Fraudstyles of the Rich and Famous

As news breaks about fraudulent bribery payments by the wealthy and celebrated to officials and coaches at prestigious colleges to obtain admissions spots for their children, the lingering question resurfaces: how do the privileged continue to embroil themselves in such public scandals?

What about other wealthy people who make financial contributions to colleges and universities conveniently timed around their own children’s acceptances? While in certain situations fraud has not been alleged, these instances still raise the specter of unfairness, inequity, and the question of deceptive practices—for both the “contributor” and the benefitting institution.

Clearly, a sense of entitlement permeates many of these individuals. But a more compelling inquiry is whether these individuals even recognize the questionable nature of their actions.

Fraud is generally defined as the intentional use of deception to obtain something of value or deprive another of that value. Bribery amounts to a form of fraud, where the bribing party seeks to hide their payment for an unfair benefit. For instance, bribing a university official to get your son or daughter admitted can deprive that university of the opportunity for a more qualified applicant, and it robs superior applicants a fair shot at gaining admission. Over the years, the understanding of bribery has expanded from direct cash payments for reciprocal benefits to also include indirect, non-cash “contributions”, such as charitable donations and even employment of relatives.

An interesting parallel exists between these pay-for-admittance cases among the elite and what regularly occurs within business. Certainly, the business world is rife with classic cases of fraudsters swindling the naive and gullible out of their money. But another spin on fraud also exists, one less understood. Many employees find themselves either the unwitting perpetrators of fraud or unwilling accomplices in such schemes.

For instance, employees may feel pressured by managers to commit fraud for their employer’s benefit, even though these employees receive nothing of value themselves, other than avoiding a job loss that would otherwise occur if they disobeyed orders. Recall the many Wells Fargo employees who managed to retain their jobs by following orders to open fictitious accounts for unsuspecting customers.

Other employees commit fraud simply to “go along to get along.” I recall a speaker during my graduate business school days who recounted his story of going to jail for helping a vendor to commit financial fraud, even though he claimed no direct benefit. The only seeming benefit to him involved helping a valued vendor out of a tight invoicing situation—albeit repeatedly.

These recent reports of the wealthy and famous engaging in bribery to obtain a lucrative slot for their children in the better colleges don’t sound much like dubious characters meeting in seedy motel rooms to exchange briefcases of unmarked bills. Rather, it’s possible a more subtle “self-deception” is at play. Much like the well-intended employee who gets caught up in something they did not ask for and did not want, the college admissions scandal also suggest parents rationalizing their efforts, though seriously questionable, to help their children by leveraging their status. (Not that their actions represent good
character modeling, of course.)

Syntrio’s new course, “Business Fraud: Avoiding Deceptive Business Practices,” goes beyond the obvious
fraud of employees who purposely steal from their employers or businesses that conduct an ongoing
campaign of deception. The course also addresses the fact that employees can sometimes get enmeshed
in fraudulent schemes either without personal benefit or due to work pressures. Sometimes, it’s the
subtle, sly, creeping situations that trip up a good person, putting him or her onto the wrong path.

A Funny Thing Happened on the Way to a Bribery Indictment…

Something unusual and surprising happened last week in the corporate compliance world.

A company’s two senior leaders were charged with a foreign bribery scheme and—at the same time—the company itself was exonerated. If you’ve been following the case of Cognizant Technology Solutions, Corp., you’re perhaps also surprised by this turn of events.

The short story: In April, 2014 the company’s president and chief legal officer (and compliance head) were charged with a $2 million bribery scheme to promote construction of its corporate campus in India.

Typically, when bribery is detected, a government regulator charges a company’s senior executives with criminal conduct while, at the same time, also pursuing charges against the company for aiding and abetting the crime, hiding it or obscuring it revelation. Then, a long, drawn out process might unfold of investigation, litigation and sanctioning to bring the company to heel for the misdeeds of its executives and itself.

But, a company can sometimes escape such charges if it can demonstrate that it took steps to reinforce compliance, as we know from a case involving Morgan Stanley when Hong Kong executives were charged with bribery related to internships for customers’ family members in exchange for business.

Similarly, in Cognizant’s case, the company escaped criminal charges just as two of its senior leaders were being charged. Where it gets interesting is that two weeks after the company uncovered this scheme, it notified the authorities and assisted with the investigation.

A lot of things have to go right for a company to take the following actions:

  • Uncover a bribery scheme involving the president and senior legal officer (perhaps the two people most able to hide such a scheme)
  • Avoid interference by these two executives that could have sidetracked an internal investigation.
  • Avoid the propensity to “lawyer up” to protect the company from the threat of possibly aggressive regulators looking to make an example of the company.
  • Decide to report the scheme to authorities two weeks after identifying it.
  • Offer assistance to the authorities to help investigate the scheme.
  • Agree to pay some $24 million in disgorgement and penalties for a $2 million bribery scheme

This makes one wonder just what was going on within this company for its leadership at that time to take such bold actions:

  • Demonstrate a clear understanding of what constitutes signs of foreign bribery at the executive level.
  • Show willingness to take on both the company’s then-president and chief legal officer.
  • Be ready to buck the trend of turning inward to protect the company with a layer of lawyers and court filings.
  • Be willing to trust regulators’ possible willingness to provide leniency to companies that disclose, assist and disgorge.

It's a rare case for a company’s remaining leadership to take such prompt, assertive, responsible actions as Cognizant’s did. The likelihood is that these actions did not occur on the spur of the moment with senior leadership quickly ‘finding religion’ in the face of confusion and substantial challenges. What’s more likely, the leadership that wasn’t involved in the bribery scheme had a clear understanding of wrongdoing, stout conviction about the right course of action, sturdy moral courage to take the right steps when many others would have thought first of self-protection, and unfettered belief that regulators would treat the company judiciously.

Despite the involvement of the company’s compliance lead in the bribery, one wonders just what sort of culture of integrity existed among the rest of leadership? And what steps does such a company take to instill such a culture within these top leaders to motivate them to act responsibly in the face of such a challenging situation?

The US Justice Department indicated its refusal to charge the company was due to: "Cognizant’s prompt voluntary self-disclosure, cooperation and remediation, as well as Cognizant’s disgorgement to the Department and the U.S. Securities and Exchange Commission (SEC) of the cost savings that resulted from the bribery scheme."

In the end, something unusual and surprising happened: The remaining leaders were right, they did right, and, as a result, they and their company were treated accordingly.

2018: The Year in Bribery

As 2018 passes on, one of the extraordinary aspects of the past year was the seeming normalization of bribery and corruption in the media. Yet despite the year’s headlines dominated by stories regarding sexual harassment, cyber security and data privacy, bribery was nonetheless the clear winner in news stories.

One-Third of all News Headlines Involve Bribery & Corruption

An analysis of one news monitoring service found bribery and corruption accounting for roughly one-third of all headlines. The most prevalent area of business involved governments, including those of Brazil, Peru, China, Argentina, Hong Kong, Mongolia, Atlanta and New York State.

It also included these industries and related companies (a partial list):

  • Auto: Fiat Chrysler
  • Defense: Airbus, Chemring
  • Energy: Eni Energy
  • Financial: Societe Generale, Credit Suisse
  • Food: Jim Beam
  • Healthcare: Fresenius
  • Industrial: Samsung
  • Mining: Kinross Gold, Alabama Coal
  • Oil and Gas: Shell, Eni
  • Pharma: GlaxoSmithKline, Sanofi
  • Retail: Walmart
  • Sports: FIFA, San Diego State University, University of Kansas, North Carolina State, Adidas

A review of preliminary data, through Violation Tracker, on US regulatory enforcement actions begun or advanced in 2018 found the following:

  • Foreign Corrupt Practices Act penalties (before reductions) came to almost $500 million for just eleven companies (vs. $1.3 billion in 2017 involving fourteen companies).
  • Another $87 million in fines were identified in bribery/kickback schemes under False Claims Act violations.
  • An indeterminate more likely are part of fraud enforcement actions; bribery often is coupled with fraud, though not always called out in enforcement headlines.

Is this the new norm?

What’s surprising by this information is how normal bribery headlines, government charges and fines have become. While Trace International released a study in March that indicated US enforcement actions had slightly dipped from the prior year, across the board global enforcement actions continued to run at a high rate.

So, while bribery and corruption stories may lose some of their luster in place of hot topics such as harassment, cybersecurity and data privacy, these issues still command a lion’s share of regulators’ attention and continue to bring in millions and millions of dollars in fines from companies that get it wrong.

Given this information, business leaders and compliance officers are reminded to maintain a watchful eye over at-risk business activities where bribery may be prevalent within an industry. Further, this is a good time to shore up practices at preventing, detecting, mitigating and quickly responding to suspected bribery. Specifically, recent years have seen a rise in enforcement actions aimed at bribery involving third parties, such as business partners. The “conscious disregard,” “willful blindness,” and “deliberate ignorance” defenses are being proven as poor risk management practices.

‘Tis the Season — for ethical gift-giving practices

Business is a human, social activity that focuses on building and strengthen relationships. And so, offering gifts can, at certain times, be a valuable part of business as a way to demonstrate respect or show appreciation for a customer or partner organization, including for business partners in other cultures.

Ethical Snapshot: Helpful reminders about the proper role of business gifts and entertainment and when they lead to questionable practices.

Why could an issue arise?

While gifts and entertainment are often given and received in business, they can be a hotbed for ethics and legal concerns. Depending on the context in which a gift is offered, gift-giving may be misconstrued by others as:

  • A conflict of interest
  • A way to provide improper influence on a business decision
  • Attempted bribery or kickback

What could happen?

Poorly considered exchanges of business courtesies could:

  • Disqualify your organization from potential business opportunities
  • Lead to legal fines and other sanctions
  • Smear reputations
  • Ruin careers

What should you do before giving a gift?

Offering gifts or entertainment should not put you, your colleagues or your organization at risk. Before you exchange these business courtesies within a business setting, you should be asking yourself three questions:

  1. What are the rules for exchanging gifts and entertainment?
  2. Are the local customs for the exchange of business courtesies appropriate for my business and the situation?
  3. Should I seek guidance on the subject, and is this guidance sound?

What should you do before receiving a gift?

When acting on behalf of an organization, individuals should never accept gifts and benefits unless it is clear that the particular gift or benefit:

  1. Does not diminish the authority or ability of the organization’s representative to independently make decisions and act in the best interest of the organization
  2. Enhances the best interests of the organization as a whole, either by providing more time to learn about the inner workings of the client or company being served, or education about the greater corporate community as a whole
  3. Has no apparent impact on professional judgment or appearance of bias.

About Ethical Snapshots: Ethical snapshots are microlearning and communications modules designed to address a range of ethics and compliance issues through videos and follow-on questions to prompt the learner to explore a situation and consider ways to best address it. Ethical Snapshots can be used in your organization as emails to your employees, on video monitors in high-traffic areas or during instructor/manager-led training. View More Ethical Snapshots

Third-Party Vendors: Great Value with Great Risk

Your business must move quickly to evaluate opportunities, enter markets, develop products, ramp up sales, respond to customer needs and complaints, and a host of other challenges that make the difference between success and failure.

Leveraging third-party partners, such as suppliers, contractors, consultants, agents, distributors, representatives, and other parties, is now more important than ever for a business is to move grow rapidly and confidently in today’s fast-paced world.

 

What would you do?

These third-party partnerships can create both the potential for great value and chance of great risk. What would you do in the following situations?

  • A vendor with lax information security controls led to significant personal data disclosures of customers and the customers’ end-consumers
  • An agent you have recruited to seek business from foreign governments on your behalf is engaging in bribery.
  • You receive shoddy or defective parts from your subcontractors or found unsafe components or raw materials built into products for end-consumers.
  • As an exporter you discover that partners violating international trade requirements.

There are a multitude of scenarios that your employees, in various roles in your company, could encounter when working with third-party vendors and these can put your organization in a great deal of risk.

 

What could happen?

While your company may not be the source of the problem in the above scenarios, it is still going to bear the brunt of the fallout which can result in:

  • Failure to meet your obligations to customers
  • Inability to meet expectations to stakeholders
  • Damage to your company’s reputation for integrity
  • Suspension, restrictions or debarment from certain opportunities

 

What should you be doing?

As a company, you should be addressing the specific challenges in relationships with suppliers, contractors, agents, representatives, distributors, and other partners and educating all employees throughout an organization that work directly or indirectly with third parties to be educated on these relationships.

Such training would be particularly valuable to:

  • Leadership charged with building and maintaining relationships with third parties
  • Sales staff who work with agents, representatives, and distributors
  • Procurement or purchasing staff who work closely with third parties
  • Operations staff who interact regularly with third parties
  • Functional staff who manage contractors and consultants
  • International trade staff who work with agents, brokers, and similar partners

These partnerships can create both the potential for great value and chance of great risk in maintaining an ethical reputation. In order to safeguard against potential problems, companies need to develop more sophisticated ways to evaluate, establish, and maintain third-party relationships to protect from unanticipated risk and, in turn, help them best achieve their goals from the relationship.