Anti-Bribery and Corruption Index (ABCI) - PwC · 2017-09-28 · 2 Anti-Bribery and Corruption...

Anti-Bribery and Corruption Index (ABCI) in Russia ‒ 2017Integrity and affiliation due diligence of counterparties

www.pwc.ru/en/services/forensics

Third issue

2 Anti-Bribery and Corruption Index (ABCI) in Russia ‒ 2017

Compared with last year’s survey, the aggregate ABCI score this year rose from 64% to 68%, as a result of improved performance in five out of the seven sectors. In our view, this was due to increased awareness of benefits compliance programs provide, improvement in compliance related publicity as well as further implementation of compliance procedures by leading Russian companies. The leading sectors (telecoms and pharma) demonstrated the largest increases. Overall, Russian companies improved their ABCI performance to 66% (a gain of 3 percentage points) and narrowed the gap on foreign subsidiaries (which scored 68%, an increase of 1 percentage point).

One of the most important elements of anti-corruption strategies is counterparty due diligence (covered in the second half of the report). As part of our research, we surveyed Russian companies on their experience in establishing procedures to screen counterparties and identify conflicts of interest. While most companies perform regular checks on their business partners, only half of our respondents expressed confidence in their company’s due diligence practices.

By reading this report, you will gain a better understanding of what companies hope to achieve with their counterparty checks. You will also have the opportunity to explore our analysis of different approaches for implementing a robust systems of checks. In addition, our report includes practical recommendations from our respondents on how to improve procedures on screening counterparties and identifying conflicts of interest.

Best regards,

Roy Muller PartnerForensicsPwC in Russia

We are pleased to present the third Anti-Bribery and Anti-Corruption Index (ABCI) survey on the robustness of compliance programmes in corporate Russia.

With each passing year, bribery and corruption issues receive more public attention. Business owners, executives and politicians have been the focus of corruption scandals both in Russia and abroad. Meanwhile, over USD 1 trillion are paid in bribes worldwide every year, while annual global losses from corruption have reached USD 2.6 trillion.1

Based on information in the public domain and survey data, this report explores the steps that the largest Russian companies are taking to comply with anti-corruption laws. We analysed 125 companies from seven sectors: telecommunications, retail and consumer goods, financial services, automotive, energy and utilities, mining and metals, and pharmaceuticals.

Foreword

1 https://www.oecd.org/cleangovbiz/49693613.pdf

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Survey highlights

68%

72%

86%

60%

8%

49%

97%

Russia’s aggregate ABCI rose from 64% to 68%.

Pharma experienced the largest increase, up from 65% a year earlier.

The telecom sector strengthened its hold at the top, as its ABCI score improved from 80% to 86%.

More than half of our respondents have in-house compliance functions, an improvement of ten percentage points compared with last year.

Most believe that automation is the key to improving their counterparty screening systems, but only 8% of our survey participants use software expressly for this purpose.

Almost half of our respondents have identified conflicts of interest between among their counterparties and employees within the last two years.

The vast majority of companies perform counterparty integrity and affiliation due diligence. However, only 51% of our respondents believe that their company’s procedures are sufficient.


Anti-Bribery and Corruption Index: detailed results

Russian companies listed abroad and foreign subsidiaries in Russia have significant incentives to develop strong compliance frameworks. These include the challenges presented by legislative changes, recent high-profile investigations, enforcement actions and the close regulatory scrutiny of companies that violate anti-corruption laws. Western experience shows that compliance controls can help companies to enhance transparency, add value and protect their reputation.

In 2016, 27 companies paid a total of USD 2.48 billion in fines for violations of the US Foreign Corrupt Practices Act (FCPA).2 Just one year earlier, USD 133 million in fines were levied for 11 investigations. In 2016, two out of the four largest fines (for a total of USD 916.6 million) were related to the overseas operations of Russian companies or foreign subsidiaries in Russia. Both cases landed on the list of the ten biggest FCPA cases of all time.

The ABCI increased by four percentage points to 68%, thanks to corporate hotlines, dedicated in-house compliance functions and improved policies and procedures. According to the survey results, the index either rose or stayed about the same across all sectors, with the scores for different sectors ranging from 60% (automotive) to 86% (telecom).

The telecom sector is still in the lead at 86%, thanks to a decline in corruption-related publicity. The telecoms managed to strengthen their position thanks to the closing of recent anti-corruption cases.

Pharma companies improved their ABCI performance to 72% (up 7 percentage points) thanks to new compliance policies and procedures and the deployment of corporate hotlines. Traditionally, Russian pharma companies have been encouraged to place a strong emphasis on compliance by their parent companies and foreign business partners. In addition, the major market players (large international pharma companies) impose rigid compliance requirements on their subsidiaries and local distributors.

As noted in the 2016 PwC Global Economic Crime Survey, companies are increasingly using corporate hotlines to allow staff to report internal violations to management. The higher scores for the automotive industry (up from 53% to 60%) and energy and utilities (up from 59% to 64%) are largely the result of successful corporate hotline programmes.

As was the case last year, state (70%) and public companies (70%) achieved high scores. The index for Russian companies rose to 66%, thanks to improvements in policies and procedures as well as in risk assessment.

The ABCI score rose to 68%

2 http://www.fcpablog.com/blog/2017/1/3/the-2016-fcpa-enforcement-index.html

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How ABCI scores changed across the largest companies?

State companies

2017 2016

70% 70%

66%

71% 70%63%

Listed companies Russian companies

Several key index components improved significantly in 2017, thus pushing the overall index up. Leading Russian companies have taken steps to implement policies and procedures (up from 63% to 72%) and in-house compliance teams (up from 50% to 60%). These steps are the building blocks of robust compliance frameworks and may drive future increases in other index parameters.

As noted above, one essential element of a good compliance framework is the use of hotlines.3

Companies typically do not disclose compliance-related communications or compliance risk assessments. As a result, the scores for these parameters are much lower than for other dimensions.

During our research, we discovered that the mass media are paying increasing attention to investigations involving bribery and corruption.

Key index parameters improved for top Russian companies

72%

72%

33%

60%

33%

69%

63%

24%

50%

20%

Hotline

Policies and procedures

Compliance-related message from top management

Compliance function

Non-compliance risk assessment

What were the contributors to ABCI score in 2016 and 2017 (share of maximum possible score)?

2017 2016

3 For recommendations on using hotlines, please see the 2016 version of the survey at https://www.pwc.ru/en/forensic-services/publications/abci2.html


Last year, top Russian companies focused on developing and adopting new compliance policies and procedures, which led to an increase in this parameter across all industries.

These improvements were driven by strong regulatory incentives to develop compliance programmes, as well as by business owners who understand the obvious benefits of enhanced transparency. Compliance policies and codes of ethics are basic elements of effective compliance control programmes.

Due diligence (on counterparties and business partners) is another key element that can help companies to mitigate compliance risks.

Our survey explored how some large companies operating in Russia have implemented systems to screen counterparties and identify conflicts of interest.

One of the most significant drivers of growth in the index is the adoption of compliance policies and procedures

100%

79%

81%

72%

62%

85%

48%

100%

66%

68%

62%

58%

65%

44%

Telecommunications

Retail & consumer

Pharmaceuticals

Mining and metals

Financial services

Energy and utilities

Automotive

How compliance policies and procedures were implemented by large Russian companies?

2017 2016

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Integrity and affiliation due diligence of counterparties: Russian practices

According to the 2016 Russian Economic Crime Survey, 33% of fraud cases are committed by external perpetrators, including customers, vendors and other third parties. Procurement poses an especially high risk of fraud (95% of the respondents reported that most cases of procurement fraud were related to vendor selection). Our experience shows that tax, financial and reputation risks in dealings with business partners are best identified and mitigated by conducting counterparty integrity due diligence and identifying conflicts of interest.

We asked representatives of large companies operating in Russia to share their experience in this area. We managed to gather opinions from a range of specialists, including CFOs and directors from compliance, legal and security departments.

Below, we present detailed survey results and our key observations.

Distribution of respondents by industry

47%* Subsidiaries of foreign companies

53% Russian companies

15%

7%

11%

32%

11%

10%10%10%

Retail & Consumer

Financial services

Automotive

* percentage of the total number of respondents

Mass Media and Telecom

Construction and building materials

Other

Transport & Logistics

Pharmaceuticals


The second most popular reason (61%) to conduct counterparty integrity due diligence is to identify and prevent conflicts of interest. Our survey reveals that many companies have already uncovered episodes where employees have influenced decisions for personal benefit (please see the section on “Conflicts of interest in companies: not a rare thing”).

The third most important reason for checks is to comply with regulations (54% of respondents). One-third of the surveyed companies are subject not only to Russian anti-corruption laws but also to foreign laws such as the US Foreign Corrupt Practices Act (FCPA) or the UK Bribery Act (UKBA).

Integrity due diligence: adding true value for business

What is the key objective for conducting counterparty integrity due diligence in your company? (choose one or several options)

Identification of unreliable counterparties to mitigate financial risks

Identification and prevention of conflicts of interest

Compliance with regulations

Identification of counterparties possibly related to government officials

Other

92%

61%

54%

24%

3%

Almost all our respondents (97%) report that their companies perform counterparty integrity due diligence. This suggests that companies believe that collecting and analysing information about business partners is not merely a legal obligation, but is also good for business.

The vast majority (92%) of our respondents say that the main reason to conduct checks is to identify unreliable counterparties in order to minimise financial risks. Counterparties that are financially unstable or insolvent can directly affect the ability of companies to meet their commitments. As such, most companies prefer to assess and mitigate counterparty risk in advance.

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Is your company subject to the anti-corruption laws of countries other than Russia? (choose one or several options)

Do your agreements with business partners or clients mention that your company must comply with anti-corruption laws?

No FCPA UKBA OtherDo not know

39%

67%

5%

28%

35% 29% 17% 17%

35%

54%

25%

65%

46%

75%

Subsidiary of a foreign company

Russian company

Yes

No

Do not know

These companies are exposed to additional risks when dealing with third parties (clients, service providers, distributors, etc.).

For instance, they must be especially careful to make sure that their distributors have not been involved in acts of corruption. If they fail to take adequate steps to identify and prevent non-compliance by their distributors (or intentionally ignore such non-compliance), they could face regulatory penalties.

The survey also revealed that 67% of our respondents include anti-corruption clauses in their third-party agreements. A less often cited but still important reason to conduct due diligence is to identify counterparties who are possibly related to government officials (noted by 24% of our respondents). Employees at foreign subsidiaries turned out to be more interested (59% of positive replies) in investigating relationships between counterparties and government officials than their peers at Russian companies.


In-house counterparty due diligence: the choice of Russian companies

Who conducts counterparty integrity due diligence in your company? (choose one or several options)

Security department

Legal department

Counterparty relationship management business unit

Risk management or compliance department in Russia

Other

External consultants

Risk management or compliance department abroad

58%

36%

31%

28%

11%

8%

5%

Despite the importance of conducting objective and independent reviews, companies rarely turn to external sources for assistance. Only 8% of our respondents (all at foreign subsidiaries in Russia) use external consultants to carry out checks. The vast majority of respondents (92%) conduct their checks internally, although they draw upon different company resources to do so.

As it turns out, companies most often use their security services (58% of respondents go this rather traditional route). Russian companies are twice as likely as representative offices or foreign subsidiaries to involve their security teams in counterparty due diligence (37% versus 21%).

The second most common structure that organisations use for conducting due diligence is their legal department (36%). The proportion of Russian companies (17%) and foreign subsidiaries (19%) that use their legal departments is approximately the same.

Almost one-third of our respondents (31%) say that they perform checks of their business partners through the very business unit that is responsible for relationships with business partners. Such arrangements call into question the ability of such companies to meet with the independence requirement. Counterparty due diligence conducted for the sake of formality might be insufficiently objective or even contain distorted information about the counterparty.

Dedicated compliance teams appear to be involved slightly less often: 28% of our respondents use compliance teams based in Russia, while another 6% turn to teams based elsewhere.

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Our survey suggests that most respondents deploy automated solutions to conduct internal checks. Among the most popular tools are analytic databases such as SPARK-Interfax, Kontur-Focus, Integrum, World-Check and Dun & Bradstreet. These solutions are used by 82% of our respondents, whereas only 8% use specialised software.

Identifying hidden relationships between counterparties and company employees is an important part of anti-corruption programmes.

Conflicts of interest in companies: not a rare thing

We found that most companies (65%) have already implemented procedures on declaring conflicts of interest. Employees at such companies regularly account for the financial interests and executive positions they hold in other companies. Formal procedures to be followed when conflicts of interest are identified have been established in 39% of companies. Almost one-third of our respondents (29%) have not yet implemented any of these procedures in their companies, and another 6% of respondents were undecided.

Apart from special procedures on declaring conflicts of interest, 43% of our respondents perform additional independent checks to identify conflicts of interest. However, the proportion of companies that do so is only slightly higher than those that do not (40%). Another 17% of respondents could not answer whether their company performs independent reviews to identify conflicts of interest.

Our survey suggests that conflicts of interest regularly occur in many of the surveyed companies. Indeed, almost half (49%) of our respondents have identified relationships between their employees and counterparties in the last two years. Employee-to-employee conflicts of interest (i.e. family or other close ties between employees and their direct reports) were uncovered in 19% of our surveyed companies. One-quarter of our respondents have not identified any conflicts of interest in the last two years, while 21% of our respondents could not answer the question.

Does your company use any automated solutions for collecting and analysing information about counterparties? (choose one or several options)

82% 14% 10% 8%

Yes, we use analytical databases

No, we don’t use automated solutions

Yes, we use softwareOther


Do not knowDo not know

Yes, conflict of interest declaration

Yes,conflict of interest declaration and resolution

NoNo

Yes

Identifying conflicts of interest

Yes, the company has identified counterparty-to-

employee conflictsNo

Do not know

Yes, the company has identified employee-to-

employee conflicts

Does your company have a conflict of interest declaration and resolution procedure in place?

Does your company conduct independent reviews to identify conflicts of interest?

Has your company identified conflicts of interest over the past two years?

17%

21%

6%

26%

39%

40%

25%

29%

43% 49%

19%

Identifying conflicts of interest: lack of automation and monitoringWhen speaking about identifying conflicts of interest, our respondents mainly referenced the need for:

• automated procedures for identifying conflicts of interest;

• regular monitoring;

• increased employee awareness and accountability.

About one-third of our respondents who have not yet adopted procedures on declaring and resolving conflicts of interest said they intend to put such procedures in place.

Some companies have made such procedures mandatory not only for executive personnel but also for line functions, including those in regional offices.

One of most popular demands is for automation. Certain respondents would like to speed up the process, increase detection numbers and perform independent checks to verify relationships that have already been uncovered.

Another commonly cited recommendation is the continuous monitoring of conflicts of interest and a programme of regular rather than ad hoc checks. Some respondents also want to raise employee awareness and conduct trainings.

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Only half (51%) of our respondents said that their existing integrity due diligence systems meet their company’s needs.

Almost one-third of our respondents (28%) mentioned that they were unsatisfied with their existing systems, while another 14% could not say whether their systems were satisfactory. About 7% of our respondents highlighted specific features and deficiencies in their existing systems, but were undecided about their overall value.

Our respondents are also looking to automation and regular monitoring as a way to improve counterparty integrity due diligence. They would like to use specialised software to collect and analyse information about business partners. A number of respondents would like to have an intranet for counterparties, while others would like to be able to have automated checks of sanctioned companies and individuals.

Many respondents included such measures as regular rather than ad hoc partner checks and continuous risk monitoring activities in the list of potential improvements. Representatives of some companies also pointed to the lack of clearly defined and transparent counterparty assessment criteria or inconsistent approaches. Certain respondents additionally said that they would like to build and use a rating or scoring system for business partners.

Among other things, respondents emphasised the need for quick due diligence reviews and quality public information (they expect to see an increase in the number of analytic databases and online government services). Another common opinion was voiced about the business value of due diligence reviews. Respondents said that they would like to change the formal approach to checks and make them more meaningful.

What does a robust approach to integrity due diligence look like?

Do you think that your company’s existing system for counterparty integrity due diligence meets your company’s needs?

Do not know

Other

No

Yes

14%

7%

28%

51%


Conclusion

Our survey shows that anti-corruption trends are the same in Russia as in the rest of the world. According to a PwC global survey,4 five forces will reshape the global landscape of anti-bribery and anti-corruption in the next five years: the further improvement of international anti-corruption laws, more effective societal action against corruption, emergence of new technology, increasingly cashless societies and, as a result, more ethical and transparent businesses.

Following their international peers, Russian regulators have placed an increased focus on combating corruption. For example, in January 2017, they initiated amendments to Federal Law No. 208-FZ “On Joint-Stock Companies”. In June 2017, a new bill was submitted to the State Duma. One of the proposed amendments introduces a requirement in public joint-stock companies to implement compliance systems.5 We expect that these amendments will have a positive impact on the ABCI for public companies and for private entities planning to go public.

The growing number of media publications about corruption and numerous independent anti-corruption investigations indirectly signal that the Russian public has become increasingly engaged in the fight against corruption. Our survey found that companies are also looking to adopt technological solutions for compliance control, especially for counterparty integrity due diligence and conflicts of interest. Respondents say that automation is the most popular business demand for improving existing screening procedures. Over the next few years, we expect that the adoption of new technology among Russian and international companies will help to increase the level of satisfaction with due diligence outcomes, as well as to enhance the transparency of business. In turn, this will have a positive impact on the ABCI.

4 https://www.pwc.com/gx/en/services/advisory/forensics/five-forces-that-will-reshape-the-global-landscape-of-anti-bribery-anti-corruption.html5 http://privlaw.ru/wp-content/uploads/2017/05/2.-%D0%BF%D1%80%D0%BE%D0%B5%D0%BA%D1%82-%D0%A4%D0%97-%D0%BE%D0%B1-%D0%90%D0%9E.pdf

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Selection of companiesIn total, we surveyed 125 companies. Included in this selection is 20 of the largest Russian companies by sales volume in the following industries: retail and consumer goods, financial services, automotive, energy and utilities, mining and metals, and pharmaceuticals, as well as the top five telecommunications operators.

Selected parameters in the ABCI and their weightsBased on relevant anti-corruption legislation (Russian anti-corruption law, the FCPA, and the UKBA), we developed and analysed company performance on the following five parameters: corporate hotline for reporting internal violations to management; compliance-related message from top management; in-house compliance function; compliance risk assessment; and policies and procedures.

We analysed company websites to assess whether they disclose the above-mentioned information.

To ensure that our ABCI data closely reflects actual corporate practices, we also searched for negative news coverage or publicity related to bribery and corruption cases in which the surveyed companies may have been implicated, relying solely on reputable, trustworthy media sources.

We considered only corruption cases that occurred between January 2014 and December 2016. Moreover, we factored in only those cases that occurred in Russia for multinational companies, while we considered foreign corruption cases for Russian companies with foreign subsidiaries.

Survey methodologyOur survey consisted of 12 questions dedicated to four main topics: integrity due diligence, identification of conflicts of interest, use of automated solutions for counterparty due diligence and companies’ subjection to global anti-corruption legislation.

Seventy-two representatives of large companies operating in over ten Russia industries participated in the survey (e.g. metallurgical industry and mining, retail and consumer goods, industrial production, automotive, oil & gas and energy industry, transport and logistics, pharmaceutical industry, chemicals sector, technology, mass media and telecommunications, construction and building materials production, finance and other sectors).

We managed to gather opinions from a range of specialists, including CFOs and directors of compliance, legal and security departments.

The purpose of this survey is to illustrate indicative trends in Russian anti-bribery and anti-corruption environment.

ABCI methodology

ContactsIrina Novikova PartnerForensicsPwC in RussiaPhone: +7 (495) 232 5735 Fax: +7 (495) 967 6001 [email protected]

Roy Muller PartnerForensicsPwC in RussiaPhone: +7 (495) 967 6078Fax: +7 (495) 967 6001 [email protected]

Tatiana VostrovaDirectorForensicsPwC in RussiaPhone: +7 (495) 223 5086Fax: +7 (495) 967 [email protected]

Marina ZvyagintsevaSenior ManagerForensicsPwC in RussiaPhone: +7 (495) 967 6000, доб. 2275Fax: +7 (495) 967 6001 [email protected]

Dmytro DovbniaManagerForensicsPwC in RussiaPhone: +7 (495) 967 6000, доб. 2644Fax: +7 (495) 967 6001 [email protected]

© 2017 ООО PricewaterhouseCoopers Advisory. All rights reserved.

PwC Russia (www.pwc.ru) provides industry-focused assurance, tax, legal and business consulting services. Over 2,500 professionals working in PwC offices in Moscow, St Petersburg, Ekaterinburg, Kazan, Novosibirsk, Rostov-on-Don, Krasnodar, Voronezh, Vladikavkaz and Ufa share their thinking, experience and solutions to develop fresh perspectives and practical advice for our clients. The global network of PwC firms brings together more than 223,000 people in 157 countries.

* PwC refers to ООО PricewaterhouseCoopers Advisory, or, as the context requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a separate legal entity.

www.pwc.ru/en/services/forensics

Anti-Bribery and Corruption Index (ABCI) - PwC · 2017-09-28 · 2 Anti-Bribery and Corruption...

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