Insights & Reports > Kroll Global Fraud Report

Companies with any exposure to risks from corrupt practices, known or unknown, are facing a perfect storm. The worldwide economic meltdown has placed increased pressure on business to generate returns. Greater, more global competition is focused on ever fewer opportunities – often in riskier, emerging markets which are performing better than others. This situation creates a sometimes strong temptation to obtain a competitive advantage through improper payments. Meanwhile, across-the-board cost-cutting by most corporations is shrinking compliance and control functions, thereby decreasing their ability to cope with the threat of corruption.

Regulatory enforcement, on the other hand, is at an all-time high. In the United States, more cases have been initiated under the Foreign Corrupt Practices Act (FCPA) since January 2006 than in the prior 28 years combined. More widely, an increased focus is being placed on the personal liability of individuals, notably senior executives: all 38 signatories of the 1997 OECD Convention on Combating Bribery of Foreign Public Officials have criminalized corruption. This reflects a trend towards new and more stringent regulations against corrupt payments worldwide. We have also recently witnessed greater international cooperation between law enforcement agencies in different countries and a rise in multi-jurisdictional investigations.

In this environment, it is crucial for companies to review, understand, and assess the roles of the intermediaries they may use, whether in daily operations or when seeking to expand internationally. An overwhelming popular conviction holds that companies use agents, joint venture partners, foreign subsidiaries and the like to avoid direct involvement with corruption. It certainly is common for companies to delegate excessive authority to third parties and, in doing so, relinquish control over activities that these contractors conduct on their behalf. Moreover, intermediaries are the most common conduit for those who do wish to make improper payments. The amount of money channeled through them can be staggering. One recent example is the FCPA case involving Siemens AG: according to a company press release, Siemens Venezuela paid directly or indirectly over US$18.7 million to various third-party agents and consultants, concealing their true purpose with “the creation of sham agreements for ‘studies’, ‘consulting’, ‘workshop equipment’ and ‘supplies’;” Siemens Argentina, meanwhile, “paid over US$85 million to certain third party consultants or entities which performed no legitimate business function but which helped to facilitate payments.”¹

At the end of 2008, following more than two years of investigations by the German and US authorities, as well as an internal investigation, Siemens Aktiengesellschaft agreed to the highest regulatory settlement in the history of the US Foreign Corrupt Practices Act amounting to US$ 800 million, including an SEC settlement of US$350 million and a DOJ settlement of US$450 million. On top of this, Siemens AG also agreed a settlement amounting to D395 million with the German authorities. These amounts were determined on the basis of the magnitude of corruption that had been uncovered: bribes totaling approximately US$1.4 billion in roughly five and half years.

As the Siemens case shows, passing responsibility to intermediaries does not transfer liability for the actions of agents, leaving companies with considerable exposure to regulatory risk. To make matters worse, improper relationships with intermediaries also creates an opportunity for collusion between those inside and outside the company, with significant potential to generate serious fraud.

Companies seeking to identify whether they may be entangled in corrupt schemes with intermediaries should look out for traits such as payments to offshore jurisdictions, excessive commission structures, services rendered having an intangible nature, a lack of any audit trail, a history of corruption in the country, and inflated prices. However, these are just red flags, and in practice may often be justified by a reasonable explanation.

Therefore assessment of a new potential agent, or a review of the role of an existing one, should be comprehensive and take into account all relevant circumstances. The raison d’être of an intermediary is always the place to start. If one discovers issues of concern here, or finds other red flags, it is imperative to scrutinize the intermediary further. Failure to do so may result in serious repercussions on numerous levels: legal, financial, business, and reputational.

1 Statement of Siemens Aktiengesellschaft: Investigation and Summary of Findings with respect to the Proceedings in Munich and the US, December 15, 2008

Matteo Bigazzi is an associate managing director in Kroll’s Investigations Practice, specializing in internal fraud, based in London. Matteo joined Kroll in May 2001 and has worked on a wide variety of cases including fraud detection, investigation and prevention assignments. Prior to joining Kroll, Matteo collaborated with the University of Florence, where he held seminars in geopolitics and geo-economics.