Scott Lane
Scott Lane

Fighting Fraud Internally When Dealing With International Firms

A strong corporate compliance program will ensure trouble-free operations at home and overseas and safeguard the value of your brand.

June 2, 2011
by Scott Lane

In a global economy, in which supply chains connect countries around the clock at a moment’s notice, relationships between companies are so close that one’s imprudent policies can easily endanger another’s good name and even worse, lead to serious fines, incarceration and considerable financial loss.

However, the nonprofit organization, Transparency International (TI), which monitors companies for fraudulent undertakings deemed only one quarter of the countries worldwide as clean. This covers most of Europe, North America and Australia, which are often lax or naïve in fighting corruption seriously in their overseas endeavours since they are used to being in a regulated environment.

But a quick click on the map of TI’s 2010 Corruption Perceptions Index shows that a large part of the globe lags far behind in transparency and accountability. The injustices inherent in corruption have fired up parts of the Middle East and North Africa (MENA), in which one of the reasons for the on-going uprisings is rampant corruption. This is a hotspot of fraudulent economies, but so are many other developing areas.

Within the BRIC (Brazil, Russia, India and China) countries, which have been receiving the most attention and investment, the worst offender is Russia, while India, China and Brazil follow closely, though the level of corruption in these three countries is roughly the same.

The bad news is that things are not getting better. According to TI’s Global Corruption Barometer Report, the general perception in every BRIC country has been that bribery increased considerably in 2010 compared to the year before. Getting into the melee in these countries can be very costly. The corruption component represents 20 percent to 30 percent of the total cost of doing business in Russia, says Alena Ledeneva, a professor of Politics and Society at the School of Slavonic and East European Studies (SSEES) at University College London and Stanislav Shekshnia, an affiliate professor of entrepreneurship at INSEAD, in a research paper published in March 2011, but, beyond that, they say it can be also dangerous working in these countries. Corruption in China is a capital punishment, although no foreign nationals have been sentenced to death as yet.

Should these reasons be not persuasive enough, the U.K. Anti-Bribery Act, which will be introduced in July 2011, is pressurizing companies to have a well-designed and functional compliance programs. The strict new Act is similar to the U.S.’s Foreign Corrupt Practices Act and will be relevant to all companies that conduct business in the United Kingdom (U.K.).

Historically, bribery is closely connected with the way business is conducted in countries where fraud is highly prevalent. For example, in China, the traditional way of doing business is through relationships or guanxi. This is so ingrained that people are under considerable pressure to follow the easy route to success, which involves providing impressive gifts and lavishing entertainment to those with whom business is conducted.

To ensure that companies comply with applicable local laws as well as home laws and regulations and that staff and business associates do not give in to temptation, companies have to introduce a formal and comprehensive corporate ethics and compliance program.

In their paper, Ledeneva and Shekshnia note that “In spite of the fact that many companies actively take specific actions to prevent corrupt acts, only a handful of them have a comprehensive anti-corruption strategy, which includes a clear definition of what is and what is not considered corruption, states explicit goals in this area, defines the rules and assigns responsibility and accountability.”

What Can Your Firm Do?

Building from the basics up help monitor and prevent corruption cases. Consider hiring a compliance officer who will not only be responsible for owning the program, but also executing, monitoring and following up. A comprehensive program should include clearly defined procedures that prevent, detect and deal with non-compliance and provides ways of reporting suspected non-compliance cases and set up an anonymous hotline and/or drop box.

Training seminars with refresher training should be posted on your company’s website to ensure your staff understand the program and what is expected of them as well as offer a place for staff questions and feedback. The program should be supplemented by rigorous pre-employment background checks of staff. In addition, you should make sure everyone from rank-and-file to upper management are reminded of the importance of conforming to your company’s code of ethics during your company’s semi-annual or annual reviews. Monitor any relationships with government employees and check on expenditures and commission fees closely. Regular internal audits must be conducted to examine compliance are within guidelines.


You should always conduct due diligence of all third-party vendors, including business partners, joint-venture partners, agents, vendors, distributors, resellers, consultants and business intelligence firms. You should check their legal and financial background as well as their contacts to avoid bad surprises later. Business partners should be made aware of the legal requirements and your company’s code of ethics as you should monitor them regularly. Due diligence should be conducted repeatedly, whether annually or during contract renewals, depending on the sensitivity of the business relationship.

Be Safe From Corruption

  • Set up a compliance program
  • Establish code of conduct/ethics
  • Train your staff as well as business partners in ethics
  • Do pre-hiring background checks
  • Do due diligence on your business partners
  • Conduct internal audits of compliance
  • Regularly monitor all the above

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Scott Lane is CEO of The Red Flag Group with over 15 year’s experience in legal, compliance, internal audit, export control, ethics and corporate governance and led corruption investigations in over 10 countries. Formerly, he was senior director and general counsel in various MNCs in Australia, the U.K. and Hong Kong.