Corruption and bribery risks rise for Canadian firms working abroad

A volatile economy and overseas expansion acquisition aspirations are increasing threats of corporate fraud

Canadian companies are taking bigger fraud and corruption risks when expanding overseas.

According to Ernst and Young's latest bi-annual global fraud survey, nearly half of Canadian executives are putting their reputation and businesses at risk by not looking into potential fraud and corruption-related problems in the international companies they're looking to acquire.

That contrasts with the 77% of U.S. firms that always conduct fraud-focused analysis before closing a deal.

The differences exist even though most executives on both sides of the border recognize the risks of fraud and corruption when making an acquisition.

"Canadian companies seem to be very aware of the risks posed by fraud, bribery and corruption," said Mike Savage, a partner in Ernst and Young's fraud investigation and dispute services practice. "But they expose themselves by not taking some critical steps."

With more than half of Canadian companies' M&A deals involving U.S. firms, executives might assume the fraud risks are relatively low south of the border given the maturity of the U.S. market and the extensive anti-corruption and anti-fraud laws in that country.

But according to Organization for Economic Co-operation and Development (OECD) data, U.S. individuals and firms form the largest group over the past decade that have been found guilty of bribing foreign officials under the OECD's anti-bribery convention.

And the corruption and bribery risks for Canadian firms grow significantly for those looking to expand into emerging markets around the world. Globally, 39% of the 1,700 international respondents to the Ernst and Young survey reported that bribery and corrupt practices occur frequently; 24% said the problem has worsened because of the global economic downturn.

Countries reported where bribery was most prevalent included Brazil, the Czech Republic and Indonesia (see table).

With a persistently difficult global economic climate, even more executives are willing to tread into unethical territory. The survey noted that 15% of respondents were willing to make extra cash payments to win or retain business, up from 9% in 2010. About 60% of Indonesian respondents said they were willing to do this, followed by 28% of respondents in India and Vietnam.

About a third of respondents said they were willing to provide extra entertainment to win or retain business, up from 20% in 2010. This was most likely in Vietnam, India and Indonesia.

"We're not suggesting that businesses should not go into those countries, because if you're going to grow, these are exactly the places that you should be looking into," said Savage. "All we're advocating is if you are going to go in, go with your eyes wide open, know the risks and put in place some internal controls to manage the risks."

Savage noted that executives looking into overseas acquisitions should be increasing their due diligence because a growing proportion of businesses around the world are also letting down their guard. For example, more than half of executives in China and India said they no longer do pre-acquisition fraud analysis. That's up from 25% and 30%, respectively, in 2010.

This is despite increasing fraud-related legislation coming into force. China, for example, only recently criminalized bribery of foreign government officials under Chinese law, and starting this year, the government began integrating the country's provincial databases of bribery offences into a national record aimed at improving information access.

While any analysis can include detailed audits of a company's financials for suspicious payments and costs, Savage noted that thoroughly understanding a target company's business practices and the integrity of key personnel are equally important. There will be cultural differences, but executives should be able to determine whether a corporate culture's attitude to fraud and corruption aligns with that of the parent company.

Savage said that acquiring companies can set up policies around fraud and corruption.

But he added that "Where staff have gotten into a way of doing things, saying 'This is how it's always been done,' and there is a resistance to change, sometimes more attention is needed to ensure they don't just say, 'Yes, yes, yes' and slip back into the old ways.

"There's a natural human tendency to do exactly that, and without helping them to integrate into your way of doing things, after a year or two of leaving them alone, you might be much more accountable to what they might be doing wrong." •

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