Identifying the weakest links: Avoiding fraud and supply chain corruption

Article by Achilles

Despite the best efforts of governments, regulators and companies, supply chain corruption remains an issue all over the world. The United Nations estimates put the annual global cost of corruption at around 5% of global GDP while the World Bank puts the amount of bribes paid by individuals and businesses at $1 trillion each year.

The globalisation of supply chains means that companies operating across borders can be exposed to potential corruption and bribery throughout their supply chains. There are many places where bribery and corruption policy is not strong enough, or corrupt tendencies too strongly ingrained, to combat the practice.

The Latin American region and the Brazilian powerhouse at its centre have had an ongoing issue with corruption and bribery affecting the productivity, efficiency and profitability of supply chains. Brazilian corruption scandals in recent years extend to the highest levels of government. The consequences of corruption can be severe, and it is important that both buyers and suppliers know how to mitigate supply chain risk.

A persistent problem

Efforts to curb supply chain corruption across Latin America have plateaued after an initial period of effectiveness. This problem is not unique to the region, however, as bribery and corruption policy across the world has failed to eliminate the practice. In 2014, the mayor of Venice was arrested and investigated for allegedly misallocating millions of funds earmarked for the cities flood defence projects. In 2019, Airbus shut down one of its subsidiaries after accusations that it had paid millions in bribes to secure extremely lucrative Saudi Arabian contracts.

But, the problem is a pronounced one in Latin America with a host of high profile investigations occurring over the last decade. In Argentina, the ‘notebook scandal’ has exposed decades of bribes totalling around US$56 million to and from government officials. It is, however, the number of Brazilian corruption scandals in recent years that has attracted the most attention. The investigation that began in March 2014, called Operation Carwash, into allegations that state oil company Petrobras accepted bribes from construction firms, has also implicated Latin America’s largest construction conglomerate Odebrecht.

Clearly, the practice of paying bribes to secure contracts is more common than it should be across Latin America. Buyers operating supply chains in the region and beyond should lookout for indicators of corruption and bribery. Why? Because getting unintentionally caught up in something like the Brazilian corruption scandals can be extremely damaging.

Serious consequences

Supply chain corruption damages the trust that is needed for buyers and suppliers to work well together. But it can also cause a range of long-term damage to a business’ viability.

One of the most common indicators of bribery and corruption is overpaying for contracts and commodities in order to provide incremental payments (or ‘kickbacks’) to individuals and companies. These higher prices can be passed on up the supply chain and lead to buyers overpaying, as well as inefficient operations and the non-delivery of services. Other common kinds of supply chain corruption are biased contracts, the use of non-approved suppliers and falsified invoices.

Bribery and corruption policy and compliance often requires that companies do more than just avoid bribery at the tier one supplier level. Not being aware of exactly how deep your obligations go can result in large fines for non-compliance or a failure to enforce the proper policies.

Losing the trust of the companies you work with or the customers you depend on is not something to be taken lightly. Being found to be corrupt or to have failed to act in a way that prevented it can do serious damage to a brands reputation. This can make winning new contracts much more difficult.

With the supply chain risks of corruption so high, what steps can both buyers and suppliers take?

Mitigating the risks of corruption

Protecting your business and partners from the negative effects of supply chain corruption requires active monitoring, strong principles and clearly communicated strategies. Here are some things to consider:

Keep up to date

Transparency International’s corruption index is a valuable resource when it comes to understanding which regions and countries are known to have ongoing issues. Resources like this can help you make sure you are fully aware of what kind of environments you are operating in.

Knowing the current and historical market prices of materials and services will allow you to keep an accurate benchmark of what you have been paying. The supplier searches and benchmarking reports we can provide community members can help you quickly spot any indicators of overpaying.

Show improvements

As part of your supplier on boarding process, agree improvement targets for your suppliers based around transparency. You can apply this across the board to all your suppliers, or only the ones you have identified as particularly risky as part of your supply chain risk mapping. Our data shows that only 26% of suppliers currently have a full understanding if their supply chain.

Make a plan

Contract negotiations are not just about agreeing figures and timeframes. They can also be a way for buyers to enforce their ethical and compliance standards on the companies they choose to work with.

Communicate

Your corruption and bribery policy needs to be made available to all stakeholders, both within your company and throughout your supply chain. You should also demonstrate and celebrate your compliance to legal standards.

This may sound like a tall order, but we can make protecting yourself from supply chain corruption much simpler. We validate suppliers so that buyers can operate with confidence, and our communities create opportunities for suppliers while simultaneously allowing buyers to build and manage fully compliant supply chains. As a result of our services, Skanska has seen a 74% reduction in non-compliance in their supply chain.

Our supplier pre-qualification is also an important tool for buyers looking to have up-to-date and externally validated supplier information available at all times. For companies looking to procure efficiently and in accordance with international standards and regulations, it means you never have to make decisions based on anything but the full facts.

We are a global company, as are many of our clients. We can use this expertise to make sure that you are fully compliant with regulations, and able to find good partners wherever you decide you want to do business. That is our strength, we do everything and we can help you meet all of your challenges.

Read more of our insight about supply chain corruption and how to deal with it here.

Contact us today to learn more about our services.



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