Businesses must understand corruption risks when choosing business partners, EY warns

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London, 14 November 2011: Businesses must do more to ensure they have adequate procedures to prevent corruption among external business partners, EY has warned.

Following the introduction of the UK Bribery act, companies must demonstrate they have ‘adequate procedures’ in place to address third party risks – including outsourced business. If they are not compliant companies can be fined or executives imprisoned.

The warning comes as analysis of 225 background checks carried out by EY on behalf of companies seeking to vet business partners, revealed the top corruption risks flagged against potential suppliers, staff, importers or buyers. The main risks were evidence of potentially corrupt government links (50% of red flags) signs of litigation (11%) political connections (7%) and reports of illegal activities (4%).

EY estimates that global companies with hundreds of third party partners now conduct around 10,000 and 20, 000 background checks every year, with demand rising due to compliance requirements. EY, which has launched a major due diligence background checks service, says that lack of effective checking, often compounded by language and cultural barriers in new markets, can mean that risks are not spotted until they have caused serious damage.

Paul Walker, EMEIA Head of Forensic Technology & eDiscovery Services at EY, says: “The risks faced by companies related to third party customers, vendors, suppliers and staff have never been greater, with global expansion and ever more complex business relationships. Public commitments by enforcers against bribery and corruption mean it is now crucial for companies to adopt the same risk procedures for third parties that they would routinely enforce in other parts of their business. Failure to do basic due diligence, even in cases where cultural or language barriers might hide obvious risks, can create unforeseen burdens, leading to potential enforcement action, reputational damage, and company failures.”

Background checks by sector
Healthcare companies which maintain large amounts of sensitive data and face stringent compliance are among the most likely to carry out background checks, alongside life sciences, where threats of leaked research, sabotaged laboratories and competitor espionage require checking of business partners and their links. Transportation companies and food companies often employ checks to ensure accurate logs and safety of cargo and deliveries. Employee checks are also crucial in the hospitality industry, where companies are judged on actions of employees, who may require background screening.

The research showed that analysis of healthcare background checks showed the main risks flagged as government links (46%), litigation (11%) and political connections (8%), while for medical research, government links accounted for 86% of red flags.

Paul Walker continues: “It is important that simple checks are carried out and clearly some sectors are taking these risks extremely seriously. While background checks help to prompt suspicion, it is also important to resolve unanswered questions before ultimately appointing partners who may ultimately be acting in your name. For instance how did a potential partner achieve such strong levels of success in a highly competitive market? How are will they represent your business? This will help to prevent companies being unwittingly tainted by corruption.”

Most common corruption red flags to look out for

  1. Government links
  2. Evidence of litigation
  3. Political connections
  4. Illegal activities
  5. Evidence of regulatory non-compliance, bribery and financial irregularities

For further information or for an interview please contact Jonathan Marciano on 0207 951 9456