Fighting Corruption in the Supply Chain: A Guide for Customers and Suppliers SECOND EDITION About the United Nations Global Compact The United Nations Global Compact is a call to companies everywhere to align their operations and strategies with ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption, and to take action in support of UN goals and issues embodied in the Sustainable Develop- ment Goals. The UN Global Compact is a leadership platform for the development, implementation and disclosure of responsible corporate practices. Launched in 2000, it is the largest corporate sustainability initiative in the world, with more than 8,800 companies and 4,000 non-business signatories based in over 160 countries, and more than 80 Local Networks. www.unglobalcompact.org. Disclaimer This publication is intended strictly for learning purposes. The material in this publication may be quoted and used provided there is proper attribution. The advice contained in this guide reflects the views of the spon- soring taskforce and not necessarily those of the United Nations Global Compact. Copyright © 2016 United Nations Global Compact Office 685, 3rd Avenue, 12th Floor New York, NY 10017, USA anticorruption@unglobalcompact.org Design Support: Aaron Adams (UN Global Compact) 3 Fighting Corruption in the Supply Chain 4 Fighting Corruption in the Supply Chain Table of Contents Executive Summary 6 Introduction 8 Section 1: The Business Case for Fighting 10 Corruption in the Supply Chain The Impact of Corruption in the Supply Chain 10 What Customers Can Do 10 The Supplier’s Perspective 11 The Value of Collective Action 11 Section 2: Customer-Supplier Engagement 12 Assessing Risk – Questions to Ask 12 Questions about the Engagement 12 Impact of Corruption in the Engagement 14 What Customers Can Expect 14 The Importance of Cooperation 14 Supplier Education 14 Responding to Supplier Objections 15 A Holistic Approach to Supply Chain Management 15 Section 3: Guidance on Preventing and Responding 18 to Corruption in the Supply Chain General Company Anti-Corruption Policies 18 Specific Policies for Company Representatives Involved 19 in Purchasing and Bidding Processes Risk Assessment and Due Diligence 20 Additional Controls for Purchasing and Bidding 20 Supplier Management and Control Processes 21 Contractual Precautions 21 How to React if a Corrupt Demand is Made or Corruption Occurs 22 Scenarios 23 Corruption During the Vendor Selection Process 23 Scenario 1: Procurement manager demands kickback 23 from supplier to secure contract or provide inside information on bidding process. 5 Fighting Corruption in the Supply Chain Scenario 2: Supplier offers kickback to procurement manager 23 to secure contract or provide inside information on bidding process. Scenario 3: Supplier offers gifts or entertainment to 24 procurement manager. Scenario 4: Procurement manager selects supplier 24 because of personal/family relationship. Corruption during Contract Performance 24 Scenario 5: Monopoly supplier demands that purchaser pay 24 bribe or kickback to secure goods or services. Corruption During Contract Performance 25 Scenario 6: Supplier Submits False Invoice for Work Done 25 or Employee Work Hours Corruption Involving Bribery of Goverment Officials or 25 Other Third Parties Scenario 7: Customer learns of corrupt payment by a 25 distributor to government official Scenario 8: Customs official demands bribe from supplier 26 to speed goods through customs or to pass nonconforming goods through customs Scenario 9: Supplier bribes government official to pass 26 health and safety inspections Practical Guidance on Preventing and Responding to Corruption 28 in the Supply Chain – What more should prudent suppliers do? Hallmarks of an Effective Anti-Corruption Compliance Programme Addenda 30 Resources 30 Tools 31 Sample Documents 32 Supplier Education 36 Acknowledgements 38 6 Fighting Corruption in the Supply Chain Executive Summary Global business is accomplished through Boards of Directors, CEOs and business leaders the elaborate networks of the supply chain who are concerned now more than ever about — the persons, entities and infrastructure maintaining the sustainability of their busi- that transform materials and human capital ness while protecting the reputation of their into intermediate and finished products and organizations. Indeed, reputation risk acts as services for customers and consumers. The an accelerator and amplifier of the underlying problem of corruption affects every business supply chain corruption risk. Leaders are in- in the supply chain and every aspect of busi- creasingly aware of the dangers of reputation ness in the supply chain. However, it can be risk associated with such underlying risks tackled when all actors work together. and the importance of meeting stakeholder This guide for reducing corruption risk expectations concerning their mitigation in the supply chain has been created by the and effective management.1 These amplified United Nations Global Compact 10th Prin- concerns can only be effectively addressed if ciple Working Group. The guide is intended all stakeholders work together. for both customers and suppliers. Businesses The very significant corruption risks in of all sizes should find helpful guidance and the supply chain include procurement fraud practical tools, although multinational com- perpetrated by suppliers, often in league panies (MNCs) may find more information with the customer’s own employees, and that is of immediate use. suppliers who engage in corrupt practices The guide contains an introduction, fol- involving governments and other public ac- lowed by three sections and addenda. The tors. The direct costs of this corruption are introduction and first two sections outline considerable, but are often dwarfed by the the business case for fighting corruption in indirect costs related to management time the supply chain, and provide a framework and resources dealing with the issues, such for customer-supplier engagement on these as legal liability and irreparable damage to a issues. These sections will be of interest to company’s reputation with both tangible fi- both strategic executives and to programme nancial and intangible long-term stakeholder administrators and technical personnel. The consequences. Firms that engage their supply final section and addenda offer detailed guid- chain through meaningful anti-corruption ance on (i) common supply chain corruption programmes can: scenarios; (ii) the hallmarks of an effective • Improve product quality anti-corruption compliance programme; and • Reduce fraud and related costs (iii) a set of tools for fighting corruption. These • Enhance their reputations for honest business sections are directed toward programme • Build internal resilience to meet and man- administrators and technical personnel. age inevitable crises • Improve the environment for business • Create a more sustainable platform for The Business Case future growth The global public is increasingly demanding transparency, accountability and trust in Suppliers will see parallel advantages from business. This is particularly true in the age the fight against corruption. Those who en- of hyper-transparency and super-connectivity gage honestly with their customers and with where business misconduct is identified and public actors benefit their own reputations, broadcast on a global basis within hours and which is to their ultimate advantage. even minutes of its discovery. The risk of cor- ruption has taken center stage in the minds of 1. Andrea Bonime-Blanc. The Reputation Risk Handbook: Surviving and Thriving in the Age of Hyper-Transparency. Oxford: DŌ Sustain- ability 2014. 7 Fighting Corruption in the Supply Chain Customer-Supplier dant. However, efficiencies can be achieved Engagement if customers are willing to accept training or auditing conducted by other customers, Assessing Risks and if there is a standard code of conduct to Fighting corruption in the supply chain, like which all customers agree. The path to this any business decision, requires an assess- efficiency is Collective Action, particularly ment of risks, a balancing of costs and ben- industry-specific and regional anti-corrup- efits and tailoring the programme to fit the tion organizations. risk profile. To help with an assessment of these risks, the guide offers a series of ques- Synergy: Integrating Corrup- tions with accompanying commentary and tion Controls with Existing links to tools and resources. These questions Supply Chain Controls concern the customer’s own business and the steps it has taken to fight corruption; the MNCs typically are quite sophisticated about supplier and the nature of its business and supply chain management. Unfortunately, in reputation; the nature of the engagement, most organizations these efforts are poorly including location and other risk factors; and coordinated. A coordinated supply chain the cost of corruption in the engagement. management effort can provide a clearer and more comprehensive understanding of Cooperation and Education the strengths and weaknesses of the sup- In attempting to prevent corruption in the ply chain. Information sharing across the supply chain, it is important for customers to organization will help ensure that each go beyond simply trying to dictate compliance supplier is in compliance with all applicable and move toward comprehension and capac- standards. It is important to ensure supply ity building. Ideally, suppliers will adopt their chain integrity at every level, across depart- own programmes and systems for preventing ments and geographical borders. Supply corruption. Suppliers should come to under- chain integrity should be monitored through stand, if they do not already, why preventing all aspects of a company’s supply chain corruption and doing business with integrity relationship. Ultimately, companies need to is in their interest. Customers should look see supply chain management as a unified for continuous improvement from suppli- process with a common set of policies and ers. They should also try to educate suppliers practices that include corruption prevention and help them fix problems. At the same as well as the more traditional elements of time, customers must be ready to terminate a cost control, quality monitoring and logistics relationship where necessary. When dealing management. with suppliers who are unsophisticated on these issues, customers should consider train- Practical Guidance ing supplier personnel in much the same way This section of the guide addresses com- that they train their own employees. mon supply chain corruption scenarios. The guidance is organized around a series of The Value of Collective Action good practices. The discussion begins with Customers can expect a variety of responses general guidance then moves to a series of from suppliers when confronted with specific scenarios. In each section, guidance customer expectations concerning control is organized into two major themes: how to measures and education. Some suppliers may prevent corruption and how to respond to see these efforts as too costly. Customers corruption demands or acts of corruption must understand the true risks of corruption when they occur. in each situation in order to determine the costs to impose on suppliers and themselves. Addenda Many suppliers who provide goods and The addenda contain a series of tools for services to multiple large customers will fighting corruption in the supply chain: have genuine difficulty with multiple stan- • Resources dards and practices that may be inconsistent • Tools or, at a minimum, disruptive and redun- • Sample Documents • Supplier Education 8 Fighting Corruption in the Supply Chain Introduction Through the 10th Principle of the United Na- ness in the supply chain, so all must work tions Global Compact, businesses around the together to tackle this problem. world have committed themselves to “work This guide to fighting corruption is intend- against corruption in all its forms, including ed for customers and suppliers. Indeed, virtu- extortion and bribery.” (See accompanying ally all businesses are both. Businesses of all side note — “The UN Global Compact 10th sizes and scope should find helpful guidance Principle.”) This guide is one such anti- and practical tools for dealing with corruption corruption effort. It presents a framework both among its suppliers and as a supplier. for reducing corruption risk in the supply MNCs — with large, interconnected supply chain — the interaction between custom- chains and greater resources—likely will find ers (the purchasers of goods and services) more here than is immediately of use. and suppliers (those who provide goods and For both customers and suppliers, this services). To provide practical assistance, the guide offers resources to: guide contains a set of tools and case studies, • Reduce costs associated with corruption as well as guidance for preventing and deal- • Reduce legal liability and risks to reputa- ing with common supply chain corruption tion scenarios. • Improve product and service quality The global public is increasingly demand- • Promote stable and long-term customer- ing transparency, accountability and integrity supplier relations in business. This includes the supply chain. • Promote free and open competition Purchasers — particularly large MNCs — • Promote economic development. are increasingly being held responsible, both legally and in the court of public opinion, It is important to place this guide in context. for the activities of their suppliers. As the For all companies, fighting corruption in news media regularly reports, the misdeeds the supply chain must be part of a larger of suppliers can directly affect a customer’s anti-corruption programme that addresses product and service quality. At the same corruption risks throughout the firm. This time, suppliers— who may themselves be includes assessing corruption risks, estab- large MNCs, but in many instances are lishing policies and procedures to control small- and medium-size enterprises (SMEs) corruption, educating the workforce and — must attune themselves to the problems business partners on the risks of corruption of corruption in order to protect their own and monitoring and auditing for compliance. products, services and reputations. Global Ultimately, it means promoting a culture business is vastly more complex than the where corruption is simply unacceptable. simple act of selling a product or service to a (The UN Global Compact Anti-Corruption consumer. Business is accomplished through Tools Inventory, accessible at: https://www. the elaborate networks of the supply chain unglobalcompact.org/library/156. It contains – the persons, entities and infrastructure reference and links to several excellent that transform materials and human capital sources of guidance on developing and im- to intermediate and finished products and plementing a complete anti-corruption pro- services for customers and consumers. The gramme.) Businesses should see this guide problem of corruption affects every busi- as one set of tools among a broader arsenal aligned against the corruption problem. 9 Fighting Corruption in the Supply Chain The UN Global Compact With this in mind, the UN Global Com- 10th Principle pact Leaders Summit in 2004 designated the UN Convention against Corruption as the un- At the first UN Global Compact Leaders Sum- derlying legal instrument for the new 10th mit on 24 June 2004, the UN Global Compact Principle. Although the Convention is legally – the world’s largest corporate sustainability binding only on countries that have ratified initiative – adopted a 10th Principle against it, its values and principles are applicable corruption: “Businesses should work against to the widest spectrum of society, includ- corruption in all its forms, including extor- ing the business community. The principles tion and bribery.” The adoption of the 10th enshrined in the Convention can serve as an Principle sent a strong worldwide signal that inspirational tool for companies adopting or the private sector and other non-state-actors reviewing internal anti-corruption policies, share responsibility for eliminating corrup- strategies and management initiatives. For tion and stand ready to play their part. The additional information on Article 12 (UN 10th Principle urges UN Global Compact Global Compact’s Management Model and participants not only to avoid bribery, extor- Risk Assessment Guide), see Tools. tion and other forms of corruption, but also Following adoption of the 10th Principle, to develop policies and concrete programmes the UN Global Compact established a multi- to address it. Companies are challenged to stakeholder working group to provide stra- join governments, UN agencies and civil tegic input to the UN Global Compact’s work society to realize a more transparent global on anti-corruption and to define the needs economy. of the business community in implement- The 10th Principle was the response of ing the principle. The Working Group on the the business community and other non-state Implementation of the UN Global Compact’s actors to the adoption of the United Nations 10th Principle also aims to contribute to Convention against Corruption. The UN greater coherence by supporting the align- General Assembly adopted the Convention in ment of existing initiatives and avoiding the October 2003, and it entered into force on 14 duplication of efforts. December 2005. As of April 2015, more than The Working Group has established 140 States (140 signatories; 176 parties) have several task forces to develop various tools ratified the Convention. As the sole global, and resources to help businesses achieve the legally binding anti-corruption instrument, goals of the 10th Principle. This guide is the the Convention provides a unique opportu- result of one such effort. nity to prevent and fight corruption in both public and private sectors. Agents and consultants The focus of this guide is on the relationship between customers and traditional suppli- ers of goods and services, not on the use of agents or consultants who may be hired spe- cifically to deal with governments to, for example, help secure government business or legislation. There are brief references to these relationships in this guide, but they raise very particular and serious risks of corruption beyond the scope of this document. 10 Fighting Corruption in the Supply Chain Section 1 The Business Case for Fighting Corruption in the Supply Chain Corruption, broadly defined, is the single • Procurement Fraud (sometimes with the greatest obstacle to economic and social assistance of one’s own employees) development around the world. Corruption àà Kickbacks distorts markets, stifles economic growth, àà Fraudulent billing debases democracy and undermines the rule àà Various purchasing and sales schemes of law, thus, contributing to conflict and in- àà Corrupt practices involving governments stability. It has been estimated, for example, and other public actors that the cost of corruption equals more than àà Suppliers who corruptly bypass health 5% of global GDP (US $2.6 trillion), with over and safety requirements US $1 trillion paid in bribes each year. àà Suppliers who evade legitimate law The risk of corruption in the supply enforcement chain has taken center stage on the minds àà Suppliers who avoid necessary licensing of business leaders and boards of directors. àà Suppliers who pay bribes to customs of- Aside from the pervasive destruction that ficials or licensing authorities corruption visits upon world populations, àà Suppliers who pay bribes to government it is imperative that businesses and leaders officials to bypass taxes understand the adverse reputational impact that corruption can have on their organiza- These corrupt practices have the potential of tions, institutions, brands and share price. In causing devastating harm to communities and recent years, enforcement of anti-corruption societies whether via harmful product quality laws has risen sharply, with improved coop- or deadly safety and environmental disasters. eration among various governments and, in The direct impact of this corruption in come cases, the imposition of massive fines the supply chain, as significant as it is, often against companies and prison sentences for is dwarfed by the indirect impact of: offending corporate executives. In addition, • Management time and resources international financial institutions and ex- addressing the issues port credit agencies increasingly are barring • Legal liability or penalizing companies involved in corrup- • Damage to reputation tion. Ultimately, corruption makes business far more costly by imposing extraordinary obstacles to growth and undermining share- What Customers Can Do holder value. Recent emphasis on anti-corruption enforce- For a more complete discussion of these ment on a global scale – not only with issues, see Clean Business Is Good Business, renewed enforcement of the US Foreign Cor- in the Resources Section. rupt Practices Act, but also the adoption of anti-corruption legislation in the UK, Brazil, and Mexico, etc. – has brought business The Impact of Corruption in leaders to the realization that dealing with the Supply Chain corruption should be a part of good supply chain management, generally. Moreover, cus- To fully appreciate the impact of corruption tomers (large MNCs) typically have in place in the supply chain, one must first under- very sophisticated supply chain management stand how it can manifest itself. Examples of processes focused on such issues as supplier corruption in the supply chain are: identification, cost control, logistics, and 11 Fighting Corruption in the Supply Chain supply quality. Therefore, it behooves these But there is also much that businesses can customers to integrate corruption risk into do through Collective Action. Appropriately their day-to-day processes so that a typical structured cooperation among purchasers supply chain management program includes, can level the playing field for all, and help but is not limited to, the following: provide the necessary conditions for honest • Supplier Principles business. By adopting common supplier stan- • Due Diligence dards and monitoring procedures, customers • Supplier Education can improve efficiency because suppliers • Contract Enforcement will not face conflicting requirements. By • Auditing acting together, customers also can improve • Additional Anti-corruption controls their leverage in the fight against corruption because suppliers will not be able to reject It is also important to note that customers tough standards from any single customer. can, under certain circumstances, be held Cooperation among suppliers will also liable for the corrupt acts that their suppliers make the playing field fairer and more ef- commit on their behalf. Indeed, under the ficient. By adopting common standards and UK Bribery Act, this legal liability attaches practices and monitoring compliance, sup- whether or not the customer is aware of the pliers can minimize and restrain those who supplier’s corrupt conduct. may be tempted to act corruptly for short- Engaging the supply chain about corrup- term gain or quick profit. tion can reap even greater benefits. Firms that For a useful compendium and framework engage their supply chain through meaning- on fighting corruption through “Collective ful anti-corruption programmes can: Action”, see the Resource Section. • Improve product quality • Reduce fraud and related costs The Definition of “Corruption” • Enhance their reputations for honest and the UN Global Compact business Corruption often is defined as “the misuse of entrusted • Improve the environment for business power for private gain.” This convenient and short • Create a more sustainable platform for definition, encompassing myriad illegal and illicit acts, future growth recognizes the breadth of the concept, but does not attempt to enumerate acts or precisely delimit their The Supplier’s Perspective scope. Suppliers will see parallel advantages from Therefore, the UN Convention against Corruption calls the fight against corruption. Suppliers that for ratifying States to outlaw, at a minimum: establish effective programmes to combat • Bribery of public officials; corruption in their organizations will im- • Embezzlement; prove product quality, reduce costs and avoid • Trading in influence; liability. These actions also will ease relation- • Abuse of function; ships with existing and new customers who • Illicit enrichment by public officials; will have more trust and feel less need to • Bribery and embezzlement in the private sector; mandate their own standards and to insist • Money laundering; and on disruptive monitoring and enforcement • Obstruction of justice. activities. Perhaps most important, suppliers who engage honestly with their customers However, it is also important to note that each Member and with public actors enhance their reputa- State is free to go beyond the minimum standards set tions and obtain a competitive advantage by forth in the Convention. becoming the preferred supplier of choice of ethically concerned customers. These corrupt actions are spelled out under the chapter of the Convention devoted to criminalization and law The Value of Collective Action enforcement, which explains that corruption is a crime that is wider than bribery and extortion. In accordance Each firm’s first priority in this area should be with this approach, the 10th Principle of the UN Global to prevent corruption in its own business and Compact calls for companies to work against corruption to engage suppliers directly on these issues. in all its forms, including extortion and bribery. 12 Fighting Corruption in the Supply Chain Section 2 Customer-Supplier Engagement Preventing corruption in the supply chain re- Questions about the quires a clear-headed view of the hazards and Customer’s Business a strategic approach to engaging suppliers. An assessment of corruption risk should The task begins with an assessment of risks. begin with an appraisal of what internal controls the business already has in place Assessing Risk to fight corruption. A business that does not take adequate care to prevent corruption is The overall process of assessing the likelihood in a poor position to make such demands of of fraud and corruption in the supply chain its suppliers. is complex, and it should be noted that not all customer-supplier relationships present the same level of risk. For example, buying Questions the Customer office supplies from a large office supply Should Ask About the Sup- chain in a developed country presents very different risks and necessitates a different plier level of controls than the purchase of key food The risk of corruption is unique to the ingredients from a medium-sized supplier in particular business, and the level of corrup- a developing country. Fighting corruption in tion risk presented by any given supplier will the supply chain, like any business decision, vary in relation to a number of variables, requires an assessment of risks, a balancing such as the size of the supplier, its geo- of costs and benefits and tailoring the pro- graphic location, the nature of the goods and gramme to fit the risk profile. services, etc. Key Questions the Customer Should Ask About its Own Business • What internal controls are in place to prevent, detect, and respond to internal fraud? • What internal controls are in place to prevent, detect, and respond to procurement fraud, including cash and petty cash management? • What due diligence processes are in place for vetting suppliers for potential conflicts of interest? • What internal controls are in place to prevent, detect, and respond to supplier fraud? • What mechanisms are in place to monitor suppliers? • What internal controls are in place to monitor spending limits and documentation review, including multiple levels of management review? • Do you have contractual audit or inspection rights? • If yes, do you exercise these rights? How effective are they? • Does the overall anti-corruption programme meet applicable standards? See section 3 for additional guidance 13 Fighting Corruption in the Supply Chain Key Questions the Customer Should Ask About the supplier • How large is the supplier? • How was the supplier identified? • Where is the supplier located? àà Through a trusted source? • What are the goods or services to be àà Through use of a pre-qualification or produced/delivered? certification service? • What are the corruption risks in these àà Is the supplier a friend or relative of an locations? employee? • What is the supplier’s reputation for • What controls does the supplier have in integrity and ethical conduct? place to prevent corruption? See section 3 for additional guidance Key Questions About the Engagement • What is the nature of the goods àà Does the supplier require government or services to be supplied? licensing? • What is the size of the contract? àà Are the goods subject to VAT or other • What is the importance of the contract to taxation? the supplier’s business? àà Is the supplier responsible for dealing àà What is the likelihood of kickbacks? with customs officials? àà What is the likelihood of procurement • Is the supplier being engaged as an agent fraud? specifically to deal with the government, • Does the engagement require multiple for example, to obtain licenses or permits invoices and payments over time, such as or to deal with customs or tariffs? for construction work? • What is the supplier’s relationship to the • What are the possible points of contact government? with government corruption? àà Is the supplier government-owned? àà Is the supplier subject to government àà Does the supplier have a family rela- inspection? tionship to a government official? See section 3 for additional guidance 14 Fighting Corruption in the Supply Chain Key Questions Regarding the Impact of Corruption in the Engagement • How costly would supply chain disruption be if the supplier engaged in corruption? • What are the operational risks of such disruption? • What are the risks to a company’s reputation if such disruption occurs? • What are the possible remedies if there is a problem with the supplier? • How will you control the damage in each case? • Do you have alternative sources of supply? àà How many alternative suppliers are there? àà Is this a “strategic supplier”? àà Who has the leverage in the relationship? • If commercial claims, regulatory investigations or charges are brought against the cus- tomer because of its supplier’s corrupt activities, are there additional consequences? See section 3 for additional guidance What Customers Can Expect To be meaningful and effective, anti-cor- ruption measures must be credible, and not The Importance of Cooperation simply boilerplate in a contract. Where there In attempting to prevent corruption in the is significant risk of corruption, doing busi- supply chain, it is important for customers ness with integrity must be emphasized as to go beyond simply trying to dictate con- critical to the engagement from the outset. formity, and move toward comprehension and capacity building. In many instances, the customer will not have the leverage to Supplier Education mandate compliance in any event, and tak- Customers should consider training supplier ing advantage of your customer or supplier is personnel in much the same way that they not in either party’s long-term interest, even train their own employees. Many MNCs have if the immediate deal is attractive. The key is sophisticated programmes for preventing to build trust and a common vision. human rights and labour abuses in the sup- Ideally, suppliers will adopt their own ply chain and train suppliers on programme programmes and systems for preventing requirements. Most of these same companies corruption. Suppliers should come to under- have written policies against corruption in stand, if they do not already, why preventing the supply chain and many have adopted corruption and doing business with integrity supplier codes of conduct. Indeed, with the is in their interest. Clean business is good increase in anti-corruption enforcement business for the supplier — which is looking activities, many MNCs are now, routinely, for other customers and who likely is a cus- providing supplier education in the area of tomer itself — not just a contract term that a anti-corruption. particular customer is demanding. Supplier education can come in many forms Customers should look for continuous and will be dependent upon the risks and costs improvement from suppliers; they should involved. Face-to-face interaction, which pro- educate them and work together to fix prob- vides opportunity for supplier personnel to ask lems. At the same time, customers must be questions and provide feedback, is preferable, ready to terminate a relationship where nec- but when in-person training is not cost-effec- essary. It is worth noting again, to minimize tive or practical, web-based training is a useful the potential disruption from a termination alternative. Additionally, leaflets and handouts decision, customers must evaluate their sup- may be useful in many cases. However it is pliers to the extent possible prior to entering done, it is important to help suppliers under- into a relationship. stand the consequences of corruption. 15 Fighting Corruption in the Supply Chain To maximize efficiency when dealing the supplier. One indication that a supplier with many suppliers who may need such takes fighting corruption seriously is if it is a training, and to help level the playing field, signatory to the UN Global Compact. customers may consider bringing key person- nel from multiple suppliers together for joint education sessions. Ultimately, suppliers A Holistic Approach to Supply should run their own education programmes Chain Management for their employees. For additional information regarding sup- MNCs typically are quite sophisticated about plier education, please see “Supplier Educa- supply chain management. This includes tion” in the Addenda. complex systems and programmes for supplier selection, cost control/oversight, logistics management, inventory control and Responding to Supplier quality assurance. Many MNCs also have Objections robust programmes for dealing with human rights, labour and environmental issues It is important that customers understand among suppliers. the true risks of corruption in each situation In recent years, more emphasis on the in determining the costs to impose on sup- part of MNCs has been placed on risk- pliers and themselves. Many suppliers who ranking its suppliers in a manner that is provide goods and services to multiple large coordinated with the organization’s risk customers will have genuine difficulty with assessment. Just as companies take into multiple standards and practices that may be consideration the variables that inform their inconsistent or, at a minimum, disruptive and compliance risk assessments (e.g., size of redundant. They may object to having to sign the business, location of operations, prod- on to several standards of conduct. They may ucts and services, business strategy, etc.), so be asked to attend training from multiple cus- too do they analyze the variables that help tomers, or may face audits and other monitor- inform which suppliers may present a higher ing activities from many customers. These are corruption risk than others (e.g., geographic legitimate concerns to which customers must location, reputation of the business, products be sensitive and willing to engage. and services, etc.). To assist in this analysis, Efficiencies can be achieved, for example, many companies utilize a “risk matrix” that if customers are willing to accept training ranks suppliers in accordance with the level or auditing conducted by other customers, of corruption risk that they pose for the and if there is a standard code of conduct to customer. Once the supplier is ranked, the which all customers agree. The path to this customer then applies an appropriate level of efficiency is Collective Action” and is par- vigilance and due diligence, accordingly. ticularly effective for industry-specific and For a sample Risk Matrix, please see the regional anti-corruption organizations. Sample Documents Section. For additional efficiencies in supplier It is important to note here that organiza- training or auditing, please see the Resour tions have adopted comprehensive, well- ces Section. coordinated and integrated approaches to There is great value to standard contract supply chain management. Instead of poorly language for all suppliers; however, supplier coordinated, separate groups within the requests to modify, or be excused from, con- organization, with little connection to one tractual terms and codes of conduct should another, recent developments among MNCs be carefully considered within the context of include a more unified, holistic and inte- the customer’s own supplier risk assessment. grated approach, relying on risk assessment Indeed, objection to anti-corruption contrac- outcomes that dictate the appropriate levels tual provisions may be a red flag that the sup- of due diligence with respect to specific com- plier is a particularly high risk for corruption. panies in the supply chain. Nonetheless, many suppliers will have their For example, a coordinated supply chain own codes, and it may be possible to allow management effort can provide a clearer their language to stand in for the customer’s and more comprehensive understanding of if the customer is otherwise confident about the strengths and weaknesses of the supply 16 Fighting Corruption in the Supply Chain chain, reduce control redundancies and sup- process from initial sourcing through post- port unified compliance reporting. Assessing performance supplier evaluation, but often suppliers outside of, or across, departments do not attend to the corruption risk inher- enables the organization to better identify ent in various mileposts. Corruption risks, those suppliers who might excel in some including kickbacks and other forms of pro- areas but fail to meet minimum standards curement fraud, as well as bribery and other in others. Information sharing across the forms of government-related corruption, are organization will ensure that each supplier particularly great: is more efficiently managed for compliance • When companies are evaluating suppliers against all applicable standards. MNCs that and offers free themselves from the segregated manage- • When creating and managing contracts ment framework will realize the synergies • When approving contract performance of cost savings and improved supply chain performance as a result. Most organizations Suppliers will face heightened temptation can become more efficient in their supply and pressure to act corruptly: chain management by implementing com- • When responding to a tender mon risk assessment processes, common • When sourcing materials information systems and the increasing use • When in production of automation. Coordinated Supply Chain Management A commitment to ensure the ethical practices includes communication and cooperation of the supply chain requires a company-wide amongst: effort to root out corruption at all stages. • Procurement (including sourcing, Ultimately, companies need to see supply selection, tenders, bidding) chain management as a unified process with • Quality a common set of policies and practices that • Legal include corruption prevention as well as the • Operations (including logistics manage- more traditional elements of cost control, qual- ment, inventory control ity monitoring and logistics management. • Audit (including cost control, oversight • Contract Management • Human rights or CSR • EH&S • Human Resources Ensuring supply chain integrity is a com- mitment that must be undertaken at every level, across departments and borders. Supply chain integrity should be monitored through all aspects of a company’s supply chain relationship. In a typical MNC, supply chain professionals engage in evaluation and control at each stage of the supply chain 17 Fighting Corruption in the Supply Chain 18 Fighting Corruption in the Supply Chain Section 3 Practical Guidance on Preventing and Responding to Corruption in the Supply Chain In this section of the guide, we present General Guidance on practical guidance on confronting common Anti-Corruption Practice supply chain corruption scenarios. The guidance is organized around a series Related to the Supply Chain of good practices specific to particular cor- ruption scenarios. Not all practices will be Corruption Prevention: applicable to all companies. Each scenario How to Reduce the Probability addresses the appropriate response to the of Corruption Occurring corruption demands or acts of corruption when they occur. General Company Anti-Corruption Policies We close this section with general guid- • Implement and enforce a publicly-available ance on anti-corruption practices related to company-wide code of conduct, including a the supply chain, specifically, as well as the zero tolerance anti-corruption policy hallmarks of an effective anti-corruption àà The code of conduct should address the compliance programme, generally. corruption issue as a whole. The compa- This entire section is designed to parallel ny should provide specific examples so RESIST (Resisting Extortion and Solicitation that employees can learn how to respond in International Transactions), a tool jointly to common corruption scenarios. Some developed by the International Chamber companies provide a separate “anti- of Commerce, Transparency International, corruption handbook” for guidance, the UN Global Compact, and the World while others include examples right in Economic Forum, available at https://www. the code unglobalcompact.org/library/157. We have • Recruit, hire, develop and promote em- copied directly much of the general guidance ployees whose ethical values are consistent available in RESIST, modifying and adding with the company’s values. Provide addi- guidance related to the supply chain, and tional screening for employees with higher making reference to the model tools that corruption-risk exposure (e.g., procure- accompany this guide. As with RESIST, the ment, sales, meeting planners, etc.) guidance in this section may be used as a • Require employees to acknowledge under- training tool for employees who are exposed standing of and compliance with the code to the relevant risks. of conduct • Set up clear company anti-corruption directives and related sanctions for non- compliance • Establish and promote reporting mecha- nisms and encourage reporting of suspect- ed bribery and other unethical business practices by the company and its suppliers and other business partners • Establish initiatives that promote a culture of ethics and accountability 19 Fighting Corruption in the Supply Chain • Create an environment where employees • Train and discuss anti-corruption policies feel safe speaking up without fear of retali- with personnel involved in purchasing and ation bidding processes before the start of the • Establish a reputation for zero tolerance project (if possible): for bribes by publicizing anti-corruption àà Identify and openly address incentives to efforts accept kickbacks or pay bribes • Provide training to all relevant personnel àà Train employees on the consequences of on anti-corruption laws and policies, the corruption (legal, financial, damage to consequences of bribery and corruption reputation, etc.) for the company and employee, how to re- àà Train employees on standard bidding spond to such demands and how to report procedures and rules of interaction with such demands suppliers and customers àà Emphasize the possibility of criminal àà Prepare employee guidance on how to prosecution and the damage to reputa- respond to corruption demands, incor- tion, for both the company and exposed porating cultural, industry and function employees specific advice • Send regular reminders to exposed em- àà Consider providing employees with ployees appropriate incentives for reporting cor- • Provide competitive remuneration for ruption demands employees at risk to reduce incentive to • Perform background checks on person- demand or accept kickbacks nel involved in purchasing and bidding, • Provide periodic reports to senior manage- including potential conflicts of interest, ment and the board on the status of the while respecting legal considerations and company’s anti-corruption programme, privacy rights including training initiatives, targeted sup- • Before, during and after the bidding plier audits, possible red flags, reports of process, prohibit or strictly regulate gifts, suspected bribery, etc. entertainment, sponsorship and donation activity For more information on promoting a cul- àà Establish thresholds appropriate to the ture of “ethics and accountability” please see local environment the Resources Section. àà Make it known that there is zero toler- ance for parties directly or indirectly Specific Policies for Company involved in the purchasing or bidding Representatives Involved in Purchasing process and Bidding Processes • Establish clear rules and procedures for • Establish clear rules and procedures for acceptance of goods selecting a supplier. General selection àà Goods must strictly conform with criteria should include objective require- contract specifications, with deviations ments on costs, performance, transparency accepted only through a written confir- and integrity of the supplier such as: mation from customer employees àà Opening the tender to more than one àà Acceptance of goods should require sign supplier off from more than one customer em- àà Guidelines for the assessment of supplier ployee, and should include an employee bids, including: pricing, quality, logis- who was not involved in placing the tics, financial standing, and qualifica- order tions of the supplier àà Contract managers must maintain a àà Rules for establishing “preferred sup- professional relationship with supplier plier” relationships that award large employees and avoid excessive familiarity quantities to one supplier • Train relevant employees on rules and àà Open bidding whenever possible procedures for acceptance of goods àà Compulsory review of supplier bids by a • Always operate as a team consisting of at team of customer employees least two employees, and do not meet with àà Multiple levels of authorization, depend- suppliers alone at key contract milestones ing on the value of the contract 20 Fighting Corruption in the Supply Chain Risk Assessment and Due Diligence Additional Controls for Purchasing and • Implement a process to evaluate corrup- Bidding tion risk prior to entering into a customer- • Audit purchasing and bidding processes supplier relationship àà Define an audit plan specific for the àà Assess the risk that your potential busi- purchasing and bidding processes ness partner will engage in corruption àà Analyze contracts and contract process àà Assess the corruption risks of the documents for gaps, inconsistencies and particular purchase or sale, including unusual transactions cultural, industry and geography risks, • Review payments involving heightened as well as points of contact with possible risk government corruption àà Pay special attention to agents, consul- àà Gather relevant information from major tants and advisers used in the bidding enterprises, embassies, export credit process agencies, banks and trade associations in àà Carefully review payments to bank order to make an informed decision and accounts with financial institutions understand the business practices of the outside the project location and to tax country in question havens or to countries maintaining àà Consider the legal framework and imple- banking secrecy above average standards mentation of existing anti-corruption àà Scrutinize expenses of purchasing and policies and laws, as well as whether bidding employees the country has signed and/or ratified • Implement a regular, independent internal the United Nations Convention against monitoring function Corruption àà Make sure a senior executive reviews àà Consult country profiles found on online high-risk payments to agents, consul- tools such as www.business-anti-corrup- tants or financial institutions outside of tion.com the project location àà Consider the worst-case scenario and àà Designate responsibility for regular, various strategies that could potentially timely and detailed review of purchas- be deployed ing and bidding process documentation • Perform due diligence on suppliers, cus- • Use anti-corruption technology to increase tomers and intermediaries involved in bids monitoring effectiveness àà Identify “red flags,” such as a reputation • Use continuous control monitoring to for corruption, family relationship with identify higher risk transactions such as a government officials, no registered office large concentration of orders to the same and refusal to reveal owners supplier, large variations in item contract àà Gather information from relevant price within the same industry or with embassies, chambers of commerce and contracts prepared by other procurement trade associations, national anti-cor- managers ruption bodies, third-party information • Implement automated segregation of providers and other companies duties in the purchasing and bidding àà Do not establish business relationships processes with suppliers and customers that do • Limit authority for purchasing decisions not meet your standards • Regularly rotate procurement manager • Consider the presence of competing suppli- assignments ers before entering a market or establish- • Regularly review the control matrix in the ing a geographic supply chain purchasing and bidding processes àà Where there is only one acceptable sup- plier in a region, or suppliers have repu- tation for corruption, explore alternative suppliers in other regions 21 Fighting Corruption in the Supply Chain Supplier Management and Control Contractual Precautions Processes • Include anti-corruption provisions in con- • Customers should establish a code of con- tracts with suppliers duct for suppliers, including expectations àà Supplier agrees to abide by all applicable about corruption anti-corruption laws àà Include provisions about bribery, kick- àà Supplier agrees to abide by the custom- backs, conflicts of interest, gifts and er’s code of conduct for suppliers or its entertainment and accuracy of business equivalent records àà Supplier agrees to audits of its anti- àà Require suppliers to agree in writing corruption efforts and to submitting to abide by the code of conduct or to an additional documents if necessary equivalent code of its own • Supplier contracts should specify who is • Ensure that supplier personnel receive accountable for corruption-related liabili- training on anti-corruption laws and ties policies, the consequences of bribery and • If the supply contract includes require- corruption for the supplier and employees, ments and penalties related to timely how to respond to corruption demands performance, the contract should exclude and how to report such demands (See liability delays resulting from bribery “Anti-Corruption Education and Commu- demands from relevant government (e.g., nication for Suppliers” in the Addenda to customs) officials and require immediate this guide) reporting of such demands to customer àà Emphasize the risk of criminal prosecu- tion and damage to reputation for the Collective Action supplier and for the exposed employees • Work with other customers, suppliers, àà Training may be provided by the sup- non-governmental organizations (NGOs), plier to its employees, by the customer industry organizations, high ranking or by a third-party such as an industry competent government officials and trade organization unions to build an empowered legal sys- • Monitor supplier anti-corruption efforts tem that will enforce anti-corruption laws through questionnaires and audits (See • Work with industry associations and NGOs “Supplier Questionnaire” in the Addenda to establish to this guide) àà Mechanisms for common supplier anti- àà Include questions about the state of the corruption training supplier’s anti-corruption policies, train- àà Common supplier anti-corruption audit ing and oversight standards and mechanisms for common àà If practical, conduct regular on-site supplier anti-corruption auditing anti-corruption audits, perhaps in àà The exchange of information about sup- conjunction with quality audit visits; In plier anti-corruption practices and acts the alternative, conduct an audit in any of corruption supplier that provides cause for concern. àà Prioritize audits based on questionnaire For more information on “Collective Action,” results and other risk factors please see the Resources Section. àà Third-party auditors may conduct audits, perhaps in conjunction with audits related to human rights, labour policy, environment and other UN Global Com- pact principles àà Ensure corrective action/remediation of risks discovered through questionnaires and audits • Monitor supplier performance throughout the duration of the contract and look for signs of corrupt behaviour 22 Fighting Corruption in the Supply Chain Corruption Response: • Discipline all employees involved in acts of How to React if a Corrupt corruption, which in some cases may mean Demand is Made or Corruption terminating employment • Retrain relevant employees on policies Occurs against corruption, and the possible sanc- Immediate Response tions for non-compliance • Take time to think about the situation • Critique due diligence and supplier audit- • Seek guidance from responsible personnel ing frameworks to determine whether any before responding if possible red flags may have been overlooked • Refuse, politely, the first request and em- • Identify opportunities for improvement in phasize the company’s business principles. various controls and implement If the request is repeated, explain that • Review and improve supplier training accepting such a payment would violate • Retain investigation results and document the company’s business principles and may corrective action for both legal implica- violate applicable laws and could lead to tions and future risk assessment the dismissal and criminal prosecution of • Upon conclusion of the investigation, the employee concerned document and apply lessons learned (e.g., • Explain that the solicitation (direct or indi- make relevant changes to operations, rect) must be made in writing and needs to review processes, etc.) be reported to management Discuss with Legitimate Representative of Document and Report Internally Supplier or Customer • Make a record of the relevant interaction • Report the solicitation to the appropriate • Report, immediately, to management or level of the supplier or customer’s organi- the appropriate officer responsible for zation matters involving the code of conduct (e.g., • Convene a meeting of all parties and compliance officer) and define an appropri- discuss potential challenges to a success- ate strategy ful contract without specifying too many details, which should serve as a deterrent Investigate and Take Corrective Action to the guilty party • Establish a process to investigate potential issues of corruption, including a disciplin- If Suspicions are Substantiated, Consider ary body with authority to eliminate a External Disclosure to: supplier or customer relationship and take • Government agencies charged with fight- corrective action against employees who ing corruption engage in corruption • Trade associations and other industry • Investigate, perhaps in conjunction initiatives: with supplier or customer management, àà Report solicitation in a collective man- whether the solicitation or act of corrup- ner to relevant authorities tion was an isolated incident or indicative àà Expose corrupt organizations to other of a systemic practice companies • Develop a strategy to promptly assess pos- • Embassy or consulate representing home sible legal, operational and reputational country to seek guidance and support risks arising from the act of corruption • Financing institutions, if any export credit àà Conduct an independent audit to assess financing or coverage is proposed any actual risks to product or consumer • Regulators health and safety that may result àà There may be a legal obligation to report àà Ensure that product recall and other corruption to a regulatory agency in the contingency plans are up-to-date home or host country, but even if there is • Investigate the entire engagement as well no legal obligation, disclosure may be the as past deals with the same supplier or best course to minimize adverse effects customer • Media/NGOs • Include legal, operational and risk man- agement specialists 23 Fighting Corruption in the Supply Chain Eliminate Supplier from Consideration / Corruption During the Terminate Contract Vendor Selection Process • In a bidding process, eliminate from consideration any supplier who attempts to bribe or offer kickbacks, and increase Scenario 1: Procurement manager scrutiny of the bidding process demands kickback from supplier to • If corruption is detected in an ongoing con- secure contract or provide inside tract, calculate the costs associated with exercising the termination clause in the information on bidding process. supplier agreement Description: During a solicitation for bids, a àà Consider sourcing and screening alterna- procurement manager approaches one of the tive suppliers to minimize interruptions potential suppliers and offers to secure the to the supply chain in the event a sup- contract in exchange for a payment (“kick- plier relationship is terminated back”). What should the Supplier do? Response: How to React if a Corrupt Guidance on Anti-Corruption Demand is Made or Corruption Occurs Practice Related to Specific • Supplier should refuse to make the corrupt Supply Chain Corruption payment on the grounds that such pay- Scenarios ment violates the business principles of the company and may violate applicable laws, Following is a series of supply chain cor- and could lead to dismissal and criminal ruption scenarios with guidance on how to prosecution. respond to corruption in each case. This is not an exhaustive list and is not meant as What more should a prudent supplier do? definitive guidance, but it addresses some of Please consult “Practical Guidance” (Section 3 of the most common supply chain corruption this Guide) for additional information scenarios. The scenarios are organized into three groupings, reflecting categories of supply Scenario 2: Supplier offers kick- chain activity: back to procurement manager to • Corruption During the Vendor Selection secure contract or provide inside Process • Corruption During Contract Performance information on bidding process. • Corruption Involving Bribery of Govern- Description: A customer regularly receives ment Officials or Other Third Parties bids for raw materials from multiple overseas suppliers. Prior to submitting its bid, one of the suppliers offers a kickback to one of the customer’s procurement managers, asking for information on bids already submitted by other suppliers. What should the Customer’s procurement manager do? Response: How to React if a Corrupt Demand is Made or Corruption Occurs • The procurement manager should refuse the corrupt payment on the grounds that it violates the business principles of the com- pany, may violate applicable laws and could lead to dismissal and criminal prosecution What more should a prudent customer do? Please consult “Practical Guidance” (Section 3 of this Guide) for additional information 24 Fighting Corruption in the Supply Chain Scenario 3: Supplier offers gifts Corruption During Contract or entertainment to procurement Performance manager. Description: During a solicitation for bids, Scenario 5: Monopoly supplier one of the potential suppliers offers the pro- demands that purchaser pay bribe curement manager a gift. What should the or kickback to secure goods or procurement manager do? services. Response: How to React if a Corrupt Demand is Made or Corruption Occurs Description: A company is sourcing a criti- cal component in country X, and it appears • The procurement manager should politely that there is only one supplier in country refuse the gift and explain that such gifts that can provide the component with suf- violate the customer’s code of conduct and ficient quality and reliability. Other compa- could create the appearance of corrupt nies purchase the same component from this influence supplier. As a result, the demand may exceed the supplier’s ability to produce the com- What more should a prudent customer do? ponent. During a meeting with a company Please consult “Practical Guidance” (Section 3 of procurement manager, the supplier’s repre- this Guide) for additional information sentative accompanies the manager to a local shopping mall and suggests that purchasing expensive watches for the supplier’s repre- Scenario 4: Procurement manager sentative and his wife would guarantee the selects supplier because of person- company an adequate supply of the compo- al/family relationship. nent. What should the customer do? Description: Following a review of supplier Response: How to React if a Corrupt bids, a procurement manager awards the Demand is Made or Corruption Occurs contract to a supplier owned by his brother- in-law, ignoring other bidders. What should The customer should say no politely to the the customer do? first request and emphasize the company’s business principles. If the request is re- Response: How to React if a Corrupt peated, explain that any solicitation violates Demand is Made or Corruption Occurs the company’s business principles and may violate applicable laws and could lead to the The customer should investigate whether dismissal and criminal prosecution of the contract award was based on legitimate crite- employee concerned. ria or influenced by a family relationship: • Record the interaction and report it to • Assign investigators to review all bids and company management or the appropriate interview the procurement manager officer responsible for matters involving • Review previous contracts approved by the code of conduct the procurement manager and previous • Determine with company management contracts awarded to the supplier whether or not to continue with this • If there has been a selection for personal/ supplier. If yes, then work with company family reasons: management to apply the appropriate àà Terminate the contract and re-open the “risk-ranking” to this supplier, and to tender(s) implement additional monitoring/auditing àà Preclude the supplier from future of this supplier contracts • Go back to the supplier representative with at least one witness and reaffirm willing- What more should a prudent customer do? ness to sign a contract and ignore the Please consult “Practical Guidance” (Section 3 of solicitation this Guide) for additional information 25 Fighting Corruption in the Supply Chain àà If the solicitation is reiterated, inform differently from country to country. It is the representative that this business also possible that extra work hours have practice is not acceptable and could resulted from necessary arrangements expose all the parties (individual or made after a shutdown of manufacturing company) to prosecution not only in equipment due to nation-wide holidays.) the country where the deal occurs but • Review all prior invoices from supplier for also in other countries with competent similar inaccuracies jurisdiction • If the supplier intentionally overbilled and • Report the solicitation to the appropriate the incident was isolated, the customer level of the supplier’s organization should warn the supplier that any future • Source the component from another sup- incident will result in contract termination plier outside the region • If the supplier intentionally overbilled • Report the solicitation to the appropriate and the practice is systemic, the customer government agency, perhaps through an should terminate contract and bar supplier industry trade association from future contracts What more should a prudent customer do? What more should a prudent customer do? Please consult “Practical Guidance” (Section 3 of Please consult “Practical Guidance” (Section 3 of this Guide) for additional information this Guide) for additional information Scenario 6: Supplier submits false Corruption Involving Bribery invoice for work done or employee of Government Officials or work hours. Other Third Parties Description: A company outsources certain production to a supplier. The unit price the customer pays is based on a combination of Scenario 7: Customer learns of production cost and a predetermined margin corrupt payment by a distributor for the supplier. Because production cost to government official is dependent on the hours worked by the relevant supplier operators, the contract re- Description: A major drug manufacturer quires that the supplier inform the customer retains a company in Country x for the of actual work hours. The customer receives purposes of distributing its drugs to the local an invoice from the supplier that contains market. The drug manufacturer learns (from inconsistencies in reported work hours. A expense reporting) that the local company thorough examination of the invoice reveals has, on several occasions, engaged Country that the supplier may have inflated work X’s Minister of Health in lavish incidents of hours. What should the customer do? hospitality. During the same time frame, the customer receives news that its blockbuster Response: How to React if a Corrupt product has been approved by the Ministry Demand is Made or Corruption Occurs of Health for inclusion on the local govern- ment hospital formulary. What should the The customer should Investigate, perhaps customer do? in conjunction with supplier management, whether inaccuracies in the invoice were in- Response: How to React if a Corrupt advertent or intentional, and if intentional, Demand is Made or Corruption Occurs whether an isolated incident or a systemic practice: Customer should immediately investigate the • Review pay slips, ledgers, etc. circumstances surrounding the approval of • Interview supplier managers or super- its blockbuster drug by the local Ministry of visors to verify work hours. (Note that Health in order to determine if there is any operator work hours can be calculated potential relationship between the hospital- 26 Fighting Corruption in the Supply Chain ity provided by the manufacturer’s distribu- cifically what is not in compliance and the tor and the actual inclusion of the drug on supplier will correct the problem the hospital formulary. If such a connection àà If the bribery demand is reiterated, is present, customer should: inform the customs official that this • Review its distribution agreement for po- practice is not acceptable tential termination provisions; • Notify the customer that delivery may be • Terminate the agreement; and delayed as a result of the bribery demand • Consider possible disclosure to govern- from the customs official, and work with ment authorities the customer to find a solution • Try to determine whether the demand for What more should a prudent customer do? the bribe is endemic to the customs office, Please consult “Practical Guidance” (Section 3 of or merely the conduct of a rogue official this Guide) for additional information àà If it is a rogue official, report the inci- dent to the official’s superiors Scenario 8: Customs official de- What more should a prudent supplier do? mands bribe from supplier to Please consult “Practical Guidance” (Section 3 of speed goods through customs this Guide) for additional information or to pass nonconforming goods through customs. Scenario 9: Supplier bribes government official to pass health Description: A supplier produces widgets and safety inspections. for a customer. The contract specifies certain deadlines by which the widgets must be Description: A manufacturer of food prod- delivered, and imposes substantial penalties ucts receives ingredients from a supplier. The for late delivery. The supplier orders certain supplier is subject to inspection by the local component parts for the widgets from outside health department. During the inspection the country. These parts arrive in port, but the local health official informs the supplier are held up in customs, where a local customs that some of its perishable items are beyond official demands a payment from the supplier their expiration date and may not be used before he will release the goods. The supplier as ingredients in food products for public will incur significant penalties under the consumption. A supplier employee pays the contract with its customer if the parts are not inspector a bribe to ignore the problem, and received immediately for the production of the supplier ships the ingredients to the cus- widgets. What should the supplier do? tomer. A supplier employee who witnessed the bribe calls the customer’s reporting ho- Response: How to React if a Corrupt tline and informs the customer of the bribe Demand is Made or Corruption Occurs and the shipment of the ingredients. What should the customer do? The supplier should refuse to pay the bribe, explaining that it violates the business prin- Response: How to React if a Corrupt ciples of the company. Demand is Made or Corruption Occurs • Make a record of the relevant interaction • Immediately report to supplier manage- The customer should stop use of the ingredi- ment or the appropriate officer responsible ents and promptly assess all legal, operation- for matters involving the code of conduct al, and reputational risks and remedies: • Return to the customs official with at least • Conduct an independent audit to assess one witness and explain that the supplier any actual risks to product or consumer would like the goods released if they are health and safety in compliance with customs regulations, • Ensure that the product recall and other otherwise the official should indicate spe- contingency plans are up-to-date 27 Fighting Corruption in the Supply Chain • Notify the supplier that the customer is àà If a systematic practice, terminate the not accepting the ingredients because of contract and bar the supplier from fur- the bribe and that the supplier must co- ther contracts operate in a complete investigation of the • Inform the health inspector’s supervisor of matter, and if necessary, assist in notifying the incident the authorities • Consider that there may be an obligation • Investigate, in conjunction with supplier to disclose to various other authorities, management, whether the bribe was an including the customer’s home country’s isolated incident or indicative of a systemic anti-corruption authority and health/safety practice authorities of countries where non-com- àà Carefully review records of all prior pliant products may have been distributed shipments from the supplier or sold àà Interview the supplier personnel and review supplier records What more should a prudent customer do? àà If an isolated incident, inform the sup- Please consult “Practical Guidance” (Section 3 of plier that any additional incidents will this Guide) for additional information result in termination of the contract 28 Fighting Corruption in the Supply Chain Practical Guidance on Preventing and Responding to Corruption in the Supply Chain: What More Should Prudent Suppliers and Customers do? WHAT MORE SHOULD PRUDENT SUPPLIERS DO? [As recipient of a corrupt offer of payment] • Make a record of the relevant interaction • Immediately report offers of kickbacks to supplier management • Immediately report offers of kickbacks to customer’s organization • Work through industry initiatives to communicate bribery demands and other corruption • Expose known corrupt organizations to national anti-corruption bodies • Consider reporting solicitation to media and NGOs [As provider of a corrupt offer of payment] • Investigate corrupt payment offers, possibly in conjunction with the customer • Discipline all employees involved in acts of corruption and if necessary, terminate employment • Notify the customer of corrective action taken • At the conclusion of the investigation, document and apply lessons learned (e.g., make relevant changes to operations, re-view processes, etc.) • Retrain relevant employees on policies against corruption, conflicts of interest, or other relevant policies, including changes that may have been made as a result of the investi- gation, and the possible sanctions for non-compliance [As the target of a corrupt request for payment (by government official)] • Make a record of the relevant interaction • Immediately report to supplier management or the appropriate officer responsible for matters involving the code of conduct • If it is systemic corruption, report the incident to a national anti-corruption body • Consider external reporting, perhaps in conjunction with the customer, to: àà www.bribeline.com àà The relevant embassy or consulate to seek guidance and support àà Industry and trade associations to discuss what strategies others used to combat such corruption, and to discuss Collective Action àà Media and NGOs to leverage public scrutiny of corruption-related activities 29 Fighting Corruption in the Supply Chain WHAT MORE SHOULD PRUDENT CUSTOMERS DO? • Make a record of the relevant interaction • Investigate reported acts of corruption, possibly in conjunction with supplier • Report to supplier any reported attempted payments; • Advise supplier, in the event of reported corruption, that unless supplier investigates and takes corrective action, the supplier will not be eligible for future contracts • Discipline all employees involved in acts of corruption and terminate employment, as needed • At the conclusion of the investigation, document and apply lessons learned (e.g., make relevant changes to operations, review processes, modify internal controls, etc.) • Retrain relevant employees on policies against corruption, conflicts of interest, or other relevant policies, including changes that may have been made as a result of the investi- gation, and the possible sanctions for non-compliance • Consider publicizing (in a sanitized fashion) the appropriate disposition of the matter in order to positively impact the culture, and to send the right message to the employee organization • Follow up on the corrective actions taken by the supplier • Work through industry initiatives to communicate bribery demands and other corruption, and expose known corrupt organizations to national anti-corruption bodies Hallmarks of an Effective Anti-Corruption Compliance Programme [FCPA Resource Guide, 2012] Following are the essential elements of an effective anti-corruption compliance programme as defined by the US Department of Justice and the US Securities and Exchange Commission. See the Resources Section for additional Guidance: • Conducting periodic and targeted ethics • Implementing a process for internal and compliance risk assessments controls and appropriate delegation of ap- • Commitment from Senior Management and proval authority clearly articulated policy against corruption • Implementing processes for third-party • Code of Conduct and ethics and compli- due diligence and payments ance policies and procedures • Devising a system for confidential report- • Appropriate oversight and autonomy by ing of concerns and internal investigations Chief Ethics and Compliance Officer, • Continuous improvement, including peri- adequate resources, and access to senior odic assessments and evaluations management and the Board • Mergers and acquisitions: Pre-acquisition due • Providing appropriate ethics and compli- diligence and post-acquisition integration ance training and continuing advice • Implementing a system of consistent disciplinary measures and appropriate incentives 30 Fighting Corruption in the Supply Chain Addenda Resources compact.org/library/1781). The following Resources are referenced • World Bank Institute, Business Fighting throughout the specified sections of the Cor ruption: A Resource Center for Busi- guide ness, A - http://info.worldbank.org/etools/docs/ antic/Whole_guide_Oct.pdf • See also the Supplier Ethical Data Ex- INTRODUCTION change (http://www.sedex.org.uk), a non-prof- it membership organization that enables UN GLOBAL COMPACT 10th PRINCIPLE suppliers to share data on ethical and UN Global Compact Sustainable Supply responsible conduct with their global cus- Chain Resources: tomers. The Sedex online Self-Assessment (http://supply-chain.unglobalcompact.org/) Questionnaire includes a Business Integ- This website contains information designed rity section, including significant content to assist business practitioners in embedding on corruption sustainability in supply chains. SECTION 2: CUSTOMER-SUPPLIER SECTION 1: THE BUSINESS CASE for ENGAGEMENT FIGHTING CORRUPTION in the SUP- PLY CHAIN Key Questions Customers Should Ask About Their Own Business The Business Case Against Corruption • UN Global Compact 10th Principle Report- Clean Business Is Good Business ing Guidance (https://www.unglobalcompact. https://www.unglobalcompact.org/docs/issues_doc/ org/docs/issues_doc/Anti-Corruption/UNGC_An- Anti-Corruption/clean_business_is_good_business. tiCorruptionReporting.pdf) for a description of pdf anti-corruption programme elements that UN Global Compact participants should Corruption Risk Exacerbates Other Supply report on. Chain Risk • Transparency International Business Prin- http://www.sedexglobal.com/wp-content/up- ciples for Countering Bribery (http://www. loads/2014/12/Sedex-Briefing-Business-Ethics.pdf transparency.org/whatwedo/publication/busi- ness_principles_ for_countering_bribery) Fighting Corruption Through “Collective Action” Does the overall anti-corruption The UN Global Compact is a global initiative programme meet applicable standards? that offers mutual assistance and support to • FCPA Resource Guide – https://www.justice. businesses. Through the UN Global Compact gov/sites/default/files/criminal-fraud/lega- 10 Principles, businesses commit to support cy/2015/01/16/guide.pdf human rights and labour fairness, maintain • USSC Guidelines – See United States and improve the environment and fight cor- Sentencing Commission, Organizational ruption. This guide is one example of Collec- Guidelines, Section 8B2. (http://www. tive Action from the UN Global Compact 10th ussc.gov/guidelines/2015-guidelines-manual/ Principle Working Group. archive/2012-8b21); • A Practical Guide for Collective Action • UK Bribery Act 2010 – http://www.justice. Against Corruption (https://www.unglobal- gov.uk/downloads/legislation/bribery-act- 2010-guidance.pdf • Brazil – http://www.business-anti-corruption. com/anti-corruption-legislation/brazil • Italy – In Italy, Italian Legislative Decree 31 Fighting Corruption in the Supply Chain 231/01 provides exemption from liability (in this Resources Section). for organizations that effectively imple- ment certain management, organization and control models prior to an offense. • OECD Good Practice Guidance – Tools http://www.oecd.org/daf/anti-bribery/44884389. pdf ANTI-CORRUPTION RESOURCES (GENERAL) Key Questions to ask About the Supplier • See the Transparency International Cor- Customers and suppliers can find descrip- ruption Perceptions Index for a rating of tions and links to a wide variety of anti- perceived corruption in various countries: corruption resources, including conventions, https://www.transparency.org/cpi2014/results guidelines, tools, and industry and country • See http://www.unodc.org/unodc/en/treaties/ specific anti-corruption information, at the CAC/signatories.html for a listing of coun- UN Global Compact Anti-Corruption Tools tries that have signed or ratified the United Inventory, accessible at https://www.unglobal- Nations Convention against Corruption. compact.org/library/156. • See http://www.unodc.org/unodc/en/corrup- tion/index.html?ref=menuside for a listing of national anti-corruption bodies. • See also the country profiles available at ANTI-CORRUPTION RISK http://www.business-anti-corruption.com. ASSESSMENT GUIDE https://www.unglobalcompact.org/library/411 SECTION 3: PRACTICAL GUIDANCE INTERNATIONAL CONVENTIONS ON PREVENTING AND RESPONDING TO CORRUPTION IN THE SUPPLY UN Convention Against Corruption http://www.unodc.org/unodc/en/treaties/CAC/ CHAIN OECD Anti-Bribery Convention General Company Anti-Corruption http://www.oecd.org/corruption/oecdantibrib- Policies: Promoting a culture of ethics eryconvention.htm and accountability See Giving Voice to Values OECD Working Group http://www.givingvoicetovaluesthebook.com/ http://www.oecd.org/corruption/anti-bribery/ anti-briberyconvention/oecdworkinggrouponbrib- Collective Action – See Section 1, above eryininternationalbusinesstransactions.htm UNGC MANAGEMENT MODEL https://www.unglobalcompact.org/docs/news_ events/9.1_news_archives/2010_06_17/UN_Glob- al_Compact_Management_Model.pdf 32 Fighting Corruption in the Supply Chain Sample Documents While not developed or endorsed by the UN Global Compact, companies may find the sample documents be- low useful in creating their own materials. ANTI-CORRUPTION CONTRACT LANGUAGE TRACE http://www.traceinternational.org/ RED FLAGS CHECKLIST / ANTI-CORRUPTION WARNINGS http://fcpamericas.com/english/anti-corruption-compliance/master-list-party-corruption-red-flags SAMPLE DUE DILIGENCE FORMS /QUESTIONNAIRES PACI http://www3.weforum.org/docs/WEF_PACI_ConductingThirdPartyDueDiligence_Guidelines_2013.pdf Regal-Beloit http://www.regalbeloit.com/anticorruption/anticorruptionpdfs/englishpdfs/exhibit1_3rdpartyquestionnaireandinitialcertifica tionform_english.pdf TRACE http://www.traceinternational.org/ SUPPLIER CODE OF CONDUCT http://www.barrick.com/files/suppliers/Barrick-Supplier-Code-of-Ethics.pdf http://www.aboutmcdonalds.com/content/dam/AboutMcDonalds/Sustainability/Library/Supplier_Code_of_Conduct.pdf TRACE http://www.traceinternational.org/ SUPPLIER RISK MATRIX Third Party Risk Matrix (Sample) Risk Ranking of Suppliers • Rank suppliers in accordance with the level of corruption risk that they pose for the customer • Once ranked, the customer then applies an appropriate level of vigilance and due diligence, accordingly Variables to Consider • Geographic location; • Reputation of the business; • Products and services; • The activity the 3rd party will be engaged in, and • Relationship with the local Government 33 Fighting Corruption in the Supply Chain 34 Fighting Corruption in the Supply Chain Group X Countries: Indonesia, Indian, Korea, Malaysia, Philipines, Thailand, Vietnam Engagement TIER 1 TIER 2 TIER 3 TIER 4 Division A Advertising or Other • Co-marketing Sales and Agencies • Co-promotion Marketing • Third party promotion • Out-licensing approved product • Wholesaler/ Distributor (marketing/selling) • Sales Agent • Tender Agents • Local manufactur- ing, packaging & distribution Division B • Capital • Consultant/ Manufacturing (construction) Facilitator (when Project Suppliers hiring an individual • Contract Manufac- or a firm to inter- turing & Packaging act (e.g. negotiate, (with no marketing lobbyist/lobby) on or distribution) company’s behalf • Distributors acting (e.g. market access, as re-packagers of tax mediator, etc.) company products with a Government • Contracting, Official* Warehouse Space • Customs Broker / • Plant & Equipment Import-Export Bro- Service provider ker /Freight Forw- • Waste Treatment warders / Shipping Management Agent* Division C • Out-licensing a • Research • Contract Research Research product or collaborations Organizations compound • Out-licensing other technology or knowledge • In-licensing (prod- uct, technology, knowledge, etc) General All other: Any 3rd Party engaged by the company that could interact with a Government Official where (may cross he/she could influence our business –Compliance & Legal must be consulted for input before proceeding divisional line) Travel Agents / Consultant / M&A, JV, Technology Meeting Planners Facilitator Transfer Out 35 Fighting Corruption in the Supply Chain Level of Due Diligence by Tier Due Manual Media Consult with Standard Provide Diligence Media search by Compliance contracting 3rd party Question- Search qualified and legal and training naire (DDQ) independent before procurement materials completion corporate proceeding process by 3rd Party intelligence with the provider engagement TIER 1 • TIER 2 • • • • TIER 3 • • • • • TIER 4 • • • • • 36 Fighting Corruption in the Supply Chain Supplier Education guide contains a series of common scenarios that provide a good starting point for build- Anti-Corruption Education ing education content. and Communication for At a minimum, education should address Suppliers the various types of corruption, why corrup- tion is an issue (including the consequences In an ideal world, every supplier would have for the supplier’s business and for society), its own anti-corruption programme that how to respond to corruption demands, and would include education for their employees. where to go to report corruption demands. In this world, many suppliers do not, and In each case, training should present real- it is advisable in many cases for customers life situations and allow the employees to to educate suppliers and supplier personnel consider how best to respond to the demands about the customer’s expectations regarding and temptations to corruption. Training corruption and the general business case for should be interactive and engaging. It should avoiding corruption in business transactions. not merely present the “right answer,” but Ultimately, this should be part of supplier ca- build a sense of understanding as to why it is pacity building. Rather than a one-way trans- the right answer. fer of knowledge from customer to supplier, it should be a cooperative effort that prepares suppliers to deal with these issues internally. Audience This addendum presents general guidance This also must be informed by an understand- on supplier education and communication ing of relevant risks, as well as the practical in this area, including a discussion of subject realities of cost, and supplier receptiveness areas to cover, audiences to address, and the to education delivery. Supplier management various methods of communication. It does should always receive training. If manage- not present a model training programme, ment is able to convey what was taught in the as content and mode of presentation will training to other relevant personnel, man- vary significantly from customer to cus- agement training may be all that is needed. tomer and supplier to supplier, depending In other instances, customers will want to on risk profiles, the nature of the audience engage other supplier personnel directly. High and available technology. Content should, risk audiences may include the supplier sales however, align with the reality of the risks force, production managers, as well as others and temptations for corruption that supplier performing under the contract. personnel may face. Content should vary according to the au- dience, addressing the particular corruption risks they may face. The sales force may re- Content ceive instruction concentrating on kickback As with other elements of a supplier anti- issues, while production managers would corruption programme, the content of educa- receive more instruction on dealing with tion and communication to suppliers must government inspections. The level of detail begin with an assessment of relevant risks. necessary for training should vary with the The most effective education will include an audience, with management and others fac- overview of relevant concepts and principles, ing the most significant risks receiving the but must also include an examination of real greatest amount of content. scenarios that supplier personnel may face. A significant part of the education for These will differ across industries, regions, supplier management should include mecha- and contracts. For example, where risk of nisms for management to disseminate train- corruption in government inspections is ing to their own employee population. This high, the education should focus on govern- may include train-the-trainer sessions, where ment inspections. Similarly, where kick- the customer provides training materials to backs, false billing and reporting, or customs supplier management and assists them in concerns predominate, the education should determining the best method to deliver the concentrate on these issues. Section 3 of this training to their own population. 37 Fighting Corruption in the Supply Chain Methods The goal of any supplier education and communication programme is to build awareness and understanding among supplier personnel of the harm that corruption causes and the right way to behave in the face of corruption demands and temptations. There are multiple mecha- nisms for getting these messages across, each of which has its advantages and disadvantages. The following table attempts to capture these across four primary education and communica- tion methods. Method Advantages Disadvantages In-person • Highest impact • Resource intensive training • Allows for real-time • Difficult to schedule and interaction and discussion ensure attendance of all of difficult issues relevant personnel • Allows for role-play and other • May require live translators highly engaging approaches Web-based • The best WBT is highly • Does not allow for live training (WBT) engaging and interactive discussion and interaction • Allows learners to take • Limited by technology avail- training according to their able to supplier personnel schedule • Can be expensive if delivered • Can ensure education to only a small audience delivery through computer tracking of completions • Cost-effective across a large audience • Easily translated into multiple languages Interactive web • Allows for interaction and • Limited by technology avail- experiences discussion of difficult issues able to supplier personnel (e.g., webinars, • Cost-effective • Interactivity is limited by blogs) time constraints and absence of face-to-face interaction • Translation issues One-way • Cost-effective • No opportunity for interaction communication • Can be effective at conveying or discussion (e.g., e-mail, basic messaging and as rein- • Limited ability to ensure fliers, websites) forcement for other education delivery • Easily translated 38 Fighting Corruption in the Supply Chain Acknowledgements This publication is an updated version of the guide “Fighting Corruption in the Supply Chain: A guide for Customers and Suppliers” that was developed by the United Nations Global Com- pact in 2010. The UN Global Compact wishes to thank the members of the Supply Chain Task Force and other contributors who provided their valuable input for developing the original version of the guide in 2010. The UN Global Compact also wishes to thank Andrea-Bonime Blanc and Jac- queline Brevard, GEC Risk Advisory, for their leading efforts in the development of the revised version of the guide. The UN Global Compact also thanks the following for their invaluable comments and sugges- tions: • UN Global Compact Advisory Group on Supply Chain Sustainability with special thanks to Barrick Gold, Ford Motors, N Brown, Reed Elsevier and Sedex • Jermyn Brooks, Transparency International • Mark Snyderman, Laureate Education • UN Global Compact: Olajobi Makinwa, Anita Househam, Neha Das, Moramay Navarro- Perez, Elena Bombis 39 Fighting Corruption in the Supply Chain The Ten Principles of the United Nations Global Compact Human rights Principle 1 Businesses should support and respect the protection of internationally proclaimed human rights; and Principle 2 make sure that they are not complicit in human rights abuses. Labour Principle 3 Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining; Principle 4 the elimination of all forms of forced and compulsory labour; Principle 5 the effective abolition of child labour; and Principle 6 the elimination of discrimination in respect of employment and occupation. Environment Principle 7 Businesses should support a precautionary approach to environmental challenges; Principle 8 undertake initiatives to promote greater environmental responsibility; and Principle 9 encourage the development and diffusion of environmentally friendly technologies. Anti-corruption Principle 10 Businesses should work against corruption in all its forms, including extortion and bribery. Published by the UN Global Compact Contact: info@unglobalcompact.org November 2016