Register for Retail Risk – Singapore at www.retailrisk.com for an in-depth due diligence briefing on the hazards in Asia Pacific

Delegates at Retail Risk Singapore will be aware that the Asia Pacific region is the most dynamic market in global retail. In 2015, according to Deloitte, the region (including south Asia) accounted for more than 50% of retail sales growth worldwide, and by 2019 it is expected to account for more than 40% of the global retail market.

Growth rates have slackened, but consumer markets are showing stronger potential. One forecast (from the India Brand Equity Foundation, IBEF, in March this year) suggests India’s retail market could double by 2020, and the country’s online retail could be on a par with physical stores within the next five years.

IBEF cites a long list of famous businesses (Amazon, Walmart, adidas, Ikea, Gap, the Booker Group, Bally and many more) announcing plans in 2016-17 to enter, or expand in India’s retail space. Last year adidas (a global sponsor of the Retail Risk conference series) became the first foreign sports company to get government approval to open 100% foreign owned stores in India, and announced plans to open 30-40 flagship stores there.

Meanwhile, China’s more developed retail sector still offers partnering opportunities, particularly in e-commerce, where “global advancements will continue to be recognised”, according to KPMG.

B & C Risks

The risks for retailers in Asia Pacific are harder to calculate than the opportunities. But clearly the near omnipresence of bribery and corruption is a risk that no business can ignore. Most countries in the region score below average in Transparency International’s Global Corruption Barometer, (although Singapore ranks as the world’s seventh least corrupt country, above the UK and Germany). A regional Asia Pacific poll, which TI published this year, found 40% of the 22,000 interviewees thought the level of corruption had increased in the past 12 months while only 20% thought it had decreased.

The picture varies from country to country. Three quarters of the Chinese surveyed, but only 41% of the Indians, thought corruption had worsened. 53% of Indians thought their government was doing well in the fight against corruption, whereas the survey did not ask this question in China (and did not ask any questions in Singapore).

The risk of penalties for bribery and corruption appears to be on the increase for companies subject to strict regulatory regimes. Retailers charged with violations of the US Foreign Corrupt Practices Act in Asia Pacific in recent years have included the drinks company Diageo, (which paid $16 million in settlement) and snacks business Cadbury Ltd/Mondelez International (which paid $13 million).

UK Bribery Act

Unlike the FCPA which applies only to corruption of foreign officials, the UK’s Bribery Act (2010) catches bribes offered or given to any person, and does not offer exceptions for facilitation payments. Since 2014 the UK’s Serious Fraud Office has launched a stream of successful prosecutions under the Act, several of which have resulted in fines of around £20 million. This year the SFO took enforcement to a new level, reaching a deferred prosecution agreement (DPA) with Rolls Royce whereby the company agreed to pay penalties of some £652 million as a result of 12 counts of bribery, corruption and fraud dating back to 1989. (The offences included making corrupt payments in India and Russia and failure to prevent bribery in Nigeria and Indonesia).

The DPA does not prevent the SFO prosecuting individuals for those offences, and criminal sanctions could involve jail terms of up to 10 years. Since the DPA with Rolls Royce was announced in January other companies and executives involved in corruption prone regions have been following the SFO’s deliberations with keen interest.

Companies tend to fall into one of three categories in terms of their approach to compliance with anti-bribery laws, observers told Retail Risk News. There are companies that apply the rule book strictly whether or not it impacts on their business, because they believe that in the long run it will not have any effect. A second set, irrespective of the rules, are doing business the way they have always done it. And a third set understand the rules and have found a mid way in terms of how to manage the process. In some ways bribery and corruption still happen in their case, but not directly.

Where third parties are used for interactions with government, companies can leave themselves open to sanction by not ensuring that services rendered match fees. For example in the Cadbury/Mondelez case, an agent submitted invoices claiming he had prepared various licence applications, but the SEC asserted that the applications had been prepared by Cadbury employees.

Local laws

New anti-corruption laws have been passed in a number of APAC region countries in the last three to four years. In 2015 new amendments to China’s Criminal Law added a new crime of offering bribes to close relatives of current and former state functionaries, resulting in several prosecutions ensnaring Chinese and multinational companies.

In most APAC territories, enforcement agencies are becoming more experienced and confident in conducting raids and investigations, in which they seek specific information right across the business and its value chain, including reviewing transactions at third parties.

In 2013, the Indian parliament responded to years of protests by passing the Lokpal and Lokayuktas Act. This was to have established Ombudsmen for corruption and to have provided security for whistleblowers. But an amendment to the Act in 2016 watered it down, and so far there have been very few prosecutions.

EY presentation

Saket Bhartia, Executive Director, Fraud Investigation and Dispute Services, EY, will be raising “The Unspoken Topic” of bribery and corruption in the Asia Pacific region in his presentation at Retail Risk – Singapore. He will draw on recent EY research – a global fraud survey done in 2015, and an Asia Pacific fraud survey dating from the end of 2016.

In EYs 2015 survey more than 80% of respondents said their organization had a code of conduct covering bribery and corruption issues, but 44% believed it had little impact on how people actually behaved. All focus group respondents thought third parties were a significant risk to their business in relation to compliance.

The survey also found willingness to use whistleblower hotlines had decreased significantly since a previous APAC survey conducted by EY in 2013. Only about half of the APAC respondents said they would be prepared to use their company’s hotline, (compared with more than 80% of respondents in EYs APAC Fraud Survey 2013), owing to reduced trust in the process. (The failure of the Lokpal law to entrench whistleblower protection may have eroded trust). And all focus group respondents thought third parties were a significant risk to their business in relation to compliance.

A remarkable feature of EY’s 2106 survey was respondent willingness to justify unethical behaviour. Among its findings:

“1 in 10 of respondents would make a cash payment to win or retain business in an economic downturn rising to 1 in 4 in the Far East.”

And “42% of respondents could justify unethical behaviour to ensure they met financial targets”.

Given these attitudes it is not so surprising that although 55% of companies surveyed had a whistle blower hotline in place, “19% of respondents cited loyalty to their company and 18% cited loyalty to their colleagues as deterrents to reporting incidents of fraud, bribery and corruption”.

“Only 50% of respondents globally are using specialist monitoring software to identify fraud risks”, the survey found, and “1 in 5 of respondents are not identifying third parties as part of their anti-corruption due diligence”.

EY recommends a four pronged approach to mitigating the fraud risks: fraud risk assessments and controls ; third party due diligence; whistleblower hotlines (and protection of whistleblower confidentiality); and Big Data/ forensic analysis.

EY’s fraud investigation team offers behavioural analytics, including ‘natural language analysis’ and ‘sentiment analysis’ (of the frequency of negative emotive words used by employees on social media for example) to detect and flag up potential insider fraud and corruption issues.

For more details and answers to your questions about the use of these risk management techniques to prevent and detect fraud and bribery issues (in the Asia Pacific context), don’t miss the session with Saket Bhartia.