Identifying Corruption Risk Factors and Schemes

Identifying Corruption Risk Factors and Schemes Anti-Corruption Risk Assessment for Companies Seeking to Invest in Africa Presented by Ayotola Jagun ...
Author: Amie Gilbert
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Identifying Corruption Risk Factors and Schemes Anti-Corruption Risk Assessment for Companies Seeking to Invest in Africa

Presented by Ayotola Jagun for Transparency Denmark

November 2015

All views expressed in this presentation unless stated otherwise are mine alone and do not necessarily represent the views of my Employer.



Outline  Introduction  Sources of Corruption Risk  Approaches to Corruption Risks  Establishing Risk Tolerance  Identifying the Risks  Some Common Schemes

 Information Gathering  Conclusion  Resources


Introduction • Corruption will be the biggest risk management challenge that western companies will face when doing business in Africa. • Although corruption is not unique to Africa, the challenges it presents are far greater in this region than anywhere else. • State institutions in African nations are often weak, and there is a lack of both the political will and the necessary resources to enforce domestic anti-corruption laws. • It is no longer acceptable for companies to regard corruption or facilitation payments as “part of the way business is done in Africa”, or to tacitly condone such practices by their local partners and agents. • Africa is a vast and diverse continent and levels of corruption differ from one country to another. Transparency International, statistics show that some African countries, such as Malawi, Botswana, Ghana and South Africa, have corruption ratings that indicate they are less corrupt than the worldwide average


Sources of Corruption Risk 

Economic/Political Environment – Lack Democracy, Lack of Political will to enforce

Legislative Legislation

Legal/Judicial system – Access to Justice

Structure of Government Institutions Bureaucracy and Centralisation of Power

Social Culture

Conduct of Organizations/Business Partner – Directors, Management, Employees, Agents and Contractors






Approaches to Corruption Risk  Reputational Risk – How would it look to a jury, our investors, the public etc. – Develop Social Media awareness and Communication policies.  Legal Disclosure Risk – Confidentiality, Self-reporting, Damage Control  Contingency Risk – Expecting and Planning for Black Swan events - Use of Preventative Audits, Strategic Risk Management  Business Exigency Risk – Penny-wise - pound foolish. Holistic cost-benefit analysis is key  Litigation Risk – Mediation and Arbitration. Attitude matters  Moral Risk – Integrity and Professionalism builds trust.  Due-Diligence Risk – Data management and Retention, Use of Local Intelligence  Compliance Risk – Have and follow policies and procedures  Regulatory Risk – Don’t swim against the tide. Be aware of your environment and respond to it.  Know when to cut your losses and run!!!


Example 1 - James Ibori


Establishing Risk Tolerance • As companies look for opportunities to do business in Africa, the fight against corruption will need to be an integral part of planning new ventures and transactions. • If Risk tolerance is not specifically determined ahead of the investment process, there is the potential that leadership will rationalize any identified corruption risks as acceptable. • Risk tolerance is different from Risk appetite. Risk appetite refers to the amount of risk that the organisation is willing to pursue or retainin achieving its business goals: high return high risk; low risk low return etc. • Risk tolerance applies to the maximum amount of risk that the organisation can bear despite controls. Risk tolerance is often expressed in quantitative terms (could be a percentage of net profits on a particular project or penalty for non-compliance) expressed in acceptable/unacceptable outcomes or levels of risk.


Identifying the Risks Defining the Scope of your Risk Assessment ► Do you have the co-operation of your Board and business partners to conduct the Transaction Risk Assessment/Due-diligence? ► How do you go about the risk assessment. Internal resources or external consultant, Local or International expertise or both? ► Are there inter-dependencies that may perpetuate the schemes that you may identify. Are any of those interdependencies outside the scope of your business relationship/partnership? ► Do you understand the macro issues and the strategic direction of your organization and your partner in light of those issues?


Identifying the Risks (Cont.) Corruption Risks in Specific Public Processes  Sales/Services to Government Customers  Obtaining Licences and Permits  Customs and Taxes  Land Acquistions  Public Procurement  Inspections  Setting up Plants and Operations  Judicial processes  Grants and Foreign Aid  Events and sponsorships

 Dealings with communities


Identifying the Risks (Cont.) High Risk Sectors  Defence  Extractive Industries – Oil & Gas, Mining  Infrastructure – Public Works  Health  Power  Education  Agriculture - Fertilizer High Risk Countries – High Risk to Who? TI Bribe Payers Index and Corruption Perception Index  Nigeria  India


Some Common Schemes  Use of slush funds and making payments in cash  Creating Fictitious Documents (e.g. invoices)  Providing/Demanding lavish gifts, trips, benefits, entertainment

 Awarding of lucrative contracts to related parties or nominees of public officials  Inflating Contract Values and excessive payments to third party intermediaries (in the form of commissions, margins, fees or expense reimbursements)  Giving minority ownership/shares to relatives of government officials at discounted values.  Making charitable contributions to organization, foundations or trusts set up or recommended by government officials

 Nepotism in recruitment (bestowal of patronage by reasons of ascriptive relationship rather than merit); and misappropriation (illegal appropriation of public resources for private uses.


Information Gathering  Desktop Research – Conduct a review of all compliance related reports, such as:  Country Reports (World Bank, OECD, Mo Abraham)  Industry Reports  Compliance Reports  Due Diligence Reports  Contracts with agents, intermediaries, vendors etc.

 Related Party Registers  Gifts and Benefits Registers  Trend analysis for spend on entertainment, sponsorship etc.

 Review of spend to particular government agencies (DPR, Customs, Tax) etc. against official fees and level of business conducted.


Information Gathering  Interviews – With key stakeholders. e.g. enable process owners to outline their activities and to speak to their challenges and how they deal with those challenges.  Surveys and Self-Assessments – Surveys allow for anonymous reports to be made to assist with the identification of risks from different categories of stakeholders especially if it can be deployed online.


Examples of Regional Differences  In Tanzania, it is commonplace for public officials to have private businesses that transact with their own Government agencies and conflict of interest laws do not currently exist; but in countries such as Kenya or Nigeria, this practice is unlawful although it still occurs.  In many African countries, companies regularly give Christmas presents to public officials, but this poses a heightened risk in the increasingly tough regulatory environment.  Community expectations vary even within a country. While some communities have an entitlement culture when it comes to foreign companies operating within their areas, other communities are much more hospitable.


Some Good News!  In Ghana, 7 judges were recently suspended over allegations of corruption. This follows the sacking of 22 magistrates and circuit court judges in September 2015 who were removed for receiving bribes to influence judgments in certain cases.  In Nigeria, President Muhammadu Buhari took office in May 2015 promising to root out corruption. In October the former Minister of Petroleum Resources, Alison-Madueke was arrested in London with four other people by the NCA’s International Corruption Unit on suspicion of bribery and corruption offences. Alison-Madueke had been granted bail after several hours in custody.

 As Tanzania seeks to become a regional trade hub in East Africa, it has recently begun to clean up its image by the recent suspension of its acting Director of Ports. Other probes involving the energy sector has brought down three senior officials in recent months, including the attorney general and the energy minister, and led to a shake up in the president's cabinet.


Conclusion  Those companies that have shown zero tolerance towards corruption are reaping the benefits from their new-found reputation as “the ones who don’t pay”. Examples include Chevron, Shell, Unilever etc.  While these companies have deep pockets they have included the necessary timeframes within their systems to remove the pressure of having to give bribes for permits, licences etc.  It is possible to operate ethically in Africa’s markets and to help improve the continent’s levels of governance.



Resources  Transparency International – Corruption Perceptions Index 2014. /cpi2014  Business Anti-Corruption Portal