EMBEDDING ANTI-CORRUPTION DUE DILIGENCE IN PROCUREMENT

2013 Procurement Fraud Africa SummitRoodevallei, Pretoria

Presenter: Myron. D. B. Betshanger

Combating Corruption and Fraud Through Procurement Integrity and Innovation

“A Ounce in Prevention is Better than a Pound in Cure”

Corruption and Fraud

1. Distorts Markets through uncompetitive practices

2. Increases the Costs of Doing Business,

3. Undermines the “Rule of Law”,

4. Increases the gap between Rich and Poor,

5. Undermine Economic Growth, and

6. Undermines the creation of sustainable employment opportunities by businesses

What Is Procurement Anti-Corruption / Bribery Due Diligence ?

Procurement Anti-Corruption /Bribery Due Diligence can be defined as the process of providing assurance as to the integrity of an organization’s procurement processes and the resulting contractual relationships with suppliers and service providers.

Organizational Ethics and

Compliance

Program

Procurement Anti-

corruption Due

Diligence

Procurement Anti-corruption Due Diligence must therefore be aligned with

- overall Corporate Strategy and Objectives,

- Corporate Governance, Ethics and Compliance Programme,

- Company’s Enterprise-wide Risk Management (ERM) Framework,

- Company’s Anti-Corruption and Anti-Fraud Prevention Strategy, and

- Procurement and Supply Chain Management Policies and Procedures.

Therefore, Procurement Anti-corruption Due Diligence must –

obtain buy-in from Board, Senior Executives, Middle-Management and Staff

be purpose driven with tangible end results (prevent, detect and deter fraud and corruption),

be risk-based, forming an integral part of company’s enterprise risk management (ERM) programme,

Be headed by specialist procurement functionary, e.g. Procurement /Supplier Quality Assurer (PQA) or Procurement Compliance Officer (PCO),

be a continuous process (Past, Present and Future),

show measurable Return On Investments (ROI), and

be consensual – obtaining the supplier partner’s active involvement in analysis is essential,

Basic Attributes of a Procurement Due Diligence Investigation

Due Diligence

Parameters

Media

Profiling

Watchlist

Database

Politically

Exposed

Persons

Company

Registry

Site Visits

Reference

Checking

Litigation

Records

Character

Testing

Additional Sources of Information

External

Due Diligence

Services

Company

Experience

Existing

Contracts

Certifications

&

Training

Past Issues

Allegations of

Corporate

Malfeasance

1. Company Registry

(a) Type of Information to Research on:

(i) Date of Incorporation / Establishment of Supplier / Vendor

(ii) Ownership – Initial, past and current Directors, Shareholding and Senior Executives (if listed)

(iii) Business Activities

(iv) Tax Certification

(v) Compliance Certifications

(vi) Regulatory Restrictions or debarments issues against supplier company.

Best Practice Note:

Undertaking fresh corporate registry checks safest way to ensure you obtain latest information on a

supplier company. Relying solely on database information providers dangerous when searching for

latest and up-to-date corporate information.

2. Watch List Database- mostly held by government security sector institutions on corporations and individuals suspected of national and/or international

criminal activities such as drug and human trafficking, money-laundering, terrorist financing, corruption, fraud, etc.

Best Practice: Simply instructing a watchlist database company /service provider to conduct searches on the company

itself is fairly limited if all you can check is the company’s name. The aim of the exercise should be to do a thorough search on –(a) the name of the company as well as previous names under which it was registered,

(b) name of every key individual attached to or associated with the company,

(c) Boolean searches.

3. Politically Exposed Persons (PEPS)

- Conducting research into PEPS is crucial to Procurement Anti-Corruption Due Diligence.- Presence of PEPS in supplier management or employment raises red flags that may warrant additional

due diligence investigations and/or controls to be undertaken and/or implemented.

Best Practice:

Employ services of external politically exposed persons database service provider to provide information on person concerned and conduct a thorough risk assessment determining the nature and extend to which the PEPS concerned and supply company can expose your company to risk of corruption and bribery as well as any resultant reputational risks resulting from your contractual association.

4. Litigation Records- can reveal whether supplier company has been engaged in –

(a) Disputes with other entities

(b) Disputes with Banks and other financial institutions

(c) Illegal Conduct or Subject to enforcement proceedings by regulators

(d) Debarments or other steps taken by a regulator to restrict the supplier company or its directors

(e) Corrupt or other integrity-related misconduct

Best Practice: Best practice would be to assess the company, the country in which it was registered/incorporated or head-quartered and the countries in which it operates, the type of court that would give rise to significant proceedings and then conduct a search of those court’s registry files. It is a good idea to supplement court registry searches with media, watchlist and reputational research.

TIP:

It is worth remembering that a history of breaking the rules in one area often (though not always) demonstrates a predisposition to break the rules in other areas, either because of lax compliance or a willingness to circumvent the rules to get ahead.

5. Know Your Contractor (KYC) / Supplier Site (In Loco) Visits

- key to the high end of due diligence spectrum and aimed at revealing the following

information:

(a) whether supplier company in fact exists at given location,

(b) gain an overview of the supplier’s organisational structure,

(c) review of supplier’s policies and procedures on governance, ethics and compliance,

(d) the size and nature of the supplier’s operations,,

(e) whether the supplier is manufacturing off-market products, producing parallel imports or

engages in counterfeit production,

(f) whether it complies with legal, regulatory and industry requirements,

(g) the nature and extend of its Quality Management Systems, and

(h) whether a distribution centre is active or whether it is non-existent

Best Practice:

During Site Visits to supplier premises it is advisable to –

* appoint cross-functional team to conduct the Supplier Assessment and Supplier Audits (SASA),

* conduct Supplier Assessment post tender evaluation but pre-contract award,

* inspect the supplier’s record of account and other book keeping records.

* Familiarise oneself with the supplier’s document and record keeping processes (QMS)

* Interview key personnel such as Quality Managers, Financial Managers / Accountants, Senior

Executives, etc.

* With Supplier’s Permission, take photos of key localities on suppliers premises,

* conduct Supplier Audit at regular intervals during currency of contract

6. Character Assessment / Reputation Testing - Several ways to do Character Assessment/Reputation Testing can be conducted including-

(a) assessing how supplier company markets itself,

(b) determining who supplier company’s top clients are,

(c) how supplier company secure and retain its client base

(d) background checks on supplier company’s leadership and managers,

(e) supplier company’s presence in market or absence thereof,

(f) financial stability of supplier company,

(g) extent of supplier company’s dealings with government or state owned entities,

(h) whether supplier company is experiencing volatile or negative growth,

(i) employee satisfaction surveys, high or low staff turnover,

(h) whether there are known integrity issues. (Have there been past or present allegations of

corruption, bribery, illegality or other impropriety?

Best Practice: It is of cardinal importance to clearly set out the questions to be asked and answered during the character assessment / reputation testing phase so as to ensure that there is consistency in the line of questioning and that they are drafted in a manner that test the veracity of the integrity of the subject without breaching any laws or inducing them to breach any contract by supplying confidential information or trade secrets.

7. Media Analysis- essential to determine profile of supplier company and its individual leaders.

- Must have clearly set parameters.

Best Practice: Best practices are –

(a) to conduct media analysis in multiple languages,

(b) using multiple media applications such as websites, blogs, bulletin boards, social websites,

(c) to limit the scope of media analysis by conducting “negative only” searches, and

(d) using local sources wherever possible.

WHAT TO LOOK OUT FOR

1. “No Go Zones”

Some “No Go Zones” that may emerge from due diligence where further review and approvals may be required going forward. This may include:

(a) The supplier company’s name (or individual’s) appears on various countries governmentwatch lists listing persons involved in (potential) illegal activities).

(b) There are media articles reporting integrity-related issues, making an allegation regarding theintegrity of the supplier company or its key principles.

(c) There are litigation involving fraud, illegal conduct, corruption or integrity violations or other non-compliance issues.

2. Red FlagsThere are a number of “Red Flags” that may appear in due diligence reports. Not all red flags suggests that there is an issue or that your company cannot do business with a supplier. It does mean however that the red flag needs to be reviewed more closely before taking any further steps.

Typical “Red Flags” are:

• Company Reports

- the number of shareholders or ownership of the supplier is not disclosed or not fully disclosed.

- the supplier company originates from a country known for low transparency.

• Government Watchlists

- Any appearance on a watchlist is certainly a red flag and perhaps even a “ No Go”

• PEP or SOE

- Any hit on politically exposed persons (PEP) or State-Owned Entities (SOE) is a red flag warranting

extra precaution and review.

• Legal Proceedings

- Many companies are involved in legal proceedings. However, any legal proceedings involving the

following will or should raise a red flag:

(a) Proceedings involving Fraud, Collusion, Anti-trust violations, Corruption and Bribery

allegations.

(b) Bankruptcy or significant repeated proceedings to recover outstanding money or satisfy contractual

terms.

(c) A pattern of frequent and continual involvement in litigation.

• Media / Internet Searches

- Any “negative” media or internet results including negative press. Illegal activity, fraud or collusion.

- Press reports suggesting unethical behaviour.

• Site Visits

- Any site visit that reveal the following is a red flag:

(a) Offices in residential areas,

(b) Offices where company name is not indicated

(c) Offices with significant levels of security and/or highly restricted access,

(d) Offices which is much smaller in comparison to company’s size of operations.

• Other “Red Flags” that may be found in due diligence investigations include:

(i) Unusual payment requests such as -

- Requests to be paid in different currency or in a different location than appropriate,

- Requests to split payments into smaller amounts, and/or

- Requests for unusual favourable payment terms.

(ii) Unethical practices e.g. preparing false documents, giving false answers to questions, etc.

(iii) Comments or suggestions that imply bribery,

(iv) Requests to keep partnership relationship a secret.

(v) Close relationship between supplier and government officials in high-risk countries,

(vi) Suggestions that supplier company would give employment to family member of Buyer, or other

Procurement official,

(vii) Reported history of integrity issues,

(viii) Suggestions that sub-contract work be given to supplier with close links to political exposed

persons or political party.

The Benefits of Procurement Anti-corruption & Anti-fraud Due Diligence

Enhances the company’s reputation as an ethically-driven and compliance orientated business entity.

Contributes to company’s overall anti-corruption and anti-fraud compliance programme.

Enhances the company’s Enterprise-wide Risk Management programme.

Improves the operational cost efficiency of the company.

Contributes to the company’s “bottom-line” through enhanced cost saving benefits.

Improves the integrity of the company’s procurement processes.

Ensures that company only on-board high quality and capable supply partners with high business ethical values and compliance programmes.

Ensuring that company’s ethics and compliance programme are extended to its external partners.

Embedding ethics and compliance within procurement processes and among procurement staff.

Improved Supplier Relationships based on a clear understanding of expectations i.r.o ethical behaviour.

Conclusion

Growing risk of fraud and corruption and resultant of enforcement actions and damage to corporate reputation means that Procurement can no longer be side-lined in Anti-corruption and Anti-fraud compliance management.

• Procurement can no longer afford to “burry its head in the sand” hoping that the

issues of fraud and corruption will somehow magically disappear.

• Make effective and active contribution to combating and preventing

Corruption and Fraud because of-

- Huge amounts of data collected on supply partners as well as lessons learned from past

experiences can contribute effectively to the management of corruption and fraud

risks to which the organisation may be exposed to.

• Procurement Professionals can innovatively assist the whole

organisation in the act of balancing its risks and contribute towards

achieving corporate strategies and objectives

Thank You Myron . D. B. Betshanger

Corporate Governance & Strategic Management, Ethics, Compliance & ERM Specialist, and Anti-Corruption Specialist, Procurement / Supplier Quality Assurer.

Cell. 082 5243086

E-mail: betshangermyron2@gmail.com

@betshangermyron

LinkedIn: http://www.linkedin.com/pub/myron-duncan-burton-betshanger/37/219/1b8

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