Expanding into new markets presents lucrative opportunities, as well as risks.
Potential threats in new territories include corporate corruption, malpractices, and fraud, which most firms have to face. Corruption and fraud cover a wide array of situations, but it is the unobtrusive yet more prevalent forms of fraud and corruption that create the biggest risks for organizations.
Corporate corruption and fraud can be characterized into 4 distinct categories. Understanding these 4 categories of corrupt practices prepares the executives to efficiently deal with the troubles they are likely to encounter in their careers.
- Grease Payments
- Employee Fraud
Most corporations in new markets face problems when their people are asked to make payments—by the local government or political figures—in order to achieve a business contract, acquire regulatory approval of a product, reduce taxes, or avoid customs duties. It is illegal in ethical companies to pay bribes by both the local as well as home country laws. Managers hardly ever make payments openly. This is mostly done through agents or dealers, utilizing unaccounted funds, funding foreign trips, giving gifts, and making donations to nongovernmental organizations as advised by the crooked officials.
Grease payments are demanded for doing routine transactions faster. Most executives encounter requests for grease payment by both government officials as well as by private sector employees. In some regions, even commencement of a business is littered with hurdles at each step where executives are often pressurized to pay grease payments or suffer undue delays in processing simple tasks.
In some countries with ineffective rule of law, dishonest officials demand money from businesses by coercing their executives or threating their operations. Executives new to such places typically fall prey to these coercers and succumb to make payments. Such threats and intimidation are often real based on the coercers’ reputation and past actions.
Another common menace in corporate organization is the involvement of senior executives in fraudulent activities, such as receiving kickbacks and commissions. Many a recent surveys and studies on global fraud have revealed the involvement of senior officials of multinational organizations in the developing markets. Greed is the major factor that tempts senior executives to undertake such fraudulent activities—such as faking the books, stuffing the channel with stocks, and forging parallel agreements with customers.
Preventing Corruption and Fraud
It is typically the materialistic politicians and dishonest public officials that are held responsible. However, corruption in most circumstances arises out of reciprocal obligation. The leaders or executives who succumb to the demands of the crooked officials or politicians are equally responsible for the act.
To avoid the threats of denting their reputation, organizations must ensure to make dealing with corruption a fundamental organizational capability. A simple way to do it is to devise something beyond policies and controls—such as building a culture of ethics and compliance, or operate ethically in any market around the globe.
It is critical for the organizations to create internal capabilities to resist corruption and inculcate behaviors and mindsets persistent with strong morals to endure such potential threats as they occur.
The 4 principles to combat Corporate Corruption are of great assistance to executives in this regard:
- Have Basic Controls in Place
- Invest in Core Functions
- Have Strong Local Leadership
- Tough It Out
Have Basic Controls in Place
Combating corruption becomes easier by establishing appropriate policies, rules, codes, and compliance measures. This starts with assigning appropriate budgets to conduct audits and compliance reviews, training teams to abide by anti-bribery and corrupt practices laws, taking action against corrupt employees, and defining a formal code of conduct for every employee. Effective processes for discounts, gifts, travel, and charitable contributions be laid out; and there should be proper communication of all these policies, codes, and rules to all stakeholders including the customers. Likewise, proper fraud investigation processes should be formulated, which should be quick, focused, rational, and impartial.
Interested in knowing more about how to combat malpractices in your organization? You can learn more and download an editable PowerPoint about Corporate Corruption and Fraud here on the Flevy documents marketplace.