Corruption Risks and Corporate Social Responsibility Spending

csrGlobal companies have been embracing socially responsible spending projects to build stronger relationships with local communities. The idea makes a lot of sense and real projects can result in real benefits.

As with any significant source of money, there are risks. Major global companies have been caught in some embarrassing situations, some of which can have real legal and reputational consequences.

Think of the irony of these situations – in an attempt to promote the goodwill of the company in emerging markets, companies spend large amounts of money, only to find out later that foreign leaders have lined their pockets with the funds to the detriment of the locally intended beneficiaries.

I will bet you that  more than half of the Fortune 500 companies have experienced this situation or have yet to find out how the money donated for a real cause and project was actually spent.

Press reports have identified a number of major companies that donated money to foreign governments to support meaningful public interest projects, only to find out years later that the money is gone and no progress has been made on the project. It is not just embarrassing but the company may be liable under the FCPA, the UK Bribery Act and possibly other anti-corruption laws.  As an example, according to press reports, a number of American oil companies donated close to $175 million to Angola for Sonangol to construct a training facility.  No one can account for the money nor can anyone point to any evidence of a training facility.  This is an extreme example but one that underscores the risks in corporate social responsibility spending.csr4

Unfortunately, companies have to go back to the drawing boards and build a set of internal controls around the process. Not to repeat myself over and over, but before money leaves the company, internal controls have to be in place to ensure that the company knows who the money is being given to, the purpose of the project, and a schedule for audits has to be implemented.

Juts like many other areas, due diligence is a must and should be robust given the amount of money that may be involved. Also, companies have to monitor their social responsibility projects and regularly audit the projects to ensure that the money is being used for authorized purposes. In many respects, the risk created by a significant project in the millions of dollars can be significant and even more dangerous than many third parties working with the same company.

To get a handle on the issue, companies have to first identify the extent of the issue. How many projects has the company authorized? What process is in place to secure approval of the project? How is the spending authorized, monitored and audited?

csr3Given the lack of compliance maturity around this issue, anti-corruption compliance officers are likely to discover that a number of projects are authorized at the local community level, budgeted to the local office, and run by the local office with little regard for controls and verification of appropriate use of the money.

The analogy to third party due diligence ten years ago is accurate for many companies. Instead of third party intermediaries operating all over the globe without any real centralized set of internal controls, social responsibility spending may be in the same immature situation. Compliance officers should reach out to company staff in emerging countries and/or regions and begin the painstaking process of identifying the projects, defining the controls that will be needed, and then instituting policies and training to ensure that future projects are adequately vetted to ensure compliance with anti-corruption requirements.

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  1. May 24, 2016

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