Global Tax Fraud: Combating Bribery And Corruption by EY

Overview

Global commitments to combating corruption and enhanced cooperation by international law enforcement agencies have increased the pressure on companies to mitigate fraud, bribery and corruption risks. There is also a growing consensus that prosecuting individual executives, and increasing government efforts to apply international standards on the transparency of company ownership will help tackle these issues.

In this context, our 14th Global Fraud Survey provides powerful insights from over 2,800 senior executives in 62 countries and territories across the world. It shows that  while many businesses have made significant progress in tackling fraud and corruption, there remains a persistent level of unethical conduct – 39% of respondents consider bribery and corruption to happen widely in their country, with almost half able to justify unethical behavior to meet financial targets.

The report explores these issues in detail and provides insight as to how businesses can take steps to minimize the risk of corruption in their operations. It also provides specific regional insights in Africa, Brazil, China, Eastern Europe and India following interviews conducted by EY Partners with executives from leading companies about the survey’s findings.

Key findings

Combatting corruption as a global priority

  • 91% of respondents believe it is important to know the ultimate beneficial ownership of the  entities with which they do business
  • 83% of respondents view enforcement against management as an effective deterrent against fraud, bribery and corruption

Justifying unethical behavior and misconduct

  • 51% of respondents in emerging markets consider bribery and corruption to happen widely in their country
  • 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
  • 42% of respondents could justify unethical behaviour to ensure they met financial targets
  • Almost half of all finance team members interviewed stated that they would be prepared to engage in at least one form of unethical behaviour to meet financial targets or safeguard a company’s economic survival.

Bolstering defenses

  • While 55% of companies have 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
  • 1 in 5 respondents are not identifying third parties as part of their anti-corruption due diligence

What steps should businesses take to minimize risk?

  • Adequately resource compliance and investigations functions, so that they can proactively engage before regulatory action is taken
  • Establish clear whistleblowing channels and policies that not only raise awareness of reporting mechanisms, but encourage employees to report misconduct
  • Undertake regular fraud risk assessments, including an assessment of potential data-driven indicators

Combating Corruption As A Global Priority

Never before have governments and multinational institutions cooperated so extensively in combating bribery and corruption. The transnational nature of the issue led the G20 major economies to recognize bribery and corruption as an important impediment to economic growth and the group’s focus on corruption has continued under its Chinese presidency in 2016. The G20 outlined its priorities in the “2015-2016 G20 Anti-Corruption Action Plan” identifying key areas where economies and multinational organizations must strengthen their cooperation.

Among the issues identified, the G20 highlighted the abuse of legal and corporate structures to hide or conceal criminal activity as a “critical issue in the global fight against corruption.” It committed to increasing transparency over the beneficial ownership of companies and assets through the application of international standards on the beneficial ownership of legal persons and arrangements set by the intergovernmental body, the Financial Action Task Force.

The respondents to our survey suggest this move has popular support – 91% of respondents believe it is important to know the ultimate beneficial ownership of the entities with which they do business.

The World Bank too is aligned with the G20 approach, issuing guidance in 2015 requiring greater beneficial ownership transparency in its contracting processes. Again, the respondents to our survey indicate that they believe this level of transparency would help mitigate the risk of fraud, bribery and corruption, with 83% supportive of the World Bank’s guidance.

Global Tax Fraud: Combating Bribery And Corruption

Ongoing Challenges Of Bribery And Corruption

Globally, bribery and corruption are still perceived to occur widely, and our respondents do not believe that the situation has improved since our last survey in 2014. Thirty-nine percent of those surveyed considered bribery and corrupt practices to happen widely in their countries, consistent with 38% in our last survey.

The situation appears to have deteriorated in developed markets where 21% of respondents reported that such behaviors were widespread, increasing from 17% in our last survey. This contrasts with the trend seen in emerging markets, where our results indicate a small improvement, with the perceived prevalence of bribery and corruption perceived to be down from 53% to 51%.

The worsening view in developed markets may reflect an increased awareness of bribery and corruption in those markets. This may be a result of numerous high-profile corruption cases affecting major U.S. and European corporations.

Global Tax Fraud: Combating Bribery And Corruption

Consistent with previous years, our respondents continue to believe that bribery and corruption are less likely in their business sector. Only 11% of respondents stated that bribery and corruption happened in their sector, far lower than the 39% of respondents who believed that it happened in their country.

This sector-level perception also appears at odds with our respondents’ observations regarding their personal experience of such risks, with 32% of individuals recognizing that they have had concerns over bribery and corruption at work. Could it be that certain respondents remain unclear as to what constitutes impropriety or that they do not recognize certain corrupt actions as such?

Our survey indicates that a persistent minority of executives continues to justify certain behaviors, including making corrupt payments, when facing an economic downturn or in an effort to improve the perceived financial performance of their company. We highlight significant areas of concern regarding executive behaviors that should raise alarm bells for boards and other stakeholders.

Justifying Unethical Behavior And Misconduct

Our survey found that a significant minority of executives continue to justify unethical acts to improve a company’s performance. When presented with a series of options, more than one-third would be willing to justify inappropriate conduct in an economic downturn, while almost half would justify such conduct to meet financial targets.

While the behaviors that these respondents can rationalize differ between regions, they should be deeply concerning to all companies.

Global Tax Fraud: Combating Bribery And Corruption

The continued prevalence of such unethical behavior places businesses at risk of illegal conduct, which could lead to subsequent enforcement action. Board members and companies’ audit committees should be aware that regulators are focusing on these behaviors and are keen to hold individuals accountable.

Despite 84% of respondents believing that the board is giving the correct level of attention to fraud, bribery and corruption-related issues, almost half believe that boards need a more detailed understanding of the business if it is to be an effective safeguard against these risks. In this context, awareness of risks is not sufficient

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