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Corruption

The way a company manages its exposure to corruption can lead to either disaster or triumph ... Petrobras is facing its biggest corruption scandal in history

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Peter Burgess

Corruption reputation risk and opportunity

The way a company manages its exposure to corruption can lead to either disaster or triumph

Petrobras is facing its biggest corruption scandal in history

What elements should global oil and gas companies take into account to manage reputation risk and corruption risk? What are the necessary due diligence themes that need to be addressed to mitigate these risks?

Ingrid Lorena Dumas, Chief Compliance Officer of Ecopetrol, Colombia

Corruption risk and associated reputational risk are at an all-time high for businesses globally as governments apply multiple and sometimes contradictory laws to companies doing business in different jurisdictions. As recent high-profile scandals show, corruption and bribery run especially deep in the oil and gas and extractive industries, where economic gains are potentially high and value chains are long and complex.

Put simply, corruption entails paying or promising to pay money or other value to public or private officials in exchange for favours. Recently, several jurisdictions, such as the UK and Brazil, have expanded the traditional definition of corruption – the US Foreign Corrupt Practices Act only targets public officials, for example – to also include private corruption.

Reputation risk is “an amplifier risk that layers on or attaches to other risks – especially environmental, social and governance (ESG) risks – adding negative or positive implications to the materiality, duration or expansion of the other risks on the affected organization, person, product or service.” (Andrea Bonime-Blanc. The Reputation Risk Handbook: Surviving and Thriving in the Age of Hyper-Transparency. DŌ Sustainability, 2014)

The reputation risk from corruption goes along with other risks, especially ESG risks. Reputation damage typically arises when a company pretends to have proper anti-corruption measures in place but gets caught in a corruption scandal. As a result, the company incurs fines and suffers business losses, such as plummeting stock market prices. For example, last year the French industrial group Alstom agreed to pay a record $772.3m fine for bribing officials to win power and transportation projects from state-owned entities around the world.

The corollary to such risks is the reputation opportunities associated with corruption – where a company has proper anti-corruption programmes and detectors in place that systematically investigate and report corruption incidents, when necessary, to the authorities. In this case, companies both meet their stakeholders’ expectations and enhance their reputation and business value. In 2012 Morgan Stanley and in 2013 Ralph Lauren, for instance, investigated bribery incidents within their companies and voluntarily disclosed their findings to the government.

There are two critical measures that allow any company to protect and enhance its reputation in the face of a corruption incident: a demonstrable commitment from the C-suite and the board to doing ethical business and the use of effective internal programmes to detect and prevent corruption.

Turning the corruption challenge into a reputation opportunity

There are many and different opportunities for bribery and corruption in the oil and gas industry, each of them with related reputation consequences. Being prepared for corruption risks means protecting or even enhancing the company’s reputation.

First, the central role of government agencies in overseeing virtually all aspects of the oil and gas sector presents multiple risks and opportunities for bribery and corruption. As governments at all levels grant or deny rights to oil and gas companies, businesses have an opportunity to improve their reputation by implementing an effective and predictable due diligence coordination and execution protocol that understands the role of the government. In practice, this means coordination of the legal, compliance, finance, project and business development aspects of the business.

Second, the complex, extensive and diversified oil and gas supply chains mean that the sector is well exposed to third-party corruption. To mitigate these risks, companies should implement well-defined policies and effective platforms to proactively manage and oversee third parties in all aspects of the business.

Third, oil and gas companies are especially prone to suffering reputational losses from environmental, health and safety (EHS) corruption-related incidents. Again, there is an opportunity to enhance reputation by putting in place strong auditing and other EHS controls.

Finally, community relations at the local level can be fraught with human rights, labour rights, security and corruption issues. To mitigate these risks, businesses should develop comprehensive community engagement strategies that work in parallel with their corporate anti-corruption policies. The Petrobras case: corruption reputation risk in action

A widening corruption scandal is swirling around Brazil’s state-run oil giant Petrobras is amid allegations that former senior executives, construction companies and politicians funnelled kickbacks from hefty oil contracts.

According to the police, federal prosecutors and the testimony of former company executives involved in the scheme, Petrobras officials conspired with service companies to overcharge for goods and services. Some of the extra revenue from the inflated contracts was then kicked back to executives and politicians as bribes and campaign contributions. Brazilian authorities said on 29 January that the kickback scheme involved at least $800m in bribes and other illegal funds, but the figure could change as the case develops. Several top executives from some of Brazil’s biggest construction and engineering companies remain jailed as the investigation continues.

The scandal has dealt Petrobras a heavy financial blow. The company said it would cut its investments in 2015 because of its current financial situation and losses resulting from the corruption case. In an effort to repair its reputation, Petrobras has also hired a compliance officer to head the company’s first compliance programme.

Yet, a smart, long-term strategic solution would require the CEO and the board to proactively lead the anti-corruption effort in a broader, holistic manner, investing in creating a sustainable culture of integrity – with all the right policies, incentives and performance metrics in place for the long term.

Anti-corruption risk tools for better reputation resilience

Tone from the top: boards and C-suites need to commit to anti-corruption not just through branding and marketing, but also in core business activities. This includes voluntary disclosures to government and enforcement agencies.

Global anti-corruption policy and plan: coordinating with all relevant internal functions: legal, compliance, finance, PR, external relations, HR and communications.

Anti-corruption due diligence for mergers and acquisitions: coordinating with legal and finance departments to incorporate ethics and compliance measures into due diligence.

Proactive third-party management: if a software or other third party management tool is in place, ensure that it is well understood, thoroughly tested, properly implemented and shared across the business.

Dr Andrea Bonime-Blanc is chief executive of GEC Risk Advisory, recently authored The Reputation Risk Handbook: Surviving and Thriving in the Age of Hyper-Transparency and tweets @GlobalEthicist.

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Corruption reputation risk and opportunity | Ethical Corporation ethicalcorp.com What elements should global oil and gas companies take into account to manage reputation risk and corruption risk? What are the necessary due diligence themes that need to be addressed to mitigate these risks? Ingrid Lorena Dumas, Chief... Like Comment (1) Share Unfollow Reply Privately1 day ago Comments 1 comment

Peter Burgess Peter Burgess Founder/CEO at TrueValueMetrics developing Multi Dimension Impact Accounting

I was fifteen years into my career before I realized the scale of the corruption problem ... and decades later I am disgusted at how so little progress has been made to get to grips with the problem.

In my view, one of the reasons why corruption flourishes is that rule of law itself has been severely compromised by systems of law making that in themselves have become a corrupt process. I remember the first time I was asked what 'I wanted the law to be' by a law maker who could make things happen 'for a price' and if this is happening to relatively small me, then the mind boggles at what is happening for much bigger people in much bigger companies!

While organizations like the World Bank, the United Nations, USAID and the rest seem to be working 'within the law', they have been loath to be pro-active in getting the corruption problem solved. Several times in my career I had the data (I am an accountant after all) to show exactly where project moneys were going but getting these organizations to pay attention was impossible. Nobody seemed to want the corruption issue to blow up on their watch. Sad.

The US Foreign Corrupt Practices Act sounds like it would be a big constraint on corruption ... but it is, like so many other US laws, designed to sound good while being almost totally ineffective. Why would it be any other way given the almost total control of the US Congress by corporate interests.

Big banks are another place where grand corruption should be thwarted ... but rather than helping in the fight, big banks seem to be complicit. The concept of 'know your customer' is interesting. A big bank can feel totally comfortable serving a rich corrupt customer because such a customer is not going to make waves. Bank privacy rules being what they are means that inquiries about potentially corrupt transactions are thwarted until all sorts of legal hoops have been jumped through ... and the corruption goes on because corruption and the moneys involved are really good for bank profit performance. Yes ... some banks are getting fined ... but the legal process takes a very long time, and the damage has already been done ... and typically, the people involved in the banks are not held accountable at all.

I would love to see a comprehensive accounting for the Petrobas corrupt money flows ... and then the same data for all the other big oil companies on the planet. It would be very interesting!