What Every Multinational Company Should Know About … Anticorruption Red Flags (Red Flags Series Part I)

We have received several requests to publish a list of red flags pertinent to multinational organizations. To accommodate these requests, we are publishing a three-part series on anticorruption, export controls and economic sanctions red flags, and antiboycott red flags. The first of these articles, on anticorruption red flags, is found below.

As covered in previous articles in our biweekly series — see here, here, here, here, here, and here — anticorruption compliance is a key part of any multinational’s international regulatory risk management. Anticorruption efforts have been an enforcement priority of the U.S. government for the Foreign Corrupt Practices Act for several decades now, with other countries increasingly taking a more aggressive posture on anticorruption enforcement as well.

One of the most important pieces of any anticorruption program is the identification, distribution of, and education about anticorruption red flags. Anticorruption red flags are indicators or warning signs that suggest the potential presence of corrupt practices within an organization, transaction, or relationship. Most multinational companies should take steps to identify the most relevant anticorruption red flags pertinent to their operations and to ensure that they are widely known within an organization. Doing so is crucial for multiple reasons:

1. Early Detection: Red flags serve as early warning signs of potential corruption, allowing organizations to identify and address issues before they escalate. Detecting corruption at an early stage can help prevent significant damage to an organization’s reputation, finances, and operations.
2. Risk Assessment: By identifying and analyzing red flags, organizations can conduct thorough risk assessments to evaluate their susceptibility to corruption. Understanding the specific risks they face enables organizations to implement targeted preventive measures and allocate resources effectively to mitigate those risks.
3. Risk Mitigation: Recognizing red flags allows organizations to assess and mitigate their corruption risks effectively. The quick identification of potential bribes allows organizations to identify small problems before they become larger, take steps to end suspect conduct, and to minimize potentially costly investigations and penalties. Further, by understanding where vulnerabilities lie, companies can implement appropriate controls, policies, and procedures to minimize the likelihood of corruption occurring.
4. Compliance: Many jurisdictions require organizations to implement anticorruption compliance programs as part of their legal obligations, with some of these obligations, such as the Foreign Corrupt Practices Act and the UK Bribery Act, having extra-territorial effect. Recognizing and addressing red flags is essential for demonstrating compliance with anticorruption laws and regulations.
5. Ethical Standards: Identifying and disseminating red flags turns every employee into a potential compliance resource. This is particularly important in a multinational environment, where oversight of far-flung operations is complicated by distance, language barriers, and the potential absence of direct compliance resources in certain countries. Proactively addressing potential corruption also reinforces an organization’s dedication to integrity, transparency, and accountability, fostering a culture of ethical conduct among employees and stakeholders.
6. Financial Integrity: Corruption can have severe financial implications, including losses due to fraud, embezzlement, or bribery. Monitoring and responding to red flags help safeguard an organization’s financial integrity by preventing illicit activities that could result in financial losses or damage to assets as well as potentially costly fines and internal investigations.
7. Protecting Reputation: Instances of corruption can severely damage an organization’s reputation, leading to loss of trust among stakeholders, including customers, investors, and regulators. Recognizing and addressing red flags demonstrates a commitment to integrity and can help preserve the organization’s reputation and credibility in the long term.
8. Stakeholder Confidence: Addressing corruption risks and red flags enhances stakeholder confidence in an organization’s operations and governance. Investors, customers, financial institutions, and other business partners are more likely to engage with organizations that demonstrate a proactive approach to combating corruption and maintaining ethical standards.

For all these reasons, anticorruption red flags are important because they help organizations detect, assess, and mitigate corruption risks, ensure compliance with laws and regulations, uphold ethical standards, protect financial integrity, preserve reputation, and enhance stakeholder confidence. Ensuring that your organization’s personnel are aware of the red flags that indicate a potential payment of a bribe is accordingly one of the key pieces of a well-functioning anticorruption compliance program.

The anticorruption red flags that are pertinent to a particular multinational company can vary, depending on how the company conducts business, its international footprint, its use of third-party intermediaries, its countries of operations, the extent of its dealings with government officials, how it interacts with government officials, its customer base, and other factors. But as a starting point, we have compiled a list of red flags that should form a good starting basis for many companies. These red flags do not, in and of themselves, indicate specific liability risks with respect to a particular transaction but nonetheless indicate the need for heightened vigilance.

General Red Flags

• Payment in a country with widespread corruption and/or a history of anticorruption violations. Countries that are considered to fit this category include some Middle Eastern and Asian countries, and much of the former Soviet Union and Africa.

• Widespread news accounts of payoffs, bribes, or kickbacks in a foreign country.

• Indirect or unusual payment or billing procedures requested.

• Adverse litigations with regulators, tax authorities, customers, and suppliers. Incidents of economic default, bankruptcy, and debt recovery applications are present.

• The registered address of the business is associated with many other businesses, indicating a shell address.

• Business appears to have a complex or vague ownership structure that may seem unusual for its size and scale.

Agent Red Flags

• The agent is new to the business or does not have much experience in the industry at issue.

• The agent has family or business ties with a government official.

• Bad reputation of the agent or rumors of criminal activity, convictions, corruption allegations, or prior improper payments or other unethical business practices by the agent.

• The agent requires that its identity not be disclosed.

• The potential foreign government customer recommends the agent. This could suggest a coordinated scheme to divide a payoff.

• The agent lacks the facilities and staff to perform the required services. This could suggest that the agent may be performing its job through corrupt payments.

• Insistence on the involvement of third parties who appear to be unnecessary for the work required.

• An agent insists on having sole control over meetings with or approvals by a foreign government or government official.

• The agent attempts to assign its rights or obligations to another party.

• The agent has an unexplained termination by another company, which could suggest the discovery of illegal conduct in that relationship.

• Unusually large or frequent political contributions to a person or political party by the agent, which could suggest an arrangement for the direction of business to the agent.

Control-Based Red Flags for Intermediaries

• An agent refuses to allow auditing of its books, based on reasonable suspicions of violations.

• An agent requests payment of inadequately documented or entirely undocumented expenses.

• Any other unusual request by an agent that reasonably arouses suspicion. For example, if an agent asks that certain invoices he backdated or altered, further inquiry is warranted.

Internal Red Flags

• Any unnecessary payment of money by an employee to any third party.

• Any overinflated or unauthorized invoices processed by an employee to make payments to a third party or someone outside the organization.

•  Payment made to a foreign public official.

• An employee deposits a large amount of money in smaller increments or has deposited an unusually large amount based on the employee’s position within the company.

• Colleagues in key roles appearing to live beyond their means or refusing to take annual leave.

• Offers of gifts or hospitality that seem disproportionate or do not have a connection with the business activities being conducted.

• Pressure exerted on staff to act outside of recognized processes or procedures.

• “Off the record” conversations; business not conducted through official and recorded communication channels. For example, being unwilling to put something in writing over email, etc.

Financial and Bookkeeping Red Flags

• Compensation arrangement is based on a success fee or bonus; unusual bonuses for foreign operating managers.

• Request for payments in third countries or through third parties or shell companies (particularly requests for payment in a jurisdiction that has no relationship to the transaction or to the entities involved in the transaction), or requests for payment in another country’s currency, which has no relation to the transaction.

• Payments to P.O. boxes or non-existent addresses.

• Requests that payments be made to two or more accounts.

• Request for payments in cash or cash equivalents.

• Requests for payment in another country’s currency, the country of which has no relationship to the transaction or to the parties involved in the transaction.

• Requests for donations to be made to a charity or for donations of goods and services.

• Invoices or reimbursement requests that reflect inflated amounts, lack detail or documentation, or are at or just below the limits made outside of the company’s authorization policies, or which otherwise do not confirm to a company’s accounting procedures and policies.

• Request for invoices that reflect a higher amount than the actual price of goods or services provided.

• Invoices that vaguely describe the services provided or that lack detail (e.g., “services rendered”).

• Poor or non-existent documentation for travel and expense reimbursements.

• Expense reimbursements at or just below the limit allowed by company policy, or at or just below the limits made outside of authorization policies.

• The existence of over-invoicing, false or backdated invoices, consecutively numbered invoices, duplicate invoices.

• The existence of zero-dollar or round-dollar invoices.

• Recording transactions to general purpose or miscellaneous accounts that can be used to hide improper payments.

• One-time payments to vendors and other third parties not typically utilized in the day-to-day business.

• Disproportionate allocation of capital as Work In Progress / Intangible assets that seems to have been written off in the past balance sheets of the business.

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