Our procurement fraud series continues today with our anti-fraud expert (and star of the upcoming television series “CSI: Procurement”) Matt Rogers, a Director in the Financial Advisory Services practice at AlixPartners, LLP. Part one of this interview which highlights procurement fraud prevention strategies can be found here. Today’s discussion focuses on a recent trend – the increasing focus by the criminal and regulatory agencies on illegal payments made abroad – before concluding with some final thoughts.
Illegal Payments to Foreign Officials
Matt indicated that payments made in violation of the Foreign Corrupt Practices Act (“FCPA”) are one area that has been receiving special attention by the Department of Justice and the SEC in recent years; since procurement is often the first business function to enter a new market, Chief Procurement Officers should take special note. In general, the FCPA prohibits corrupt payments to foreign officials for the purpose of obtaining or retaining business. In addition, the FCPA requires companies whose securities are listed in the United States to meet its accounting provisions, which were designed to operate in tandem with the anti-bribery provisions, requiring corporations to make and keep books and records that accurately and fairly reflect the transactions of a corporation and to devise and maintain an adequate system of internal accounting controls.
The FCPA extends beyond the borders of the United States to overseas subsidiaries and to any individual, firm, officer, director and employee of the company or any agent or stockholder acting on its behalf. Matt says that the procurement function has a central role in ensuring compliance with FCPA. According to Matt, “in many instances, corrupt payments have been conducted through an intermediary, such as payments made to ‘consultants’ to assist in getting business overseas.” Matt says that, “in other instances, companies make improper payments through their local petty cash accounts because controls are generally less robust than through the procurement process.” According to Matt, “It only takes one improper payment to set the regulators abuzz, and then the costs to investigate and/or defend clearly surpass the costs to prevent.” He believes that internal controls that are specifically designed to prevent or detect these improper payments and training focused on the provisions of the FCPA are basic steps on the road to compliance.
Although the United States leads the charge in the global battle against corruption, efforts by other countries are not going unnoticed. For example, the United Kingdom recently introduced tougher anti-bribery laws with its Bribery Act of 2010 and 38 different countries are currently coordinating efforts to combat bribery of foreign public officials through their affiliation with the OECD Anti-Bribery Convention (See Organisation for Economic Co-Operation and Development Convention on Combating Bribery of Foreign Public Officials in International Business Transactions at http://oecd.org).
Historically, tips, particularly those from employees, have been the leading method for the detection of corporate fraud according to studies conducted by the Association of Certified Fraud Examiners. More recently, government sponsored bounty programs have been introduced in an attempt to entice more people to report potential fraudulent activities. Matt says that there are “pros and cons to such programs and that it is still too early to determine how effective they will be in rooting out fraud.” Despite very sophisticated methods of detecting procurement fraud, relationships that extend beyond the four walls of the enterprise are difficult to monitor and track so CPOs and their teams must be vigilant because “fraud is challenging to uncover, especially the corruption-related schemes. Understanding the symptoms of fraud, identifying the red flags as they arise and carefully and confidentially investigating them in a timely manner will generally serve the enterprise’s best interest. It is a best practice to involve corporate counsel prior to any investigation in order to protect the interest of the company and to preserve the integrity of the investigation.”
As we’ve seen recently, procurement fraud is a very real concern with very real implications. The good news is that many Chief Procurement Officers and other experts are rising to the challenge with tools and strategies in hand.
CPO Rising would like to extend our thanks to Matt Rogers for working with us on such an important topic. If you have more specific questions on the matter, I encourage you to engage Matt directly by emailing him at firstname.lastname@example.org.