Bribery? They could write what they know on the back of a brown envelope

Despite high-profile scandals such as BAE, many British multinationals remain blissfully unaware of the fraud dangers lurking overseas. Simon Evans reports
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Despite presiding over a renaissance in the fortunes of BAE Systems in which its share price scaled new heights, Mike Turner's time as chief executive of the defence giant, which ended last week, will always be tarnished.

The probe by the Serious Fraud Office in Britain may have been kicked into the long grass but officials at the US Department of Justice are pursing an investigation into whether BAE paid millions of pounds in bribes to Saudi officials.

Bribery scandals have also been rooted out recently at the German engineering group Siemens, while eight arrests were made at the Chinese operation of French supermarket group Carrefour, where managers were allegedly taking kickbacks.

And while British firms happily talk up their position in the vanguard of operations in emerging markets, the dangers faced by these companies from bribery and corruption are often ignored.

According to a report, "Economic crime: people, culture and controls", by the accountants PricewaterhouseCoopers (PWC), UK companies remain worryingly complacent about the threat posed abroad. As a result, plenty more chief executives could soon find their heads on the chopping block, or, at the very least, answering some awkward questions.

"British companies place far too much emphasis on anti-fraud controls they've had in place at home," says Tony Parton, a partner at PWC and author of the report. "Granted, British firms spend more than in the past and more than most other countries [on anti-fraud measures], but fraudsters are getting increasingly clever and sophisticated. And, you've got to remember, poverty is a real incentive to commit crime in some of these countries."

Mr Parton adds: "We investigated a crime in China where over 100,000 fictitious documents had been created. Saving face is a real issue in many countries, so companies need to set realistic targets for employees or else they face the prospect of people inflating the numbers."

PWC also worked recently with a British company that has subsidiaries in emerging markets. Locals on the ground, it transpired, had dramatically overplayed sales over a four year period. The investigation resulted in a £50m write-off.

Despite the mounting evidence to the contrary, just 17 per cent of British firms responding to survey questions from PWC believe they are likely to experience a financial crime; yet nearly 50 per cent of the companies responding have suffered from fraud.

After a recent four-year stint working in China, Mr Parton says bribery remains a cornerstone of the business culture. The concept of guanxi – meaning network or relationship – is sometimes put ahead of transparent behaviour.

The jury also remains out on Chinese government attempts to clean up the system through the recent launch of a new anti-corruption unit. "The evidence suggests that corruption isn't diminishing in any way," Mr Parton says. "It's difficult to tell whether the new body will have any teeth to unearth the problems."

Cosmetic it may be, but judging by the recent execution of the former head of China's drug administration, for taking bribes for faulty medicines, businesses could face a much tougher time in the years to come.

"The penalty was draconian and it sent a message," observes Mr Parton. "But it's difficult to tell what the authorities will do. It's very ad hoc."

Ad hoc also seems to be the phrase when it comes to the approach of some UK companies to bribery and corruption practices. However, one consultant who specialises in mitigating fraud risk abroad believes this might be changing.

Ken Farrow, the director of fraud services at Control Risks, the corporate investigator, says: "We are at last seeing a realisation from some UK companies of the need to do better due diligence and investigations in these countries.

"These places aren't like Britain, where there are easily accessible databases of information. Firms are realising that they have to get their houses in order or face the consequences," he says.

"We are seeing more people investigate whether local employees are in the pockets of central and regional governments, for example."

But, Mr Farrow adds, companies face a dilemma when they root out any wrong-doers.

"It's difficult for firms to know how to deal with people committing fraud within their company. You simply can't get effective law enforcement in these countries. So it's not a case of sweeping under the carpet but finding appropriate ways to deal with the issue internally."

According to Mr Parton, publicising corruption within your organisation is the best way to avoid being targeted by criminals.

"Companies that have shown themselves to have a zero-tolerance policy, and who have publicised any wrongdoing, seem to have fared well because they lose the tag of bribe payer."

While British corporates face a burgeoning threat abroad, the risks at home have dramatically increased too, according to the PWC report.

In recent times, the City of London may have benefited from the rapid inflows of cash from far-flung places such as Kazakhstan, but the new money will present new issues in the future.

And while the City has feasted on the fruits of listings and corporate growth, the influx of new workers, many of whom are transient, poses big risks.

"The profile of the typical fraudster has changed a lot," says Mr Parton. "On the plus side, we've seen a significant reduction in senior management fraud. But the more flexible [job] market has changed things.

"The typical fraudster is now 36 years old, more highly educated, and will have been with the organisation and in position for just under two years."

The UK faces another threat in the coming years too, the PWC report suggests. Preparation for the Olympics has begun in earnest, with tens of thousands of people set to be employed in the construction and infrastructure projects for the London games. But unwanted guests could be homing in on the East End too, hoping to grab a piece of the estimated £9bn pie.

"There are some huge projects under way for the Olympics and it's bound to be targeted by fraudsters," says Mr Parton. "Engineering and construction industries suffer the second- largest amount of fraud in any sector. There's a real threat to London's Crossrail project too."