Combating Corruption In Retail With Technology

The EY report entitled “Emerging risks and challenges in Retail and Consumer Products (RCP) sector: a forensic outlook” noted that the sector is witnessing increasing instances of bribery and corruption in recent years, typically involving administrative approval for projects which need to be given by various government authorities. EY also observed that instances of fraud and corruption have become bigger and better staged than ever before.

Retail Tech Innovation spoke to Brent Carlson, director at AlixPartners, who noted that corruption can exist anywhere in the world, and is not specific to Asia or the retail sector. He clarified that corruption is a type of fraud and one should look to the classic Fraud Triangle framework to better understand why it exists.

Why does corruption exist in Asia’s retail sector?

Brent Carlson: According to the Fraud Triangle framework, which was designed to explain the reasoning behind workplace fraud, there are three elements that collectively generate an environment conducive to fraud: pressure, opportunity, and rationalization.

It all starts with pressure, which drives an individual to consider fraud or corruption to achieve business objectives perceived by the perpetrator as unattainable without the corrupt act. This may be external in nature, coming from unrealistic or overly-excessive demands of organizational leaders or other key stakeholders. Pressure can also come from within an individual, in the form of greed.

Opportunity is the second element – one must have the opportunity to commit a corrupt act before any such act occurs. This is where comprehensive compliance programs with organizationally tailored internal controls can be a preventative measure.

The third element is rationalization. This refers to the psychological needs of the perpetrator as he or she looks to justify his or her actions. Examples of rationalization statements are: “I need to do this for my business to survive”; “my competitors are doing it anyway,” and “If I don’t take these steps now, the window of opportunity will close.”

What types of corruption are more prominent in Asia’s retail sector compared to other regions?

Brent Carlson: It’s important to clarify that there are two fundamental forms of corruption: official (or government-related) corruption and business (or private sector corruption).

Official corruption is driven by two main factors: revenue and regulation. By revenue, this means that a certain portion of a company’s business derives from government clients. These clients may be government agencies themselves, as well as government owned or controlled enterprises.

Examples of the latter in China include nearly all of the healthcare sector, university-level education, and state-owned enterprises. It is important to note that the extent of government ownership or control varies across different countries and jurisdictions.

As it applies to the retail sector in general across geographies in Asia, the revenue factor behind official corruption is rather low. Retail by its very nature is consumer-driven and thus government-derived sources of revenue are typically non-existent or very low at most.

However, where official corruption impacts the retail sector is more likely to occur in terms of the regulatory aspect. Permits and licensing are required to operate businesses in every jurisdiction across the world, and it is in endeavors to obtain such permits or licenses which generate the risk of corruption. The amount and complexity of permitting and licensing varies across jurisdictions as well.

For example in China, companies need to obtain and periodically renew their business licenses from the local Administration of Industry and Commerce (“AIC”). All companies in China also have annual statutory (tax) reporting requirements which call for interface with tax bureau officials.

Another China-related example for companies engaged in import and export consists of interface with customs authorities. These are all areas which have arisen in prior cases involving official corruption, especially related to the U.S. Foreign Corrupt Practices Act (or the “FCPA”).

For every business in any country, region, or jurisdiction, it’s important to periodically review the regulatory requirements of its business and then map these to the functions and specific individuals within the company responsible for the interface with government agencies. That way the company can continually refresh its compliance program and engage in effective follow-on testing to help prevent potentially corrupt acts from taking place.

As mentioned above the other fundamental form of corruption aside from official (or government-related) corruption is business (or private sector corruption), and this form of corruption is important for the retail sector. Business corruption commonly comes in the form of bribes or kick-backs in order to obtain and retain business.

However, as it applies to the retail sector, the risk does not come from company representatives giving or offering bribes or kick-backs, but in being the target for these by the retailer’s suppliers. This brings important negative risks or implications to the retailers business.

First, corruption in the supply chain increases overall costs. Products are sourced based on fundamental conflicts of interest and inappropriate personal gain by the company employee responsible for the purchasing selection rather than transparent economic considerations.

Another potential risk to the retailer is that under such purchasing conditions, it’s not only economic (or pricing) issues which get skewed but also product quality issues. If products are sourced based on some element of corruption, then there is a higher risk that such products may be substandard and may result in product liability issues and reputational harm to the retailer. In Asia, corruption in the supply chain can be a major problem.

How can technology be used to fight against corruption in the retail sector? Can you cite of successful case studies where specific technologies were used to reveal and litigate said corruption?

Brent Carlson: Technology is indispensable in the fight against corruption. A bespoke aspect, tailored to each organization, is integral as it allows each company to focus on what’s applicable to their business and risk profile, instead being overly broad and generic (and therefore less effective). Dashboard tools also can pull data from any type of accounting and enterprise management system the company is using.

For technology compliance solutions, it is best to have a focused approach and to avoid overly complex and costly solutions. Based on the company’s risk profile, a tailored dashboard can be designed to monitor transactions relevant to government interactions and/or focus on supply chain corruption risks by highlighting anomalous transactional activities and questionable trends.

The best defense against corruption, however, is a comprehensive compliance program with a set of robust internal controls and the ability to adapt to a changing business environment. This must be supplemented by focused follow-on testing to ensure adherence to the program and to identify areas for further program evolution.

Think of a compliance program as living and evolving with the flow of business, rather than an unchanging code set in stone. Laws and regulations may change and require additional or different permits and licenses. Consolidation may occur within the supply chain causing shifts or companies may also enter new markets requiring both new licenses and establishing new supply chains.

Compliance needs to adapt to these factors. Without this mindset, technological tools – no matter how impressive they seem – will not be effective against corruption.

Given the view that corruption is not going to go away, how can retailers mitigate the risks against corruption in the future?

Brent Carlson: The best approach to mitigate corruption risks in retail is by implementing a compliance program that is tailored to the company’s business and risk profile. Such a program should be seen as ever-evolving, and needs to keep in step with continued changes in a company’s business.

Source: CMOI