IRM Risk Forum 2008 raising the game

1. “Just One Rotten Apple” Leader – Marie- Louise Rossi , FIRM Head of Insurance and Risk Management, New Security Foundation and John Burbidge-King WB MCMI CEO Interchange Solutions IRM Risk Forum 2008raising the game

2. Background • Post 9/11 heightened international inter-governmental concern about bribery and money laundering • Concerted development of anti bribery / anti money laundering compliance regime • Links to terrorist funding • Links to kidnap and ransom as well as other political / terrorist risks

3. Overview • Implications for corporate governance at all levels, but especially the Board and risk management

4. Overall Proposition Notwithstanding corporate commitment to compliance, how dynamic / holistic / ? enterprise is the risk management function / culture? Implications for cultural change, training and remuneration structures Insured Risks, eg: Directors & Officers Employers’ Liability Terrorism / K&R cover Property and business continuity

5. Overall Proposition (cont) Management of Uninsured / “Uninsurable” Risks, eg: Reputational risk Brand value Shareholder value Corporate survival CRIMINAL PENALTIES?

6. Anti-corruption audit AbcSure® audit tool to determine the level of corruption risk mitigation in a company’s compliance policies and business processes • Risk assessment and specific research for markets and projects • Reputational due diligence for third parties in context of applicable law, market and the corruption environment • Consultancy and training Delivering tailoredanti-corruption mitigation processes, both internal and external Individual Corporate Interchange Solutions Limited All content AbcSure and the Interchange Solutions logo are ®registered trade marks in the UK.

7. Our journey • Definitions, backgound and law • People risk • The corporate dimension • Criminality and terrorism • Discovery • Risk ~ downside and upsides • References

8. Corruption: “The misuse of entrusted power for personal gain.” Bribery: “An offer or receipt of any gift, loan, fee, reward or other advantage to or from any person as an inducement to do something which is dishonest, illegal or a breach of trust in the conduct of the enterprise's business.” Extortion “The abuse or threat of power in such ways to secure response In payment or other items of value” Some definitions

9. Corruption canvas“But ~ this is the way you have to do business to win the contract in…” • Financial pressures (individual and corporate) • Banking system • Mortgage fraud • Competition ~ level playing field • Economic cost of corruption • Associated with other crime • Emerging pacts and industry agreements • UK SMEs and weakness in the supply chain.

10. Legal and regulatory landscape • United Kingdom (L) Prevention of Corruption Acts 1906 and 1916 (L) Anti Terrorism Crime and Security Act 2001(L) Proceeds of Crime Act 2002 (L) Fraud Act 2006(L) Company’s Act 2006(L) 3rd EU Money Laundering Directive and UK AML (P/R) Listing and FSA Rules National laws in other jurisdictions(including Scotland) • Foreign Corrupt Practices Act (USA) • ConventionsOECD ConventionUN Convention Against CorruptionUN Global Compact NB UK Law Commission drafting a new anti bribery and corruption bill

11. Our journey • Definitions, backgound and law • People risk • The corporate dimension • Criminality and terrorism • Discovery • Risk ~ downside and upsides • References

12. People bribe ~ not companies

13. What is this?

14. 23 year old graduate Ben has worked for Sharpes Media plc for 4 months. The regional manager of Dynamedia, a long standing key supplier, phoned Ben to tell him how much he enjoyed the business relationship. Ben is flattered. A week later, Ben received an unmarked case of wine, delivered to his home. Inside he discovers an envelope marked “With Thanks” containing a cheque for £100. Ben assumes the gift is from Dynamedia, although there’s nothing on the box to indicate this. A little naive and unsure whether this is normal he considers reporting the gift to his operations manager, a slightly remote lady in her late 50’s. He falters and asks a colleague more his age. Linda told him “Oh ~ you too? Well, there’s no rule against it; it would be rude not to accept. Besides, keeping the suppliers on-side means we can get better rates for our clients… so it’s a win-win situation all round”. Ben banks the cheque. He places increasingly more business with Dynamedia, encouraged by their matching generosity and what he perceives as their recognition of his building a good personal relationship. Ben and his colleagues are being groomed to receive and accept bribes. They have been enticed into placing more business with Dynamedia through the receipt of increasingly disproportionate incentives. These would probably be viewed as bribes by the authorities. Grooming

15. Risk behaviour Examples: • Individual The CBRN Team • Group Siemens • Corporate Enron • Market UK Premier League football • Denial Wembley plc

16. Our journey • Definitions, backgound and law • People risk • The corporate dimension • Criminality and terrorism • Discovery • Risk ~ downside and upsides • References

17. Companies may provide the framework

18. Tone from the top XYZ plc Strategy & M&A Procurement Supply Chain Financials & performance Board Board Management Operations Regulation Management Governance     Direct/ indirect sales channels    ‘At Risk’ Transactions [D&O weak link]

19. Suppliers Over- invoicing Bills of quantity Procurement Brown envelopes Kickbacks Management Contracts Gain Gifts & Hospitality Favours Sales & Agents Slush fund Customers Where can bribery occur? Employees Joint Ventures & Offset

20. Overseas Plants Exports Overseas Agents Customer Cross Shareholding Regulatory Enquiry Media report Buyer Bribed Supply chain sensitivities Provides Key Component

21. ABC Limited is a small Borders based manufacturer of specialised encrypted circuit boards, only used by a small number of aerospace, defence and military customers. One of the company’s key customers is Grantham plc, a prime supplier of communications equipment to the UK Ministry of Defence. ABC is investigated by the City of London and MOD Police after a tip off by a disaffected employee about paying bribes to a foreign defence official to win a tender to supply a part government owned military electronics plant. The Operations Director suffers serious depression after his home is searched at 0500 and is sent on sick leave. The investigation completely disrupts ABC’s production schedule; the legal and other costs quickly escalate. The board discovers that their legal costs insurance is insufficient and due to an oversight, the Director and Officer Liability (D&O) insurance renewal premium was not paid when it had became due two weeks previous to the raid. A cash crisis follows; ABC is unable to meet its commitments to its bankers who have become unhelpful in present economic circumstances. Critical deliveries fall behind and as a consequence, Grantham plc fails to deliver a crucial order of infantry radios to the MOD as the alternative supplier to ABC, based in Canada, cannot respond to Grantham’s urgent demand. Within two months of the allegation, ABC is forced into bankruptcy and supplies to Grantham plc, now struggling to meet its commitments to the MOD, have stopped. SME’s at risk

22. Our journey • Definitions, backgound and law • People risk • The corporate dimension • Criminality and terrorism • Discovery • Risk ~ downside and upsides • References

23. Criminals and terrorists????

24. Asymmetric Risk Anti-competition Money laundering/fraud Triangle of corporate crime Bribery / corruption / extortion “A blurring of the lines between terrorism, organised crime, bribery and corruption, money laundering and fraud is already apparent. Organisations will need to take a more holistic approach to what is becoming a single area of risk.” Fraud Advisory Panel 10th Annual Review June 2008.

25. The global village Business “Trust” Crime & Terrorism “Advantage” Law enforcement “Evidence based”

26. Criminal and terrorist riskLinks to the criminal network Fraud Money laundering Counterfeiting/IPR Theft Prostitution/ Pornography Weapons Bribery & Extortion Terrorism Organised crime People Trafficking Drugs

27. Mountain highway @ £250 million @ 5% commission Commission and contracts(some simple maths!) 5 ambulances @ £50,000 each @ 5% commission = £12,500 for the agent = £12,500,000 for the agent

28. Follow the money ~ scenario“British company wins major road contract in Bolivia” £12,500,000 for the agent • Nice chap, company helps set up bank account(s) • Salesman gets kick-back from agent • Agent has cousin in Colombia and supports family • Unbeknown to agent family close to FARC • Agent wire transfers $500,000 through forex shop • Transfer picked up by US Secret Service • Collection of funds in Medellin • Funds buy explosives expert/materials from ETA • ETA uses part funds for drugs ring in Bilbao • Head of ring arrested by UK police at Heathrow • Extradited to Spain: cooperation UK/Spain/US • After 12 months, out of the blue , Scottish company and their bankers raided by Strathclyde Police

29. IPR theft

30. Thoughts so far • Relationship between corruption and money laundering • Relationship between corruption and tax evasion • Relationship between corruption and organised criminal groups… at least • Exposure to criminal prosecution • Exposure to civil liability in an action to recover corrupt payments • Risk to insurers ~ what’s the potential cost, especially in USA

31. Our journey • Definitions, backgound and law • People risk • The corporate dimension • Criminality and terrorism • Discovery • Risk ~ downside and upsides • References

32. They won’t get me! “The more I got away with ~ the more a game it became, a game I knew I would ultimately lose” Frank W Abagnale Jnr

33. UK FSA USA SEC Regulation Regulation GCHQ NSA Monitoring Monitoring MI5/MI6 CSS HMRC Investigation SFO FBI Investigation Border Agency SOCA O/s A-C Unit OECD monitoring National Contact Point CPS Prosecution Prosecution Dept of Justice Promotion Dept of State F&CO Promotion International CISC OLAF Other State organisations Disclosure INTERPOL Bribe Line AML clearance Enforcement net POLICE

34. Discovery • Third party, whistleblowing, disclosure • Money laundering suspicious activity reports(SARs) • Dawn raid business premises company professional advisors directors homes • During searches, individuals (including staff) may be questioned • Specific intelligence (profiling and research) • International co-operation • By happenstance and loopholes…Oops!

35. Enforcement radar screen Profile Case Fit Industry Sector Industry Reports Countries~Operation/Export Association Patterns travel and banking Press and NGO Allegation SARs & AML PEP connection Supply chain exposure US and other intelligence Whistle blowing Reports

36. Our journey • Definitions, backgound and law • People risk • The corporate dimension • Criminality and terrorism • Discovery • Risk ~ downside and upsides • References

37. Reputation “It takes twenty years to build a reputation and five minutes to ruin it. If you think about that, you will do things differently”Warren Buffet TRUST

38. At what risk to company? • Reputation and public opinion • Catalyst for other corporate crime and vice versa • Share volatility, loans, covenants • Adverse ratings and risk of contract blacklisting • Diversion of resource and employee morale • Impact on customers, suppliers and partners • Costs, legal, accounting, IT support, PR management etc • US dimension • Criminal conviction

39. Headlines Paradigm BVfined $1m for $12,500 bribe[2007] “WSP Internationalfaces Indonesia graft inquiry” [Aug 2006] “Weir Grouppledges fresh inquiry into £2.5 million 'bribes' to Saddam” [Oct 2005] De La Rueconfirms that a police investigation is being conducted at the Company(July 2007) Birmingham City FC“Corruption raid on Premier League club” [March 2008] “Compassprofit halved as UN investigation continues” [Nov 2005] “Bribery probe forDaimlerChrysler” [Aug 2005] “Vetcohit by record fine for bribes” [Feb 2007] “AWBchief grilled on ‘bribe’ plan” [Jan 2006] Sainsbury “Potato buyer arrested over alleged£3m bribe from Greenvale” [March 2008] “Siemens“fined €201m by German court in bribery case” [Oct 2007] “ABBdiscloses possible bribery” [Feb 2006] “FormerWembleychief jailed for bribery attempt” [Oct 2005] “The CBRN TeamMD admits bribery and awaits sentence” [Aug 2008] “BHP Billitondenies trying to bribe Saddam with wheat” [March 2006]

40. Share volatility:Compass Group UN and SFO investigations commence Sept 05 = 24% decline between Aug 05 and Oct 05 and did not recover value until June 06

41. Share volatility:Industry comparison (main competitor) Investigations commence Compass Group Sodexho Alliance

42. Share volatility:FTSE 100 comparison Investigations commence Compass Group FTSE 100

43. Best practice Self deception • Arrogant leadership • Showcasing • Complexity • Embedded processes • Business benefits • Sustainable business Corporate attitudesApproach to anti-corruption In denial • Unaware • No leadership • Poor administration • Banks rely on AML ?  X

44. Actions for companiesChecklist for insurers The Best Practice corporation Policy: Process: • Ethics • Compliance • Code of conduct • Gifts and hospitality • Know your customer • Oversight • Robust with accountability • Auditable, internal and external • M&A, IPO, JVs, Offset • Part of strategy and normal business process • Benchmark People: Communications: • Tone from the top • Zero tolerance of corruption • Board responsibilities • Independent due diligence/screening • Risk register and monitoring • Train, educate and train again • Single message • Cross culture, across organisation • Disclosure in reports • Openness in business • Suppliers and customers • Known for high standard of integrity

45. Minimising the risks • Anti-corruption systems, review, monitor, audit (NB Woolf Committee Report : sales and supply chains) • Maintain adequate dawn raid response procedures in force, review them, • Train staff globally ~ common approach • Ensure business continuity ~ specialist legal, accountancy, IT, media support • Check extent of D&O insurance policy ~ does it cover proceedings in the US? • What cover is in director’s and key executive contracts? • Is bribery and corruption on the risk register • How is the board organised to address this risk?

46. Benefits of anti-corruption policy and process • Enhances reputation ~ a business with integrity • Increases investor attractiveness ~ sustainability • Enter new markets with more confidently • Better supplier and manufacturing choices • Avoids contract blacklists and sanction (World Bank, EBRD etc) • Embedded as a business practice and company culture • Reflected in bottom line • Keeps you on the right side of the law • Risk reduction and lower premium opportunity And Significantly less costly than an investigation / prosecution And Do You REALLY Know Your Customer and Suppliers?

47. Our journey • Definitions, backgound and law • People risk • The corporate dimension • Criminality and terrorism • Discovery • Risk ~ downside and upsides • References

48. Key reference materials 1997 OECD Convention http://www.oecd.org/document/21/0,3343,en_2649_34855_2017813_1_1_1_1,00.html http://www.oecd.org/dataoecd/4/18/38028044.pdf UN Convention against Corruption http://www.unodc.org/unodc/en/treaties/CAC/index.html US Foreign Corrupt Practices Act http://www.usdoj.gov/criminal/fraud/fcpa/ Other useful websites: http://www.iccwbo.org/policy/anticorruption/ http://www.ibe.org.uk/ http://www.transparency.org/ http://www.traceinternational.org/ http://www.ethic-intelligence.com/?l=2&id_titre= http://www.interchange-solutions.co.uk/ Other useful sources: World Bank / Transparency International Corruption Perceptions Index

49. Q&A

50. Conclusion Next steps Opportunities Threats