A Compliance Priority — Watching Where Your Money Goes

His money is twice tainted: taint yours and taint mine – Mark Twain

In a number of enforcement contexts, I am always struck by a common theme – crooks are able to obtain access to corporate money for improper purposes.  You never hear about a crook who uses his own money to pay bribes or secure any illegal advantage.

Companies have to maintain vigilant financial controls to protect against theft, fraud and misuse of corporate funds.  There are a number of sources available from which corporate crooks can fund their illegal schemes.

There are several potential sources that recur in the corporate finance world –  third-party intermediaries, procurement and expense reimbursement.

In China and other high-risk countries, third party intermediaries are often used as a way for an insider to collude and secure money with the assistance of the third party.  These schemes are often used and involve agents, distributors and shadow/fake vendors.  The insider has to collude with the outside third party to help secure funds for a variety of illegal purposes – to steal for their own benefit and/or to pay bribes are good examples.

In many cases, an inside may have a family member or friend on the outside participate in the scheme.  In these cases, they have two significant hurdles – they have to avoid any conflict of interest detection, which is relatively easy, and they have to overcome financial controls, vendor onboarding and accounts payable scrutiny.  This is why a company’s internal controls and the role of various gatekeepers are critical.  When an insider colludes with an outsider, it is difficult to catch.

The SEC has underscored this critical issue by pointing to the importance of invoice-to-payment processes.  In many FCPA enforcement actions, the SEC has highlighted the weakness or absence of such controls as a reason that bribery may have occurred.

Procurement functions at companies have taken on greater roles in protecting against potential fraud against the company in managing vendors and suppliers.  The nature and extent of these risks in the supply chain are exponential and it is easy to get overwhelmed by permutations of risk.

In high-risk countries, one of the most significant risks is when a company appoints a local employee to manage the procurement function.  I have heard from company after company that they had to fire their procurement officer for taking bribes from potential vendors (some like to call this incoming bribes as opposed to outgoing bribes).  The local employee in a high-risk company can bring benefits from knowing potential vendors and their reputations.  At the same time, they can create significant risks because of those same connections.  It is important to build robust controls around the local procurement manager in these situations.

Another important source of illegal funds are employee reimbursement expenses – such as travel, lodging, meals, entertainment and comparable funding sources.  I do not intend to review the numerous cases in which these funds were misused to fund bribery or used by a crook to steal from the company.

Companies have recognized this issue and they are revamping their programs to require pre-approval and appropriate documentation before paying the expense.  Millions and millions (like Carl Sagan’s famous “billions and billions”) have been lost in this area, and funded numerous illegal schemes and fraudulent activities.

Yet it seems that companies have not recognized this problem to warrant revisiting and revamping their internal accounting controls surrounding this risk.  Some companies are still relying on retrospective reimbursement without requiring pre-approvals and adequate documentation.  Such an approach is outdated and poses real and significant risks.

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