Anti-Corruption Compliance Swiss-Israeli Chamber of Commerce Zurich, February 25, 2010 Dr. Mark Livschitz
Anticorruption – why bother?
Weapons manufacturer CH IL Hightech components producer $ Ministry of defence
Risks for CH parent (1) Punishment for bribing Punishment of individuals a foreign official involved, incl. D&O criminal culpability Punishment of legal entity Punishment for money laundering Forfeiture of proceeds
Risks for CH parent (2) Tax evasion for both company; aiding & abetting by individuals (bribe is not tax-deductible) Possibly forgery Tax fraud for of documents, individuals e.g. if balance (deducting bribe sheet is used to creates false obtain credit balance sheet) facility
Weapons manufacturer CH IL Hightech components producer Looking at $ ML risks $ $ Ministry of defence
Swiss parent‘s bank account: Suppliers Salaries 30 Dividends Machines Revenue 20
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) Lack of Result: serious Individual appropriate impact on Individual offence within compliance Punishment: goodwill, offence is enterprise structures fine up to CHF possibly typical through D&O conducive to 5 M debarment etc. business risk culpability individual outside crime Switzerland
Weapons manufacturer CH IL Hightech components Risks for the producer $ Israeli supplier $ $ Ministry of defence
Israel has ratified OECD anti-bribery convention in March 2009 • revenue from supply of components Israel will grant might be seized and as the case may MLA to be, forfeited and shared with CH Switzerland authorities Did Israeli • CH might request MLA also relating to these producer‘s staff individuals (gathering of evidence) • Lack of good faith might entail punishment act in good faith under Israeli law (for aiding and abetting, or re: absence of ML), and for aiding and abetting under Swiss law bribery?
Where do covert corruption risks hide in my enterprise? On indirect bribery…
Indirect bribery is popular, as bribe payers try to outsource problem by having others pay instead of them Indirect bribery is e.g. paying a purported agent, business consultant paying a real agent excessive commissions so etc. high commissions based on phantom that beyond fees for real services, he receives agreements enough to bribe Indirect bribery treated exactly like direct bribery, i.e. acts by intermediary will be imputed to principal 13
Y AG (CH) 100% Infrastructure contract OOO Y (RUS) Regional Govt. X B C D A
Y AG (CH) 100% Infrastructure contract OOO Y (RUS) Regional Govt. X B C D A OOO Fiction (RUS) BVI-Account
Producer Distribution agreement Distributor Public hospital
Producer Distribution agreement Bank account CH Owner of Distr. Distributor Public hospital
Ministry of defence Official Producer
„Captive Reseller“ Ministry of defence Official 100% 100 Distributor 80 Producer
e.g. fictitious expenses, excessive hospitalities Oil ministry 80 Oil trading co. (CH) JV partner (X) Oil 100
Common features / flags: Intermediary Payment made controlled by to third country, Intermediary bribe recipient and not where Obfuscated Intermediary does not (and as the money would accounting for unnecessary perform case may be, be needed to outlays required by pay for same) performance
XYZ Business Advisors Ltd. P.O. Box 1234 Dubai, UAE ABC AG Musterstrasse 1 CH-0000 Traumhausen For advisory on project „Big USD 550,000.-- Blue“ Pls. remit to account no. 1234, YZX-Bank, BVI
Very large sales (Non-defined) surplus Fee not agreed upon volumes to public fee agreed upon entities at high prices Intermediary lacks Sales to public appropriate Unclear indication of entities without due qualification, ownership tender process experience, infrastructure Recommended or Payment to account asked for by public in third country client
Unusual payment methods asked for: No detailed narrative provided (e.g. „ for Cash, into numbered system integration “) account, to third parties, advance payment Intermediary asks for Close relations refund of unusually high (personal, family) with or badly documented officials expenses Contract lacking proper protections, hardly any documents re contract negotiation
And now what? How to effectively counter corruption…
Necessity check: Do I need him? Qualification check: Can he do it? Licenses, referrals, etc. Integrity check: Reports on previous cases etc.? Requests for cash payments or payments to third parties? Ownership: (relationship with) public official? Written agreement Integrity clause / audit rights / training Market price for real & legitimate services
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.)
If possible, book agreed upon fees and payments Document performance of made redundantly, in agent order to avoid manipulations to facilitate excess payments, etc.
How to simplify - use fee matrix (example) Contract value Service Level 1 Service Level 2 Service Level 3 Service Level 4 of project 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%, Up to 2%, Up to 5%, Up to 6%, capped capped at USD capped at USD capped at USD at USD 4.5M 1M 1.5M 3M
Compliance-Organisation Training HR policies Intermediaries Code of Conduct Adaptation Accounting controls Monitoring 30
Legal framework: what are we fighting agsainst? Management statement Individual duties and Individuelle Pflichten: Define risk area Code of Conduct responsibilities; Dos & Don‘ts Dos & Don‘ts Charitable and political contributions Accounting rules 31
Risk areas (rules of thumb) Africa CIS Eastern Asia Middle East LatAm Italy/Greece Eastern Europe Turkey 32
… 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 33
Global risk ambits Medical Pharma products 34
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 & From customer into account origin From third party Cash 35
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 36
Advice: Assess business risk systematically through analytical tools such as risk matrixes Update risk assessment Requirement: Know at reasonable intervals, business processes encompass and address exactly, interview staff to risk of bypassing controls such effect Document interviews and risk assessment activities in writing 37
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 Potential Payments from Payments to Manual payments (e.g. double one time third countries payments checks) payments accounts etc.
Legal framework: what are we fighting agsainst? Management statement Individual duties and Individuelle Pflichten: Define risk area Coce of Conduct responsibilities; Dos & Don‘ts Dos & Don‘ts Charitable and political contributions Accounting rules 41
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? 42
No booking without legitimate voucher, report suspicious vouchers No slush funds, account for all assets No off-book transactions Limit use of cash 43
150 Purchase AG Producer GmbH machines letter: „excess payment of 50, pls. Manager return “ 50 CH account
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