By Harvey Xu, The Red Flag Group
Jack, Head of Public Relations at a listed heavy industry manufacturer shows up at a ceremony. He shook some hands and signed his name on a framework agreement. Under the agreement, Jack’s company is to donate machinery and equipment, and volunteer human hours to help renovate roads at the military camp in the town where it is headquartered. Jack walked out the room a happy man, knowing that his team had done good and made the world a little better. Six months later, Jack’s company signed a direct sales contract of $2 million, entailing excavators with the governing body of the military unit, waived from a public tender.
In another case, a power service provider actively supported and made a name of itself in developing infrastructure of third-world countries. In Indonesia for instance, the company had sponsored, participated, and supported various social and humanitarian projects, including installation of its technology at a local power plant, effectively providing a more stable source of electricity for residents in its local area. Ten years later after the commencement of the project, the company pled guilty to bribery of Indonesian government officials, effectively violated the anti-bribery provisions outlined in the Foreign Corrupt Practices Act (FCPA), to secure power sector contracts in the country. It had some 10% of its global revenue that year gobbled up from its books as penalty, while several in its senior executive teams, who knowingly entered the conspiracy and ordered the funnelling of bribes, were indicted. Funds that ultimately went to high-ranking members of Perusahaan Listrik Negara (PLN), the monopolist government-owned electricity corporation in Indonesia, were disguised as funds for legitimate consulting services in the books.
Notice how these stories sound familiar? Let’s stop here for a second.
While some may applaud the humanitarian work and goodwill, some corporate social responsibility (CSR) initiative may have been marred by the under table deals in exchange for securing million-dollar projects. Had the compliance team been involved in CSR initiatives, looking out for tenders and payments from the start, organisations will stand a much lower chance of non-compliance.
No doubt that the CSR is key in bringing organisations closer to the community. In effect and ironically, CSR activities are easily twisted into acts of mischief. The irregularities in relation to CSR initiatives are found in the various forms including embezzlements, misappropriate of assets, procurement frauds, etc. To combat this, CSR initiatives should be brought forward in organisational planning activities, and compliance professionals should take a proactive approach in monitoring those activities. Otherwise, what was once a force for good can morph itself into something malevolent, much like the cases above.
Had the compliance team stepped in and spotted the improper payments upfront, prevention of any purchasing of an FCPA violation or alike would be a lot more probable. Any consortium engaging public-sector entities would be more carefully executed, and any project contracting or contracted by state-owned entities should be tracked with more caution. This is because the aforementioned professionals, regardless of ranks, are defined by the FCPA as foreign officials, and any transfer of goods of value may constitute an offence.
While organisations may benefit from stricter and more effective internal control and oversight, they still run the risk of being pressured by sales goals and corporate targets. In the event of this, when a deal looks fishy, where misdeeds may have come from the top, it is important to bring in a neutral third party FROM THE START. The third party comes in neutral, without any conflicts of interests, and it may also help corporations appear more certified to a broader audience. Through means ranging from transparent communications to codified audit standards, employees will be infused with a compliance awareness while carrying out designated CSR engagements, showing commitment to continuous improvement and contribution to sustainable social development. Attraction of the like-minded partners and investors and realisation of a more robust value chain are also within reach.
Compliance can take both a preventative and initiative role in your CSR activities, and it is crucial that compliance be involved in an entire process of CSR initiatives not just the beginning. Misconducts would be spotted upfront, rid from your corporate ecosystem, and you would be harnessing a reputation premium going forward.
As CSR initiatives missing compliance involvement may lead to tragedies, here are some areas for Compliance to keep in mind when reviewing future CSR initiatives:
CSR activities turn sour largely when the money goes to a wrong pocket, just like the case with the power sector conglomerate. Oftentimes, the payments for the pledged cause appear to be justifiable., and nobody hardly ever questions the funds just because they appear designated and are underwritten from the surface. This misperception may easily blind you from closer examinations on whom are being paid and why we are paying. When reviewing CSR payment transactions, compliance should focus on 1) What exactly CSR projects are pledged; and 2) When the pledge actually occurs. In hindsight, any payments in disarray with these criteria may represent a red flag. Having said that timing is everything, compliance team involvement in reviewing payments should be earlier the better before things turn into a disaster. A pre-emptive payment review is key.
A sizable CSR pledged project involves a complex process from initiating, planning, authorising and executing to delivering. Compliance is not seen to focus exclusively on monitoring CSR activities. Therefore, payment review should be prioritised and carried out on a risk-based approach.
Know the third parties you are exposed to
Third party screening is one of the key elements in compliance programmes, and this is no exception for CSR activities. Bribing officials using CSR initiatives as vehicle may not look like bringing a sack of cash and handshaking with a deal. In many cases, CSR pledges shore up corruptive behaviours through engagement of third parties as service providers. Due diligence scrutiny over third parties that are involved in CSR projects is required. These third parties may be used as funnels for funds to officials and likely lack the relevancy and qualification for CSR projects, as their connections with the officials come in handier. That being said, your compliance team should pay special attention to a relationship check and qualification scrutiny in the course of due diligence exercise for CSR initiatives.
Documentation, documentation and documentation
Failure to trace and assure on the purpose and intended destination of funds may result in liabilities traced back to you, and non-compliance with the requirements of keeping records can result in penalties and even jail time. Companies that file annual reports with the Security Exchange Commission (SEC) are subject to requirements of Section 404 of the Sarbanes-Oxley Act, which were by practice adopted by many more as guidelines. Organisations are required to keep records that accurately and fairly reflect the transactions and dispositions of assets; and receipts and expenditures of the organisation are expected to be executed only in accordance with authorisations of management and directors. While this might seem like a lot of paperwork, it keeps organisations reasonably protected if anything goes wrong, with both an internal assessment and an external attestation in place.
Know who you are speaking to
As is true with virtually all corporate activities, knowing who will be watching is crucial. When it comes to CSR initiatives, your organisation will be put into spotlight with all eyes watching: those within your value chain: suppliers, distributors, contractors, and those beyond: activists group, surrounding community, regulatory agencies, even law enforcement. Take environmental stewardship for example: Less than compliant efforts to reduce waste from your facilities may end up in a case study of an NGO report, backfiring on yourself and attracting more accusations that were intended to be silenced in the first place. Patagonia’s commitment to build the best product with no unnecessary harm effectively reduced use of 124,000 pounds of petroleum-based materials in its Torrentshell Jackets produced in Spring 2016 alone, pioneering the outdoor apparel industry in transitions to recycled materials. All this effort yielded praises from activist groups, positive press, and not surprisingly sales with flying colours.
Keep in mind your boundaries
Many on the CSR team may not be the best respondent to the legal frameworks that an organisation might be subject to; and if you conduct businesses or have partners in more than one jurisdiction, it is mostly likely that you are subject to more than one sets of statutory boundaries. Chinese red-chip companies listed in Hong Kong are subject to restrictions including not only the Law on Guarding State Secrets at home, but also to requirements mandated by the city’s Securities and Futures Commission. This could get tricky from a look afar, and careful practices are most definitely suggested in attempts to ramp up bonds with community and to polish up that corporate communications page. Compliance professionals will help by bringing informed decisions and country-specific insights to the table when it comes to planning CSR causes.