Why the war in Ukraine raises the spectre of corruption
29 Mar 2023 ( Raconteur )
When Russian missiles and airstrikes began falling on Ukraine on the morning of 24 February 2022, it triggered a devastating and destabilising domino effect that would first affect people’s lives and eventually the global economy.
More than a year on, those economic effects are still being felt acutely by UK businesses with ties to Ukraine. Sanctions and supply chain disruptions have forced industries from construction to motor manufacturing to scramble to find new suppliers, and a report by Moody’s Analytics has warned that the Russia-Ukraine military conflict now poses the “greatest risk” to global supply chains.
All that disruption is allowing another threat to flourish too. “Corruption and conflict feed each other,” says Chara de Lacey, acting head of business integrity at independent anti-corruption organisation Transparency International UK. “In particular, conflict is a breeding ground for corruption, with political instability, increased pressure on resources and weakened oversight bodies creating a big opportunity for crimes such as bribery and embezzlement.”
That’s bound to be a concern for British businesses with supply chain connections in the area. “The invasion of Ukraine and the ongoing conflict create challenges for UK firms sourcing from the affected regions,” de Lacey continues. “Supply chain disruption and the shortage of key regional commodities is a key risk for corruption, as businesses may try to justify paying bribes to gain access to resources.”
Why is this threat growing?
A report by corporate intelligence group Kroll suggests that most C-suites are acutely aware of the threat that corruption poses to company integrity. As many as 49% of UK executives believe that the lack of third-party visibility is the primary driver of an increased risk of bribery, corruption and opportunism.
And in practice, this illegality can take many forms, from contractors relying on kickbacks to government officials or state-owned enterprises to grease the wheels on the movement of goods, to a supplier submitting a false invoice for work done. “The Ukraine crisis has added huge pressure to the process of achieving business continuity,” says Arun Chauhan, founder and director of Tenet, a law firm specialising in fraud and compliance issues. “Some may be tempted to bend the rules or turn a blind eye.”
What’s more, these problems could be taking root right under your nose. As Chauhan puts it: “Do you as a business know for certain that your purchasers will not use any means necessary to find a supplier, or to persuade a supplier to supply them?” The post-pandemic trend towards remote working has undoubtedly made these unwanted behaviours much harder to uncover.
The repercussions for a business caught operating outside the law can be serious. “Bribery is a criminal offence under the Bribery Act 2010,” continues Chauhan. “Commercial organisations can receive an unlimited fine and suffer other significant adverse consequences, including exclusion from tendering for public contracts and reputational damage if they are found to have failed to put in place adequate procedures designed to prevent bribery. There is also a risk of imprisonment and further fines to senior management and individuals if they are found to be directly responsible for an offence.”
How to fend off corruption risk
So, what can British businesses do to fend off this risk? Legal experts insist that one of the surest and simplest ways for businesses to ensure integrity from the outset is to focus on carefully drafted contracts and encourage greater collaboration between their procurement, legal and compliance departments.
“It’s in these early encounters with potential third parties that you have the most power to mitigate risk, when they are still in competition with one another,” explains Penny Ward, a trade and commerce partner at international law firm Baker McKenzie.
For instance, businesses might be able to take advantage of that competitive leverage to identify key risk areas in that third-party relationship and then tailor their procurement documents – particularly their request for proposals – to address those risks. After all, at that early stage of the bidding process, most suppliers will realise that non-compliance will probably cost them the tender, making them more likely to agree to terms that will limit the possibility for corrupt activities further down the line. This should also help to fast-track contract negotiations, which can be useful when you’re trying to be as agile as possible in the search for new partners.
Similarly, including a right-to-audit clause guarantees third-party transparency, data disclosure and regular reporting in future. In some cases, it may even enable procurement staff to make unannounced site visits to warehouses and offices.
Of course, not all suppliers are new. Even with established relationships, it’s quite possible that previously sound working practices can fall prey to illegalities, as suppliers feel the pressure to deliver.
How mapping supply chains in real time could help
One way to safeguard the existing supply chain and root out wrongdoing is to have it exhaustively mapped. Unfortunately, this is far from a simple undertaking, as it requires total visibility of everyone in the chain. Whether you’re a smaller operation with a shallow supply chain or a global corporation with a deep pool made up of thousands of suppliers, there needs to be a thorough understanding of every single player.
While experienced personnel and risk management teams can set about identifying and reporting on transactions or processes which look shady, the number and complexity of the deals taking place in modern supply chains may mean that technological solutions will be preferable. For instance, tools deploying machine learning to trawl for signs of suspicious behaviour may be a fairly efficient safeguard, backed up by automated verification of credentials and processes, and risk indicators to flag up potential issues.
Fraud detection models can also be embedded in platforms that monitor procurement, where they can further integrate with software that monitors the whole supply chain and centralises everything from contracts and purchase orders to expense reports and the all-important invoices. The sophisticated pattern recognition element of AI can then be brought to bear on this massive amount of data, shining a light on suspect behaviours and actions that clearly need some oversight from procurement and legal departments.
Rolling out these kinds of tools will clearly require investment, but the rewards can be significant in terms of identifying value-eroding behaviours. Whether that’s underfilling trucks, delivering parts and passing them off as compliant when they’re not, or simply materials going missing from a shop floor, there are numerous ways that disreputable vendors can exploit the strain that many supply chains are currently under.
Crucially, it’s possible to scale up or down the technological solutions according to the size of the business, so that the initial investment is in keeping with the budget available. While custom models, which usually require eye-watering investments, can be ‘trained’ on a corporation’s own data, consortium models use data from multiple comparable companies so that smaller institutions can share the model, hosted in the cloud, at a significant saving.
But AI can’t operate independently. There is always a significant human element to mapping supply chains because many suppliers will be resistant to the process. Interventions by personnel will always be required to keep mapping going down the chain, whether that’s establishing ground truths through physical visits under previously agreed audit clauses or simply ensuring suppliers buy into what you’re trying to do.
To ensure total visibility, then, suppliers need to comply fully and it’s vital they understand a business’s commitment to the task of rooting out corruption and willingly share the data needed.
A fish rots from the head down…
Ultimately, the companies that are best at mitigating risk are those that vet thoroughly, but this becomes increasingly difficult when the pressure is on to keep the supply chain moving and outmanoeuvre the logistical fallout from the war.
Here, though, the boardroom sets the tone. “Rigorous due diligence is essential to ensure responsible UK companies are not connected or contributing to corruption through their business relationships,” warns de Lacey. “These checks will always be more effective when the UK companies carrying them out are genuinely committed to stopping corruption, rather than viewing this merely as a box-ticking exercise to satisfy legal requirements.”
For John Glen, an economist at the Chartered Institute of Procurement and Supply, the current focus on supply chains is a golden opportunity to tackle corruption. “Supply chain and procurement are now front and centre of CEO thinking, and their voice in the boardroom has increased exponentially,” he says.
“In terms of tackling corruption, organisations must decide where and how they want to do business. It comes down to the ethics of individual leaders and managers, and organisations must attract leaders who have personal ethics that abhor corruption. At an organisational level, the business must then support the difficult corporate decisions that bake anti-corruption measures into an organisation.”
As the conflict in Ukraine rolls into its second year, the stakes couldn’t be higher when it comes to conducting business without reproach. It’s a timely reminder that now, more than ever, UK businesses need to be mindful of the companies they keep.
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