enough to bribe

Indirect bribery is popular, as bribe payers try to

• utsource problem by having others pay instead of them

13

Y AG (CH) OOO Y (RUS) Regional Govt. X

A B C D

Infrastructure contract 100%

Y AG (CH) OOO Fiction (RUS) OOO Y (RUS) Regional Govt. X

A B C D BVI-Account

Infrastructure contract 100%

Producer Distributor Distribution agreement Public hospital

Producer Distributor Owner of Distr. Distribution agreement Public hospital

Bank account CH

Producer Official Ministry of defence

„Captive Reseller“

Producer Distributor Official Ministry of defence 100 80

100%

Oil trading co. (CH) Oil ministry JV partner (X) 100 Oil 80

e.g. fictitious expenses, excessive hospitalities

Common features / flags:

Intermediary unnecessary Intermediary does not perform Intermediary controlled by bribe recipient (and as the case may be, required by same) Payment made to third country, and not where money would be needed to pay for performance Obfuscated accounting for

• utlays

XYZ Business Advisors Ltd. P.O. Box 1234 Dubai, UAE ABC AG Musterstrasse 1 CH-0000 Traumhausen

For advisory on project „Big Blue“ USD 550,000.--

• Pls. remit to account no.

1234, YZX-Bank, BVI

Fee not agreed upon (Non-defined) surplus fee agreed upon Very large sales volumes to public entities at high prices Sales to public entities without due tender process Intermediary lacks appropriate qualification, experience, infrastructure Unclear indication of

• wnership

Recommended or asked for by public client Payment to account in third country

Unusual payment methods asked for: Cash, into numbered account, to third parties, advance payment No detailed narrative provided (e.g. „for system integration“) Close relations (personal, family) with

• fficials

Intermediary asks for refund of unusually high

• r badly documented

expenses Contract lacking proper protections, hardly any documents re contract negotiation

And now what? How to effectively counter corruption…

Market price for real & legitimate services Integrity clause / audit rights / training Written agreement Ownership: (relationship with) public official? Integrity check: Reports on previous cases etc.? Requests for cash payments

• r payments to third parties?

Qualification check: Can he do it? Licenses, referrals, etc. Necessity check: Do I need him?

Agent‘s fee

What exactly does agent do? What is actual performance, what is mere documentation of same? Define exactly in contract Benchmark internally. Rule of thumb starting point 2-5%, depending on contract value, then increase or decrease depending on service level External benchmarking possible? Avoid unusual on-top components (large bonuses or contingency fees etc.)

Document performance of agent If possible, book agreed upon fees and payments made redundantly, in

• rder to avoid

manipulations to facilitate excess payments, etc.

How to simplify - use fee matrix (example)

Contract value

• f project

Service Level 1 Service Level 2 Service Level 3 Service Level 4 Up to USD 10M Up to 2% Up to 5% Up to 8% Up to 10% USD 15M Up to 1,5% Up to 4% Up to 7% Up to 8% USD 30M Up to 1,25 % Up to 3% Up to 6% Up to 7% Over USD 50 Up to 1%, capped at USD 1M Up to 2%, capped at USD 1.5M Up to 5%, capped at USD 3M Up to 6%, capped at USD 4.5M

30

Intermediaries Training Code of Conduct HR policies Adaptation Monitoring Accounting controls Compliance-Organisation

31

Code of Conduct Management statement Define risk area

Legal framework: what are we fighting agsainst? Individuelle Pflichten: Dos & Don‘ts Charitable and political contributions Accounting rules Individual duties and responsibilities; Dos & Don‘ts

32

Risk areas (rules of thumb)

Africa CIS Eastern Asia Middle East LatAm Italy/Greece Eastern Europe Turkey

33

… and there in particular

Infrastructure / construction business Machine building Oil business (purchase/sale of oil and drilling equipment) Freight forwarding / transportation (customs agents) „Tax advisors“ Arms / army equipment

34

Global risk ambits

Medical products Pharma

35

Example Risk Matrix (for machine building business)

Risk criterion Risk criterion detail Threshold Low Med. High Country customer EU West EU East West Africa (etc.) Sector customer Public Private Industry customer Arms Building Oil & Gas etc. Intermedary/payment Per time unit Commission Content of assignment Delivery Maintenance Repair etc. Payment method &

• rigin

From customer into account From third party Cash

36

Systematic risk categorizing…

allows customizing controls on project or division basis avoids compliance overkill and unnecessary slowing down supports company‘s position in case prosecution starts

37

Advice:

Assess business risk systematically through analytical tools such as risk matrixes Requirement: Know business processes exactly, interview staff to such effect Document interviews and risk assessment activities in writing Update risk assessment at reasonable intervals, encompass and address risk of bypassing controls

Supplement through automatic risk monitoring (measuring, and observing development of, compliance indicators)

Compliance indicators can be created based on accounting data available e.g. in SAP E.g.: ratio of payments against invoice without approved contract vs. payments where invoice is based on approved contract Other possible indicators one can measure and monitor automatically:

Hard-to-trace payments (e.g. checks) Potential double payments Manual payments Payments from

• ne time

accounts Payments to third countries etc.

41

Coce of Conduct Management statement Define risk area

Legal framework: what are we fighting agsainst? Individuelle Pflichten: Dos & Don‘ts Charitable and political contributions Accounting rules Individual duties and responsibilities; Dos & Don‘ts

42

Why accounting rules?

Financial accounting reflects flow of funds between business and third parties Corrupt payments are usually backed by faked vouchers Accounting is a significant tool to avoid illegal payments How exactly?

43

No booking without legitimate voucher, report suspicious vouchers No slush funds, account for all assets No off-book transactions Limit use of cash

Purchase AG Manager Producer GmbH

CH account machines 150 50

letter: „excess payment of 50, pls. return “

45

Customer X Transport Ltd. Customs Black Box Customer CH

X

Import mandate Transportation mandates CASH CASH CASH

CH

Transport AG

46

Internal Controls:

• Implicate multiple persons in relevant

processes, and define those processes

• Plurality of persons ensures checks and

balances

• Control not only form but also substance

General:

• Collectively in 2; no subordination
• Segmentation for thresholds or types of

transactions possible

• Divided functions: transaction and booking; 2nd

pair of eyes without interest in turnover

Payments: 4 eyes principle

47

• No unauthorized data changes
• No unauthorized payments

Restrict access to IT:

• For respect of authorization process
• For comparison of bookings and vouchers
• In risk areas
• Separate controlling and controlled

Spot checks:

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In case of suspicion, focused scrutiny Distance between controller and controlled 100% control impossible Spot checks and focused scrutiny have preventive effect Documentation!

Anything special for the banking business?

Corruption correlates with ML AML regulation requires banks to identify transaction risks and as the case may be, conduct in-depth investigation Not a problem if bank participates in specific transaction, e.g. finances a project But what if e.g. bank grants general credit facility?

CH IL

Hightech components producer Weapons manufacturer Ministry of defence

$ $

Compliance Quick-Check (Health Check)

Business in risk areas (region, industry)? Existing compliance organization (elaborate on structure, reporting lines and recruiting criteria)? Mission statement and code of conduct on anti-bribery? Rules on gifts, hospitalities, dealing with intermediaries and accounting (to counter fake entries and limit use of cash) in code of conduct or separate policies? Internal controls incl. 4-eyes and divided functions principles? Is anti-bribery a topic in internal audits? Are random tests being done? Is there intermediary vetting, what does the process look like? Intermediary agreements with integrity clauses and audit rights? Range of usual intermediary fees? How often does staff undergo training? Is there a whistleblowing policy?

Questions? mark.livschitz@bakernet.com