Rising concern about suspect third-party corporate ownership structures is a notable finding in the Kroll / Ethisphere 2018 Anti-Bribery and Corruption Benchmarking Report. When senior executives working in ethics, compliance or anti-corruption were asked to rank the reasons that potential third parties failed to meet their companies’ standards, risks associated with beneficial structures (ultimate beneficial ownership, UBO) rose from fifth to third when compared to the previous year’s survey. While still ranking behind general reputational or integrity concerns, and conflicts of interest, such risks were elevated above questionable relationships with politically exposed persons, and unusual contract and payment structures.
Mitigating ABC Risk a Challenge
About 60 percent of respondents reported that they were concerned or very concerned about beneficial ownership risks associated with their third parties, and only one in five were ‘very comfortable’ with the mechanisms they had in place to address these risks. A similar proportion was minimally or not at all comfortable.
“Regulatory mandates, critical reputational factors and data security issues are increasingly intertwined as compliance teams strive to protect their organisations from anti-bribery and corruption [ABC] risks,” says the report. “The common thread running through all these risks is the high volume of direct and indirect third parties that partner with and supply services to organisations.” In this respect, the proportion of respondents’ organisations that work with at least 1,000 third parties per year increased significantly, from 39 to 45%, between 2017 and 2018. The 2018 report is based on 448 survey responses from executives whose organisations have headquarters in the United States (58 percent), United Kingdom (21 percent), Western Europe (21 percent), Brazil (18 percent) and Central/Eastern Europe (16 percent).
The report says 65 percent of respondents believed their ABC risks would remain the same in 2018. Among the 28 percent who expected them to rise, the main reason was increased enforcement of existing regulations, followed closely by new regulations.
“Looking to the future, emerging developments such as new forms of payment (e.g. open-banking and cryptocurrencies) will make ownership waters even murkier to negotiate.” Three out of four respondents said their organisations monitored some or all of their third parties, and 58 percent uncovered third-party violations of ABC laws after the completion of their initial due diligence. While most issues were uncovered or declared at the due diligence stage, of the respondents who cited post-onboarding issues, 45 percent said they didn’t exist at the time of onboarding and 29 percent said the third party had concealed them at that time.
The report notes that doing business ethically and maintaining an up-to-date ABC program is not just about avoiding the pitfalls of reputational or legal risk. “Investors are finding that a focus on ethical business dealings can translate into rewarding financial outcomes. By way of example, the publicly traded companies among Ethisphere’s 2018 World’s Most Ethical Companies outperformed US Large Cap Indices by 4.88 percent over the last three years.” Do you have the right due diligence, ongoing monitoring, and third-party data to see beneficial ownership soon enough to mitigate risk?