by Lee Kirschbaum, SVP, Product, Marketing, and Alliances at Opus
Siemens. Alstom. Teva. Telia.
Sound familiar? They’re recipients of some of the largest fines levied by the Foreign Corrupt Practices Act (FCPA) in recent years – including, with Telia, the largest single fine to date.
And they’re far from alone. As business becomes more global by the day, bribery and corruption risk grows along with it, with more than $1.5 trillion paid out every year in bribes. As just one example, China and India, the world’s two fastest growing economies, are also in the top 10 countries most acted against by the FCPA. With growth comes risk.
And among the biggest risks of all is third parties. Third parties – such as business partners, agents or distributors — all present extensive financial and reputational risk, especially when it comes to bribery and corruption. A recent OECD reportfinds 75% of enforcement actions involved bribes paid through third parties.
Managing these external risks can seem challenging, especially when a company is doing business with potentially tens of thousands of third parties. Navigating both local and global regulations such as the Foreign Corrupt Practices Act (FCPA) and UK Bribery Act (UBKA), training third parties, and ensuring appropriate policies and procedures to comply may seem like a daunting task.
It’s no wonder companies took ABAC risk seriously in 2017 — and continue to look for help in 2018.
So what ABAC lessons have we learned in 2017 and what should we expect this year?
Lessons Learned from 2017
- Enforcement actions remain strong and steady
2017 started out with a cautious “wait and see” approach but it ended confidently in line with previous years, with a total of 39 DOJ/SEC enforcement actions, including the largest fine FCPA enforcement action to date, Telia. Of note, there were more DOJ enforcement actions than since 2010 (29 in total).
Of these combined actions, two stand out in size and scope:
The largest case ever investigated by the Serious Fraud Office (SFO) in the UK included the US and Brazilian authorities as well. Rolls Royce was found guilty of systematically paying bribes to foreign officials through third parties between 2000 and 2013.
There were 12 countries in total where this took place including China, Brazil, Angola and Iraq. Fines totalled $800 million with deferred prosecution agreements (DPAs) in the UK and US.
Telia Company AB
At $965 million, Telia Company AB was the largest FCPA enforcement action of all time. Telia paid this sum to the DOJ, SEC, Dutch and Swedish authorities to resolve its FCPA violations in Uzbekistan. The offenses dated back to 2007 when it bought an Uzbek subsidiary, Coscom, to provide telecom services. After Telia acquired Coscom, it paid $80 million through its subsidiary to a government official to acquire mobile phone assets.
- ABAC regulation has truly gone global
2017 saw no slow-down in the development of new international ABAC regulations as government appetites to tackle corruption and bribery increased.
France had a banner year for introducing ABAC regulation, with Sapin II coming into force in June to address economic modernisation, transparency and corruption and align itself with the FCPA and UK Bribery Act.
The Australia Criminal Code Act 1995 saw proposed changes following OECD criticism of the Australian regime, while Canada saw its first individual foreign bribery conviction.
Not only are international regulations being strengthened, they’re also being enforced on the global scale first laid forth by the OECD convention in the 1990s. 2017 saw multiple actions with increased co-operation between international regulatory bodies.
The greatest showing of global cooperation in 2017 was seen in the Telia case, in which U.S., Dutch and Swedish regulators came together to bring the $965 million settlement.
- A continued focus on holding individuals culpable
In 2015 the Yates Memo signalled a shift toward holding individuals, not just companies, accountable for bribery and corruption.
The Department of Justice (DOJ) continues to demonstrate a focus on culpable individuals with clear language in its documentation and public speakingand following up with clear action. 2017 saw the DOJ charge, making up 70% of its total cases.Additionally, 30% of the SECs total enforcements for 2017 were also focused on individual actions.
Notable cases from 2017 include:
The CEO and Sales Director at SBM Offshore faced up to five years imprisonment for commissions paid to intermediaries that went on to bribe officials in Brazil, Angola, Equatorial Guinea, Kazakhstan and Iraq. This was one of the first individual bribery cases brought to court by the US Justice Department relating to Petrobras.
- Due diligence on third parties continues to be critical
The common factor in many of the enforcement actions of 2017, as in previous years, is the role of third parties in paying bribes or facilitating payments. Enforcement agencies are committed to taking a tough stance on companies. With 75% of past enforcement actions involving third parties, it’s an obvious place to start an investigation.
Many of the actions we saw involved companies whose internal controls and third party due diligence failed them. Examples of such cases include:
Launched in July of 2016 and continued into 2017, the Serious Fraud Office (SFO)’s investigation of bribery and fraud concerning the company’s use of middlemen to secure backing from the British government demonstrates the global trend of enforcement when it comes to third parties. Following the SFO’s investigation launch, AirBus initiated its own internal investigation after leaked bank records revealed more than €19m in transactions were unaccounted for.
What to Expect from ABAC Moving into 2018
The last two years have seen significant ABAC activity. The forecast for 2018 looks no different. These are the key trends for businesses to be aware of:
- Enforcement actions will continue to grow globally
In the past, the driving forces behind ABAC enforcements were the U.S. and more recently the U.K. The past few years have seen France, China and many Latin American countries develop their own anti-bribery laws in line with the FCPA and UK Bribery Act. It’s likely enforcement actions will follow suit.
We’re already seeing this happen in Latin America with the Rolls Royce and Odebrecht actions. In both cases we saw the leading enforcement agency reach across its borders to bring the enforcement to a head.
This globalisation of enforcements also reflects a growing awareness corruption is bad for business and bad for society. A clear sign we’ve only just seen the tip of the iceberg of global enforcements.
- Continued cooperation in multi-jurisdictional investigations.
The international cooperation between enforcement agencies we’ve seen in the last year will continue into 2018.
As borders are crossed, or even broken down, we see the power of enforcement agencies grow. What does this mean for businesses? Well, it’s increasingly important to co-operate with the authorities with strategies such as self-reporting and DPAs.
With more established relationships and a clear desire to support global enforcement, international governments and their respective agencies are willing to work closely to bring corruption to the fore. What will be interesting to watch this year is which agencies will come together.
- Further adoption of globally recognised standards
Based on recent trends, we believe this year will continue to see a rise in the adoption of standards like ISO 37001 for providing a flexible framework for complying with global ABAC regulations. Alstom, Walmart and Microsoft have all been early adopters of ISO 37001 in its first year and other corporations will likely follow suit at this early stage. While there are mixed opinions about the efficacy of ISO 37001, it’s clearthere are many benefits to having this standard in place.
ISO 37001 also forms the basis for the Shenzhen Standard, China’s anti-bribery management system piloted in June 2017. A clear signal by the Chinese they’re taking ABAC seriously, and perhaps more importantly, a step towards creating a truly global anti-bribery and corruption standard.
- A focus on holistic third-party management
Based on the history of causes of FCPA enforcement actions, there’s no doubt managing third parties will be a significant part of businesses’ risk and compliance programs in 2018. Third parties represent the largest risk in many areas of compliance, not just anti-bribery and corruption.
We’ve seen a major proportion of companies with over 1,000 third parties – and in one of our recent studies, the number of third parties businesses have is growing by 25% per year.
The starting point for all third-party relationships should be consistent across departments: identify the third party, know what they do for you, understand what risks they pose and plan how to manage them.
Budgets for risk and compliance are under pressure, just as they are in many other company departments. Do you have enough resources allocated to your own budget to manage all of the above?
Perhaps the answer doesn’t lie in more people and money – it lies in the automation of processes and the reduction of paper-based systems. Using automation to address human capital and funding issues will give you a force multiplying effect, and one that makes for more efficient use of your existing resources.
Tackling bribery and corruption on a global scale isn’t a challenge that can be addressed overnight, but armed with continuous learning, international cooperation and intelligent use of technology, major strides are being made.
Euro zone business activity shrank in January as lockdowns hit services
By Jonathan Cable
LONDON (Reuters) – Economic activity in the euro zone shrank markedly in January as lockdown restrictions to contain the coronavirus pandemic hit the bloc’s dominant service industry hard, a survey showed.
With hospitality and entertainment venues forced to remain closed across much of the continent the survey highlighted a sharp contraction in the services industry but also showed manufacturing remained strong as factories largely remained open.
IHS Markit’s flash composite PMI, seen as a good guide to economic health, fell further below the 50 mark separating growth from contraction to 47.5 in January from December’s 49.1. A Reuters poll had predicted a fall to 47.6.
“A double-dip recession for the euro zone economy is looking increasingly inevitable as tighter COVID-19 restrictions took a further toll on businesses in January,” said Chris Williamson, chief business economist at IHS Markit.
“Some encouragement comes from the downturn being less severe than in the spring of last year, reflecting the ongoing relative resilience of manufacturing, rising demand for exported goods and the lockdown measures having been less stringent on average than last year.”
The bloc’s economy was expected to grow 0.6% this quarter, a Reuters poll showed earlier this week, and will return to its pre-COVID-19 level within two years on hopes the rollout of vaccines will allow a return to some form of normality. [ECILT/EU]
A PMI covering the bloc’s dominant service industry dropped to 45.0 from 46.4, exceeding expectations in a Reuters poll that had predicted a steeper fall to 44.5 and still a long way from historic lows at the start of the pandemic.
With activity still in decline and restrictions likely to be in place for some time yet, services firms were forced to chop their charges. The output price index fell to 46.9 from 48.4, its lowest reading since June.
That will be disappointing for policymakers at the European Central Bank – who on Thursday left policy unchanged – as uncomfortably low inflation has been a thorn in the ECB’s side for years.
Factory activity remained strong and the manufacturing PMI held well above breakeven at 54.7, albeit weaker than December’s 55.2. The Reuters poll had predicted a drop to 54.5.
An index measuring output which feeds into the composite PMI fell to 54.5 from 56.3.
But despite strong demand factories again cut headcount, as they have every month since May 2019. The employment index fell to 48.9 from 49.2.
As immunisation programmes are being ramped up after a slow start in Europe optimism about the coming year remained strong. The composite future output index dipped to 63.6 from December’s near three-year high of 64.5.
“The roll out of vaccines has meanwhile helped sustain a strong degree of confidence about prospects for the year ahead, though the recent rise in virus case numbers has caused some pull-back in optimism,” Williamson said.
(Reporting by Jonathan Cable; Editing by Toby Chopra)
Volkswagen’s profit halves, but deliveries recovering
BERLIN (Reuters) – Volkswagen reported a nearly 50% drop in its 2020 adjusted operating profit on Friday but said car deliveries had recovered strongly in the fourth quarter, lifting its shares.
The world’s largest carmaker said full-year operating profit, excluding costs related to its diesel emissions scandal, came in at 10 billion euros ($12.2 billion), compared with 19.3 billion in 2019.
Net cash flow at its automotive division was around 6 billion euros and car deliveries picked up towards the end of the year, the German group said in a statement.
“The deliveries to customers of the Volkswagen Group continued to recover strongly in the fourth quarter and even exceeded the deliveries of the third quarter 2020,” it said.
Volkswagen’s shares, which had been down as much as 2%, turned positive and were up 1.5% at 164.32 euros by 1158 GMT.
Sales at the automaker rose 1.7% in December, at a time when new car registrations in Europe dropped nearly 4%, data from the European Automobile Manufacturers’ Association showed.
Like its rivals, Volkswagen is facing several challenges due to the coronavirus pandemic as well as a global shortage of chips needed for production.
It also sees tough competition in developing electrified and self-driving cars. The merger of Fiat Chrysler and Peugeot-owner PSA to create the world’s fourth-biggest automaker Stellantis adds to the pressure.
Volkswagen said on Thursday it missed EU targets on carbon dioxide (CO2) emissions from its passenger car fleet last year and faces a fine of more than 100 million euros.
The group is expected to release detailed 2020 figures on March 16.
($1 = 0.8215 euros)
(Reporting by Kirsti Knolle; Editing by Maria Sheahan and Mark Potter)
Global chip shortage hits China’s bitcoin mining sector
By Samuel Shen and Alun John
SHANGHAI/HONG KONG (Reuters) – A global chip shortage is choking the production of machines used to “mine” bitcoin, a sector dominated by China, sending prices of the computer equipment soaring as a surge in the cryptocurrency drives demand.
The scramble is pricing out smaller miners and accelerating an industry consolidation that could see deep-pocketed players, many outside China, profit from the bitcoin bull run.
Bitcoin mining is closely watched by traders and users of the world’s largest cryptocurrency, as the amount of bitcoin they make and sell into the market affects its supply and price.
Trading around $32,000 on Friday, bitcoin is down 20% from the record highs it struck two weeks ago but still up some 700% from its March low of $3,850.
“There are not enough chips to support the production of mining rigs,” said Alex Ao, vice president of Innosilicon, a chip designer and major provider of mining equipment.
Bitcoin miners use increasingly powerful, specially-designed computer equipment, or rigs, to verify bitcoin transactions in a process which produces newly minted bitcoins.
Taiwan Semiconductor Manufacturing Co and Samsung Electronics Co, the main producers of specially designed chips used in mining rigs, would also prioritise supplies to sectors such as consumer electronics, whose chip demand is seen as more stable, Ao said.
The global chip shortage is disrupting production across a global array of products, including automobiles, laptops and mobile phones. [L1N2JP2MY]
Mining’s profitability depends on bitcoin’s price, the cost of the electricity used to power the rig, the rig’s efficiency, and how much computing power is needed to mine a bitcoin.
Demand for rigs has boomed as bitcoin prices soared, said Gordon Chen, co-founder of cryptocurrency asset manager and miner GMR.
“When gold prices jump, you need more shovels. When milk prices rise, you want more cows.”
Lei Tong, managing director of financial services at Babel Finance, which lends to miners, said that “almost all major miners are scouring the market for rigs, and they are willing to pay high prices for second-hand machines.”
“Purchase volumes from North America have been huge, squeezing supply in China,” he said, adding that many miners are placing orders for products that can only be delivered in August and September.
Most of the products of Bitmain, one of the biggest rig makers in China, are sold out, according the company’s website.
A sales manager at Jiangsu Haifanxin Technology, a rig merchant, said prices on the second-hand market have jumped 50% to 60% over the past year, while prices of new equipment more than doubled. High-end, second-hand mining machines were quoted around $5,000.
“It’s natural if you look at how much bitcoin has risen,” said the manager, who identified himself on by his surname Li.
The cryptocurrency surge is affecting who is able to mine.
The increasing cost of investment is eliminating smaller players, said Raymond Yuan, founder of Atlas Mining, which owns one of China’s biggest mining business.
“Institutional investors benefit from both large scale and proficiency in management whereas retail investors who couldn’t keep up will be weeded out,” said Yuan, whose company has invested over $500 million in cryptocurrency mining and plans to keep investing heavily.
Many of the larger players growing their mining operations are based outside of China, often in North America and the Middle East, said Wayne Zhao, chief operating officer of crypto research company TokenInsight.
“China used to have low electricity costs as one core advantage, but as the bitcoin price rises now, that has gone,” he said.
Zhao said that while previously bitcoin mining in China used to account for as much as 80% of the world’s total, it now accounted for around 50%.
(Reporting by Samuel Shen and Alun John; Editing by Vidya Ranganathan and William Mallard)
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