by Cesar Bacani
Handing out mooncakes during Chinese New Year to celebrate the festive season is such a common business practice that no one really thinks about it. So last year, a Hong Kong electronics company whose parent is a major US conglomerate presented customs officials in China with the goodies as a matter of course.
But much to the regional finance director’s surprise, internal auditors from headquarters questioned the gesture. “They said it could be considered a violation of the US Foreign Corrupt Practices Act (FCPA) and the Bribery Act in the UK,” she recalls. This year, the company was careful not to give anything to Chinese government officials at all.
Companies in Asia are getting grief from their Western parents these days as the US and UK crack down on seemingly innocuous gift-giving. China is also moving on the issue – it amended its Criminal Law in May last year to prohibit giving “property to any foreign public official or official of an international public organization” in order to gain “illegitimate commercial benefit.”
CFOs in a Bind
So does all this mean that bribery and corruption are on the decline? Sadly, a new study by Ernst & Young (Growing Beyond: A Place for Integrity) suggests otherwise. Asked whether bribery and corruption are widespread in their country, 39% of the 1,758 CFOs and other senior executives polled worldwide said yes.
More worrying in Asia, 33% of the 150 respondents from China, Hong Kong, Indonesia, Malaysia, Singapore and Vietnam said making cash payments to win or retain business is justified to help a business survive an economic downturn, more than double the global average.
Another 17% indicated that misstating the company’s financial performance is justified towards the same end, versus just 4% globally.
It seems that, even as companies are coming under pressure from regulators and their global parents to make sure they comply with the FCPA and other anti-bribery laws, they are also tempted to skirt the rules to survive economic troubles.
These opposing forces may be putting some CFOs in Asia in a bind. If their company follows the rules, it may lose business to less scrupulous competitors in countries whose public sector is especially seen as prone to corruption.
This may not apply as much in Singapore and Hong Kong, which respondents to Transparency International’s Corruption Perceptions Index 2011 judge to be clean (Singapore – 9.2 points and Hong Kong 8.4 points on a ten-point scale with 10 as ‘very clean’).
But perceptions of corruption are still pervasive in the Philippines (2.6 points, closer to zero, which is ‘highly corrupt’), Vietnam (2.9), Indonesia (3.0), India (3.1), Thailand (3.4), and Malaysia (4.3). In these markets, the urge and the need may be stronger to make cash payments and gift-giving to facilitate business and win contracts.
Nuanced Findings
The Ernst & Young survey report brands the Asia findings “particularly shocking,” noting that 60% of respondents in Indonesia think that making cash payments to win new business is acceptable. “In Vietnam, 36% of respondents consider it acceptable to misstate a company’s financial performance,” the Big Four accounting firm adds.
“It is no coincidence that this is a region where conduct has been heavily scrutinized by US authorities” – and may explain why even the giving of mooncakes is drawing scrutiny from some internal auditors.
Last year, 31 of the 36 enforcement actions launched in accordance with the FCPA involved activities in Asia, Eastern Europe and Latin America. “Many of these prosecutions were related to payments to employees or officials at state-run enterprises,” says the report.
But Chris Fordham, Managing Partner at Ernst & Young and Asia-Pacific Leader of Fraud Investigation & Dispute Services, believes that the findings are more nuanced than the headline numbers suggest. “The CFOs that we work with are invariably committed to extremely high ethical standards,” he says.
Indeed, the proportion of respondents in Asia who say bribery is widespread in their country stands at 36% – lower than the global average of 39%. “That seems to show that there is some success in terms of government regulators’ actions against bribery in the Far East,” says Fordham.
But when asked whether they felt that the risk of corruption had increased, 31% of those in Asia said yes, a proportion that is higher than the global average of 24%.
Fordham says this may be due to the publicity surrounding high-profile anti-corruption cases in Asia. “As corruption is being rooted out, people are seeing more cases reported in the newspapers – that could be the reason why people feel the risk is still increasing,” he speculates.
Is that a Cartier Pen?
Are there cultural issues at work here? “It is often the culture here to make gifts,” says Fordham. “We’re not saying that gifts are wrong, although I do have clients that clearly have a zero tolerance for this type of behaviour.”
But there is a difference between giving someone a ballpoint pen with the company’s logo on it and a Cartier pen. “Often what we’re talking about here in terms of bribery and corruption is what is in the mind of the person making the gift and what is in the mind of the person receiving it,” says Fordham.
“If within those people’s minds there is the idea that making the gift is going to help to influence, then clearly there is an issue; whereas if it is nothing more than a souvenir, then that is different.”
Similarly, the practice of “misstating” financial statements can be nuanced. “It can just be the simple choosing of more beneficial accounting policies to something far more nefarious,” Fordham points out. “An example might be the way you choose a depreciation policy or you choose a revenue recognition type policy, which could be significant and improve [your financial results].”
But in his 20 years in Asia, Fordham has also seen more egregious misstatements, “where people are prepared to use falsified documentation to support revenue recognition, for example.” In one recent case, the company policy is that customers must certify that they were satisfied with the product they bought before the revenue can be recognised. However, the documentation being shown to the accountants looked to have been falsified.
“These are not particular to Asia,” Fordham stresses. “These are the sort of financial misstatements that can be in essence around the world.”
What Can CFOs Do?
The Ernst & Young survey finds that despite the risks, companies are still failing to do enough to prevent bribery and corruption. Among other things, the accounting firm recommends the following courses of action to correct this:
Top management should not send mixed messages. “While 81% of respondents say ABAC [anti-bribery/anti-corruption] policies and codes of conduct are in place and a similar proportion [84%] agree that senior management strongly communicates its commitment to these, nearly half tell us that they do not believe people have been penalized for breaching ABAC policies,” says the report.
In Japan, only 26% of respondents said that errant executives and employees have been penalized. But in Malaysia, 56% said penalties were meted out to those who violated the ABAC policies.
CFOs should set the tone. A “larger than expected minority of CFOs” believe that unethical – and potentially criminal – actions may be acceptable if they ensure the company’s survival, notes the report. “When presented with a list of possibly questionable actions that may help the business survive, 47% of CFOs [globally] felt one or more could be justified in an economic downturn.”
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“CFOs need to redouble their own efforts to set the tone: they need to be trained, to increase their awareness and to clearly demonstrate support for initiatives to manage fraud, bribery and corruption risks,” says the report. “This is particularly relevant since, according to those interviewed, the CFO is most likely to have responsibility for ABAC compliance.”
CFOs should be aware of risks from third-party agents or business partners. More than 90% of reported FCPA cases involved third-party intermediaries, Ernst & Young points out. Yet only 10% of CFOs globally know that the company is liable for the action of its third-party agents, with 39% saying both the company and the third party are liable while 15% said the third party alone is liable.
Directors should be appropriately sceptical. “Developing channels of communication with contacts across the finance function and other executives within the business will help boards ensure that they a full and accurate picture,” Ernst & Young counsels.
Training on ABAC policies should be continued. Ernst & Young notes that as many as 42% of respondents say they have not received training on ABAC policies. “Without adequately trained employees, the ability of companies to identify issues or robustly investigate and act on allegations is also likely to be diminished,” the report warns.
More to Come
Will the current crackdown on bribery and corruption peter out? It does not look like it. Indeed, the US Dodd-Frank Act, which creates new financial incentives for people who provide original information on corporate misconduct leading to a successful enforcement action, appears to be adding fuel to the fire.
“According to prosecutors, the Act has markedly increased both the quantity and quality of whistleblower claims,” reports Ernst & Young. It asked survey respondents whether they support similar compensation schemes for whistleblowing being established in their country. Seven out of ten CFOs and other executives in China, Hong Kong, Indonesia, Malaysia, Singapore and Vietnam said yes.
All this threatens to continue keeping some of Asia’s CFOs in the horns of a dilemma. Should they bribe to survive? On balance, the answer is probably no, particularly since the bosses and boards in headquarters are increasingly under pressure to say no as well.
But the journey from ‘maybe’ to ‘never’ in Asia could take some more twists and turns, as the findings of this Ernst & Young survey indicate. In the meantime, finance chiefs should not be surprised when they are asked to justify the company’s mooncake gift-giving.
This article first appeared on cfoinnovation
