Based on a survey of 347 SOE respondents from 213 companies in 34 countries, this chapter outlines where corruption and other irregular practices in SOEs have occurred in recent years. It explores how SOE and respondent characteristics, such as the company’s sector or the respondent’s position, influences the perception of corruption-related risks. Data is deconstructed to understand more about the specific high-risk areas of public procurement, conflict of interest, influence in decision-making and bribery. Concluded cases of corruption and other irregular practices illustrate how such corruption risks can materialise.
State-Owned Enterprises and Corruption
What Are the Risks and What Can Be Done?
Chapter 1. The risk of corruption in and around state-owned enterprises: What do we know?
Abstract
Overview: The risk of corruption in and around state-owned enterprises
This section summarises and highlights the main findings from the remainder of the chapter. The chapter deconstructs corporate insiders’ perceptions about the risks of corruption and other irregular practices in their SOE. Respondents rated the likelihood and impact of corruption-related risks materialising in their company, as well as whether they believed they had already materialised in the last three years. Respondents’ risk assessments, which can be influenced by their past experiences, illustrate where SOE leaders are concerned. The chapter drills down on key risk areas, including public procurement and contracting, conflict of interest, undue influence, favouritism and bribery. The chapter’s main findings are as follows:
Forty-two percent of 347 SOE respondents report that corrupt acts or other irregular practices transpired in their company during the last three years, 1 or at least one respondent in 49% of the 213 companies. 2
SOEs in the oil and gas, mining, postal, energy and transportation and logistics sectors were more likely to have experienced corruption or otherwise irregular practices than companies in other sectors3 – with between two fifths to one half reporting to have witnessed such practices in the last three years.
Corruption and other irregular practices reportedly involved all hierarchical levels of the SOE, according to respondents. Those most commonly implicated were non-management employees and mid-level management. Their transgressions occur more in the day to day operations of the company and are thus primarily the responsibility of the Board. Business partners were also implicated according to almost one-third of respondents, highlighting a need for improved third and counter party due diligence and more rigorous application of high standards for subsidiaries, sub-contractors and partners (see Chapter 2 for more on this). One in five respondents saw board members involved in such corruption and other irregular practices, emphasising the responsibility of the state-ownership entity to promote and contribute to sound boards (OECD, 2015a).
Board members and those in charge of integrity functions (audit, compliance or legal counsel) report seeing corrupt activities and irregular practices more than executive management. As almost half of the participating 213 companies had multiple respondents of different positions fill in the survey, these diverging assessments point to (i) an asymmetry of information as to what happens within the company; or (ii) a difference in executive managements’ willingness to report.
The top corruption-related risks facing SOEs are both internal and external to the enterprise. Respondents’ assessments of risks differed according to the position of the respondent and their SOEs’ sector of operation. Such differing perceptions may have implications for the accuracy of risk assessments and efficacy of associated controls, as well as for reliability and regularity of executive management reporting to the board on corruption risks within the company.
Respondents consider the top three risks most likely to materialise in their company as: (i) violations of data protection and privacy; (ii) favouritism (nepotism, cronyism and patronage); and (iii) non-declaration of conflict of interest. Those reporting that corrupt or other irregular practices transpired in the company in the last three years also considered violations of data protection and privacy as the top risk. They however deviated by ranking stealing, fraud and receiving bribes, as more likely to occur, which may indicate which risks the respondents saw materialise in their company in the last three years.
The top 3 risks of corruption and irregular practices considered more impactful for respondent SOEs are: receiving bribes, falsification and/or misrepresentation of company documents, or false accounting and fraud.
Whether or not respondents had witnessed corruption or other irregular practices did not significantly change how they viewed the likelihood or impact of future risks occurring. SOEs with public policy objectives were less likely to report that corruption risks transpired in their company, compared to SOEs with entirely commercial objective, however, they see the risk of future occurrence to be slightly higher.
The data presented in this chapter, when compared with other international studies on both SOEs and the private sector, suggest that SOEs may be susceptible to corrupt or irregular practices that emanate from both within an SOE as well as by external forces. Particular attention could be placed on non-management employees and mid-level management, as well as executive management charged with their oversight, and highly lucrative industries dealing with natural resources and infrastructure.
Corruption and other irregular practices in state-owned enterprises: What we know
SOEs have been in the spotlight in recent years in view of their increasing international presence and market share. They have also been under scrutiny for corruption and other irregular practices in and around SOEs, with an increasing amount of literature on the potential for undue influence, bribery and other infractions to interfere with the daily operations of an SOE. The OECD’s 2014 Foreign Bribery Report found that SOE officials were more often promised or given foreign bribes, and of a higher financial value, than any other public official in all concluded cases of foreign bribery of public officials between 1999 and 2014 (OECD, 2014). A study conducted by the International Monetary Fund (IMF) found that 30% of its mission chief respondents viewed corruption to be widespread in the real sector - 71% percent of whom attributed it to malpractices in the state-owned enterprise sector (IMF, 2017).
Of the 347 respondents in this survey, 42% report that corruption risks materialised into activity or action in their company in the last three years. Aggregated at the company level, at least one respondent in 49% of the 213 surveyed companies reported their materialisation. Irregular practices are also considered in this report, taken to mean activities or behaviours that range from explicit corruption to other offenses, such as stealing that are representative of a lack of ethical behaviour which may be representative of systemic issues that inhibit a culture of integrity.
The proportion of those witnessing corruption or other irregular practices in SOEs, as reported here, appears higher than other studies that also attempt to measure the incidence of corruption and misconduct in both SOEs and other non-state firms, though the results cannot be directly compared. The 2015 Global Business Ethics Survey found that 33% of surveyed private, state and non-profit entities observed misconduct, of which 16% was bribery and corruption related. Twenty-eight percent was talent-related misconduct, 31% was fraud, lying and stealing, 31% was regulatory-type violations, and 21% contracts-related misconduct (Ethics Compliance Initiative [ECI], 2015). 4
So why is it that SOEs seem more susceptible to corruption or other irregular practices than privately incorporated companies? The remainder of this section looks at perceptions about who is involved in corruption and other irregular practices within SOEs,and where it more commonly happens.
Who perceived corruption, and who did they say was involved?
As mentioned, corrupt and other irregular practices materialised in almost half of the respondents’ SOEs in the last three years, reported most often by board members, and heads of the corporate audit, compliance or legal functions (Table 1.1). Almost half of “other” respondents, predominantly corporate secretaries, also reported occurrence of corrupt or irregular practices in the last three years.
Almost half of companies in the sample had multiple respondents. Thus, different experiences between positions or colleagues, with regards to witnessing corruption or irregular practices, suggests either: (i) asymmetry of information within the company, which may be appropriate depending on the respondent’s position; (ii) over-reporting; or (iii) under-reporting.
Table 1.1. Those who reported witnessing corruption and other irregular practices, by position of respondent
Responses to: “in your assessment, did any of the [listed] risks materialise into activities/actions in the last three years in (or involving) your company?”
Note: Board members includes Chairs and other board members; Executive management includes Chief Executive Officers/Presidents/Managing Directors, Chief Financial Officer or similar or other “C-suite” executives; the group of heads of the corporate audit, compliance or legal functions also included Chief Risk and Chief Sustainability Officers. “Other” refers predominantly to Corporate Secretaries.
Source: OECD 2017 Survey of anti-corruption and integrity in SOEs.
A comparatively limited 36% of executive management respondents reported seeing corruption risks and other irregular practices materialise in their company in the last three years. The apparent difference between executive management responses and the other categories may occur for the following reasons:
Where corruption has occurred, employees were most often involved (69%). Executive management may lack awareness of non-management employees’ behaviour, leaving this to middle management who are also often involved. However, the majority of companies’ reporting structures have the unit responsible for integrity most often reporting to the CEO or President, suggesting that the latter has venues through which it could be well informed (discussed in Chapter 2).
Forty-two percent and 25% of respondents saw mid-level management and senior management, respectively, involved in corrupt activities or other irregular practices. It is possible that executive management representatives reported seeing less corruption (Table 1.1) precisely because of awareness or personal involvement (Table 1.2).
Executive management may be more likely to under report corruption or corruption risks given their position and responsibility for the company image. Indeed, they are less likely than other respondents to agree that “loyalty to the company” and “loyalty to customers” can be an obstacle to their company’s integrity.
Conversely, board members and those in charge of integrity functions (compliance, audit or legal/counsel), and “other” (mostly corporate secretaries) reported witnessing corruption and other irregular practices more often than executive managers. This may be due to the fact they are often privy to such information through confidential reporting functions.
Table 1.2. Actors reportedly involved in corrupt activities and other irregular practices in state-owned enterprises
Responses to: “Which actors(s) was (were) involved in the corrupt activities/actions / irregular practices that materialised? Please check all that apply.”
Note: Based on 146 respondents that both reported to have witnessed one of more of the corruption-related activities or integrity offenses put forth, and reported which actors they saw involved.
Source: OECD 2017 Survey of anti-corruption and integrity in SOEs.
Who is involved?
Similar to other international studies on corruption in companies, this study finds that mid-level management and non-management employees are seen as top culprits. Table 1.2 shows that of 146 respondents that reportedly witnessed corruption and other irregular practices in the last three years, 69% reported that non-management employees were involved, followed by 42% who saw mid-level management involved. Around one quarter of respondents said senior management and business partners were involved. It cannot be ignored that 16% of respondents report that corruption risk materialisation involved a board member, 14% a public official and 8% report shareholders. Given the critical roles of boards and the state as a shareholder in promoting corporate governance and preventing corruption, Chapters 2 and 3 deal with improving integrity at these levels.
In one European country, there are three ongoing cases pertaining to corruption allegations with various level courts not yet concluded. All cases reportedly involved improper activities performed by the executive board level and top management of respective enterprises and private contractors. A survey done by the Ethics and Compliance Initiative (ECI) also found that a majority of bribery cases in the private sector involved managers (32% middle managers and 23% top managers).
Who is paying foreign bribes to SOE officials?
The findings of the OECD’s Foreign Bribery Report (2014) speaks largely to the role of SOEs in “passive bribery”, where SOE officials or board members are offered or given bribes that may or may not have been solicited. SOE respondents to this survey reported that the likelihood of receiving bribes (32% said high or medium risk) was higher than offering bribes (15% said high or medium risk). Respondents see the impact of receiving bribes as higher than offering bribes – though on a smaller margin.
The OECD’s 2014 Foreign Bribery Report looked at over 400 concluded cases of foreign bribery. Figure 1.1 displays the level within the company of the person who paid, was aware of or authorised foreign bribery of an SOE official and other public officials from 1999 to 2014. The results suggest that SOE officials are either more susceptible to being offered or given bribes – whether solicited or not – by third parties (agent/consultant) than other public officials implicated in foreign bribery cases, or that they are more likely to solicit bribes from this category than other public officials. On the contrary, SOE officials are less likely to be bribed by or solicit bribes from working level employees than are other public officials.
Figure 1.1. Position of actors who paid, were aware of or authorised foreign bribery of state-owned enterprise officials
Note: For the purposes of this report, responses of management and President/CEO were merged. The axis represents the percentage of cases involving at least one of the three categories of persons having paid, been aware of or having authorised foreign bribery of public officials.
Source: OECD (2014).
Where is it reported to occur?
Respondents in Latin America reported to witness corrupt and other irregular practices in their companies at a slightly higher rate (47%) than respondents in Europe (43%) and both higher than in Asia (26%).
Respondents in companies with entirely commercial objectives were more likely to report having witnessed corrupt or other irregular practices in the last three years, than respondents in companies with mixed objectives (public policy and commercial). Respondents in both types of company perceive the same likelihood and impact of future risks occurring. Companies with public policy objectives, however, report facing overall greater obstacles to promoting integrity that include: conflicting objectives; pressure to rule-break; opportunistic behaviour of individuals; a perception that the likelihood of getting caught is low; the relations between the company or board and political officials; unclear or ineffective reporting lines between board and others, and; inadequate remuneration or compensation. Respondents in companies with entirely commercial objectives are more likely to face risk of violations of data, regulatory violations, stealing, fraud, and anti-trust or anti-competitive behaviour.
The sector in which a respondent’s SOE operates influenced whether the respondent thought that corrupt or other irregular practices transpired in the last three years. The highest proportion of respondents who affirmed this, were found in oil and gas, mining, postal services, energy and transportation and logistics (Figure 1.2).
Figure 1.2. Those who reported witnessing corruption and other irregular practices, by sector of respondent
Note: Based on 289 responses falling into the retained 8 categories with more than 10 respondents.
Source: OECD 2017 Survey of anti-corruption and integrity in SOEs.
Some of these sectors are found by other international studies to be at high-risk of bribery, fraud and other economic crimes:
Bribery and corruption: PwC’s Global CEO Survey found that CEOs have greatest concern for bribery and corruption in mining, pharmaceuticals, construction, hospitality and energy (PwC, 2016b; 2015b).
Economic Crime, including bribery and corruption: PwC’s Global Economic Crime survey (2016a) showed that many of the identified sectors here experienced increases in economic crime, including bribery and corruption, in the last 2 years - energy, utilities, and mining and transportation and logistics with 6% and 8% increase respectively (PwC, 2016a).
Foreign Bribery: The OECD’s Foreign Bribery report showed a higher incidence of foreign bribery in the extractive sector, followed by construction, transportation, and information and communication technologies (OECD, 2014).
Fraud, overlapping with corruption: the Association of Certified Fraud Examiners (ACFE) study of occupational fraud found the highest number of fraud cases that were resulting from, or linked to, corruption, were in mining, transportation and warehousing, oil and gas, manufacturing and technology (ACFE, 2016).
Varying risk perceptions in state-owned enterprises: The likelihood and impact of risks materialising
SOE respondents were asked to assess a range of corruption risks, or risks of integrity offenses, for their likelihood of occurrence and for the impact that the occurrence would have on the company if it were to materialise.5 The 24 risks put forward for evaluation by respondents is provided in Annex 1.A.
Generally, respondents’ rank the likelihood of corruption risks materialising as low, and the impact that their materialisation could have as medium. Despite the anonymity in the survey, a certain self-reporting bias was expected in individuals’ responses to this particular question of whether certain corruption risks or irregular practices was likely, for fear of incriminating the company or admitting vulnerabilities to potentially criminal acts. As expected, respondents showed more flexibility in rating impact as higher.
Whether a respondent reported witnessing corrupt or other irregular practices in their company did not influence their assessment of how vulnerable their company is. However, respondents that “did not know” whether such corrupt or irregular practices materialised in their company rated the likelihood of future occurrence as higher than those that were able to provide a definitive response. In other words, those that lack awareness of such activities in their company, or those that were unwilling to report them, are more likely to anticipate risks materialising.
Table 1.3 provides an overview of risk assessments by respondents according to their position in the company, their sector of operation, the type of company objectives and the respondent’s (self-declared) status as a public official. While respondents’ overall risk ratings are similar, they differ with respect to which corrupt or other irregular practices they consider of higher likelihood of occurrence.
Table 1.4 shows the top 10 corruption risks for their likelihood and impact of occurrence. Four key risks of corruption or irregular practice are explored in further detail below. The risks assigned with the highest likelihood of occurrence are not consistently the same as those assigned the greatest impact on the company. Conversely, some risks considered unlikely to occur were considered to have medium or high impact on the company’s ability to achieve key objectives. Only six of ten risks in each category make an appearance as both higher likelihood and higher impact, as shown in Table 1.4.
Table 1.3. Risk assessments by state-owned enterprise respondent characteristics
Note: Column 2 - based on responses to: “in your assessment, did any of the [listed] risks materialise into activities/actions in the last three years in (or involving) your company?”; *Column 3 and 4 - based on a constructed index of respondent’s ranking of select risks to their company as “low”, “medium” or “high”, on a scale of 1-3, where 1 = low, 2 = medium and 3 = high. Likelihood is the possibility/probability that a risk event may occur in, or involving, a company. Impact is the affect that the risk event would have on achievement of the company’s desired results or objectives. For instance, high impact would have a severe impact on achieving desired results, such that one or more of its critical outcome objectives will not be achieved. Low impact would have little or no impact on achieving outcome objectives; Column 5 - the risks listed in column 5 are ranked in terms of their likelihood of occurrence, noting that in select sectors multiple risks were equally considered as likely to occur and are numbered accordingly.
Source: OECD 2017 Survey of anti-corruption and integrity in SOEs.
Respondents that report to have witnessed corrupt activities or other irregular practices in the present in their company differ with regards to the activities they think might be more likely to materialise (Table 1.5). Notably, those that report having witnessed corrupt or irregular practices in the past rate fraud and receipt of bribes as more likely to transpire than a non-declaration of conflict of interest or favouritism.
Table 1.4. Top reported corruption risks: Perceptions of likelihood and impact of risks materialising
Based on respondents’ rankings of select risks (Annex 1.A1) for the likelihood of occurrence in the company and the impact of occurrence
Note: Based on responses of 347 individuals, across 213 companies, ranking 24 corruption or other irregular practices for their likelihood of occurrence and the impact if it materialised as low, medium or high. The list of risks put forth for assessment are found in Annex 1.A1.
Source: OECD 2017 Survey of anti-corruption and integrity in SOEs.
Table 1.5. Top reported corruption risks: Based on previous experiences with corruption
Note: Based on responses of 347 individuals, across 213 companies, ranking 24 corruption or other irregular practices for their likelihood of occurrence if it materialised as low, medium or high. The list of risks put forth for assessment are found in Annex 1.A1.
Source: OECD 2017 Survey of anti-corruption and integrity in SOEs.
SOE respondents were not asked which activities they witnessed due to confidentiality. However, the risks considered more likely to transpire in companies that have, according to the respondents, already experienced corruption or irregularities, may be indicative of what respondents perceived to have witnessed. .
Figure 1.3. Risk heat map of risks of corruption and other irregular practices in state-owned enterprises: Likelihood and impact of occurrence
Note: Based on 347 individual assessments of the likelihood of occurrence, and the impact, 24 corruption risks or risks of irregular practices put forth (Annex 1.A1). Both axes represent a perceptions index out of a total of 3, where 1 denotes assignment of “low” impact or likelihood, 2 to “medium” impact or likelihood, and 3 to “high” impact or likelihood. Overall, risk likelihood and risk impact are considered low. The axes of the graph are adjusted to narrow in on key risks.
Source: OECD 2017 Survey of anti-corruption and integrity in SOEs.
To understand the interplay between risk likelihood and impact, a Risk Heat Map of likelihood and impact of risks is presented in Figure 1.3. Where replicated at the company level, plotting a risk tolerance line will help SOEs to determine which risks fall beyond the risk tolerance or risk appetite of the company and thus which are allotted further attention and eventual control. A similar risk mapping exercise could be replicated and tailored to an individual company, using the same corruption risks as put forth in this study, given the new information presented here. Care could be taken to ensure assessments of likelihood are accurate given how survey responses showed variances within the same company. A comparison can be made with the risk tolerance level established by the SOE, or by the state ownership entity. The OECD’s Risk Management by State-Owned Enterprises and their Ownership shows that the state ownership entity formally set a risk tolerance level for the overall state ownership portfolio in 15% of surveyed countries (OECD, 2016a).
The top 10 risks (Table 1.4), both in terms of likelihood and impact, feature a range of activities that can originate internally within the SOE as well as outside, or with external influence, to the SOE. These high risks can refer to demand (e.g. receiving bribes) and supply (e.g. offering bribes) of corruption.
Box 1.1. Corruption-related risks: A state-owned hospital in Europe
A European SOE provided findings of a recent risk assessment, highlighting the various challenges an SOE can face, including breakdowns of controls that should be in place to protect the SOE from corruption, undue influence and other forms of waste and abuse. The company found a risk of:
Unequal treatment in decision-making regarding recruitment; recruitment of employees with inadequate qualifications;
Conflict of interest and biased decision-making in personnel management processes (determination of remuneration, determination of the amount of bonuses); biased decision-making in the appointment of staff;
Risk of mismatch between purpose and content of missions or training trips; or misplaced and unfounded business trips;
Ineffective use of entity funds by organising purchases that are not needed for the entity or far beyond the entity facilities;
Conflict of interest in decision-making; possibility to influence decision-making about the choice of provider;
Insufficient qualification of employees for the development of quality procurement documentation; contract conditions are not ensured during performance of the contract: implementation of deadlines is not ensured; the order and amount of payments are not observed; goods that are not tendered or not specified in the procurement documentation are purchased; the contract conditions are substantially changed after the completion of the procurement procedure;
Inappropriate use of the entity’s property for personal interests, incomplete accounting of property values, planning of restoring property values, not meeting the interests of the entity on economic grounds;
Hospital staff faces the public's perception / stereotype in the performance of their duties that it is necessary to present gifts;
Source: OECD 2017 Survey of anti-corruption and integrity in SOEs.
One company provided a frank assessment of the current risks it is facing (Box 1.1), which speaks to challenges within the company as well as those pertaining to interactions with the outside world. This chapter explores below some of the risks highlighted by the company, while Chapter 2 elaborates on how an SOE can insulate itself from, and seek to control, such risks.
Understanding select high-risk areas in state-owned enterprises
As mentioned earlier, at least one respondent in 49% of SOEs reported to have witnessed corrupt and other irregular practices in their company in the last three years. The 347 representatives ranked corruption risks (Annex 1.A1) according to their likelihood and impact of occurrence – pointing to particular risks that are the most pervasive. The findings below on specific corruption risks confirm existing theories on high-risk areas for SOEs, and go further into the details in order to point to circumstances that may make these areas particularly risky.
Where the money is: Procurement and contract violations
The sheer size of public procurement, at 12% of GDP and 29% of public expenditure (OECD, 2017a; 2016b), the volume and regularity of transactions, interactions between public and private spheres, and the potential complexity of the procedures present a risk for public administration, SOEs and private companies, of waste, mismanagement and abuse.
The participation of SOEs in public procurement processes has been of concern to governments and to companies alike – whether as a bidder for public contracts (supplier of goods or services) as well as procurer in the contracting of goods and services (procurer). Between 1999 and 2014, 57% of cases of foreign bribery sought advantages in public procurement. This proportion jumps to 78%, when considering foreign bribery cases involving SOE officials versus those that do not (49%). In other words, SOE officials were more likely to be offered or given a bribe than other public officials and overwhelmingly by actors seeking to obtain procurement contracts.
As shown in previously in Figure 1.3, SOE officials report that the likelihood of procurement or contract violations materialising in the company to be higher than many other risks. Almost 40% of SOE respondents rated the likelihood that procurement or contract violations would occur in their company as high or medium.
Procurement and contract violations, for instance delivering sub-par goods/services, or violating contract terms with suppliers, was rated as amongst the top three risks for respondents:
in companies operating in energy, postal and transportation and logistics,
in positions of executive management and heads of compliance, internal audit, legal and similar, but not for board members, and
that do not consider themselves to be public officials.
The applicability of country guidelines for public procurement to SOEs varies by country. The SOE Guidelines suggest that an SOE should adopt government procurement guidelines when they are fulfilling a governmental purpose (e.g. have public policy objectives) or are a state-owned monopoly. Where SOEs are corporatised and are not subjected to public procurement guidelines, it is not only more important that there is a distinct separation between SOE operations and the state involvement in SOEs, but also that the highest standards are applied in a company’s internal procurement and purchasing policy.
The SOE Guidelines recommend that “when SOEs engage in public procurement, whether as bidder or procurer, the procedures involved should be competitive, non-discriminatory and safeguarded by appropriate standards of transparency” (OECD, 2015).
Companies with specific rules for engaging in public procurement as bidder report to have witnessed less corrupt and other irregular practices transpire in the last three years than those companies that do not have specific rules. About half of SOE respondents report that their company has such specific rules: 90% of which said they are subject to competitive bidding on equal footing with other firms. Those on equal footing reported to have witnessed less corrupt and other irregular practices (40%) than the 10% that admitted they are not subject to competitive bidding (62%).
Two-third of respondents report that their companies have specific rules as procurer. Of those who have specific rules as bidder, 90% are subject to government procurement rules. Respondents whose companies are not subject to public procurement rules as procurer of goods and services reported to have witnessed corrupt and other irregular practices more often (59%) than those who do (44%).
Where they are engaging in public procurement as procurer, risks can be mitigated by promoting adherence to public procurement regulations or, where fully corporatised, to adhere to the highest international standards for procurement. When engaging as bidder, having specific rules for bidding may also reduce risk.
Table 1.6. Risks facing state-owned enterprises engaging in public procurement
Note: Based on insights from over 50 SOE officials provided written comments on the topic.
Source: OECD 2017 Survey of anti-corruption and integrity in SOEs.
Respondents were asked to elaborate on the particular risks for their company in engaging in public procurement. These are summarised in Table 1.6. While certain political, financial, reputational and other risks were highlighted, the majority focus was on those related to corruption and integrity. SOEs are similarly concerned about bid rigging which undermines the quality of goods and services and increases prices. While bid rigging is not considered corruption, it is illegal in all OECD countries.
In considering how to protect the company from corrupt or collusive activities - either as bidder or procurer - when engaging in public procurement, SOEs could asses the risks that appear throughout the procurement cycle, as reported by OECD’s “Preventing Corruption in Public Procurement” (2016b). Further, the “OECD Guidelines for Fighting Bid Rigging in Public Procurement” can provide companies and government with insights into combatting this illegal practice, often linked to broader corruption schemes.
Forty percent of SOEs’ integrity functions have the responsibility for third-party due diligence. These companies reportedly witnessed more corruption or irregular practices in their company, than those whose companies’ integrity functions do not undertake third-party due diligence. It may be due to the effectiveness of such a function that the respondent is aware of previous infractions. Those with third or counter-party due diligence practices assess that the likelihood and impact of future corruption risks materialising, and their obstacles to integrity, are lower than companies who do not undertake such assessments. Moreover, companies that undertake due diligence assessments report a lower likelihood of procurement violations and anti-trust violations.
The case study (Box 1.2) of a Dutch Railway company illustrates how procurement-related risks can occur in practice. The casualties of the case were not only financial but stemming from a loss of trust by customers in the company. This is also an example where bribery is not a stand-alone infraction but one that is linked to other irregular practices, in this case of sharing confidential information and abuse of position.
Where incentives collide: Conflict of interest
Conflicts of interest (COI) refer, for the purposes of this report, to the influence on decision makers that may detract from the objectives established for the SOE, and/or that serves for personal or political gain. In the public sector, managing conflict of interest aims to ensure that government decisions are not influenced by individual interests. The OECD Guidelines for Managing Conflict of Interest in the Public Service state that “while a conflict of interest is not ipso facto corruption, there is increasing recognition that conflicts between the private interests and public duties of public officials, if inadequately managed, can result in corruption” (OECD, 2004).
SOEs can seek to adequately manage perceived or real conflicts of interest, knowing that a “too-strict approach to controlling the exercise of private interests may conflict with other rights, or be unworkable or counter-productive in practice” (OECD, 2004). A modern approach to managing conflict of interest involves the steps below, implementation of which are tracked in the OECD’s “Report on Implementation” (2007):
identifying risks
prohibiting unacceptable forms of private interest
raising awareness of the circumstances in which conflicts can arise
ensuring effective procedures to resolve conflict-of-interest situations.
The SOE Guidelines treat conflicts of interest explicitly in only one place, saying: “Mechanisms should be implemented to avoid conflicts of interest preventing board members from objectively carrying out their board duties and to limit political interference in board processes” (OECD, 2015a: VII.E.). However, in the corporate world, conflict of interest does not only arise in board decisions.
It is important to recognise that SOEs can never be completely separated from political intervention or politically-motivated ownership practices that may weigh on the decisions made by their boards. In a PwC (2015) survey of over 1400 CEOs of state backed and non-state backed companies, 69% said government and regulators have a high or very high impact on their business strategy. Yet SOEs can and should protect against political interests that are self-serving or service a personal interest group that run counter to the SOE’s main goals (OECD, 2015a).
As all SOE decision-makers, including board members and executive management, could become subject to conflict of interest, SOEs and state ownership entities should ensure that adequate mechanisms for addressing conflict of interest, if it does arise, are in place. The SOE Guidelines make clear that professionals concerned should have neither excessive inherent nor perceived conflicts of interest, and should not have limitations on acting in the SOEs’ interest. As such, it should render SOEs “free of any material interests or relationships with the enterprise, its management, other major shareholders and the ownership entity that could jeopardise their exercise of objective judgement” (OECD, 2015a).
Board members should disclose any conflict of interest to other board members, and then disclose information on how they are being managed by the board. Conditions for disqualification should also be clear (OECD, 2015a). One element of conflict of interest management is having particular measures in place to prevent political interference on boards – it is discussed at further length in the following section. The findings in this section focus primarily upon the risk of non-declaration of conflict of interest of SOE board members.
Here, the possibility that conflicts go undeclared is used as a proxy to understand the threat of conflict of interest and, eventually, the potential for undue influence. As shown in risk mapping (Figure 1.3), SOE respondents consider the risk of non-declaration of conflict of interest to be higher than other risks considered in this survey, with 40% of respondents reporting it to be of medium or high likelihood that the risk could materialise in their company. In particular, non-declaration of conflict of interest was rated as amongst the top three risks for respondents:
in companies operating in banking and related financial services and information and communication technology
in companies with mixed objectives (public policy and commercial)
that do not consider themselves to be public officials.
Respondents that see non-declaration of conflict of interest as a high or medium risk for their company also see as more likely the following risks: favouritism (nepotism, cronyism and patronage); interference in appointments of board members or CEOs, and; the risk of interference in SOE decision-making. While the above findings cannot prove causality, they do confirm the link between perceived lack of integrity in the public sector with conflict of interest, appointments and influence in execution of board and executive management duties.
Box 1.2. Case study: Breach of Competition Act in the Netherlands
A breach of the Competition Act by the Dutch railway company (Nederlandse Spoorwegen)
The Netherlands Authority for Consumers and Markets (ACM) published its decision regarding the investigation into a possible breach of the Competition Act by the Dutch railway company (NS) in the public procurement concession for the Province of Limburg in 2014. ACM concluded that NS had abused its economically dominant position in the related tender. There have been two violations. First of all, NS made a bid that the ACM qualifies as loss-making and, secondly, there were several non-compliant behavioural actions by NS towards competitors around the tender.
Following a complaint by Veolia (French railway company), the ACM started an investigation in October 2014 into the conduct of NS during the tendering procedure for public transport in Limburg. Following from the ACM investigation, NS came across serious irregularities during an internal compliance investigation. During the tendering process, staff at Qbuzz had received unauthorised confidential information from a (former) employee of Veolia Transport Limburg. In March 2015, the supervisory board instructed its company law firm De Brauw to look into the matter. Certain Qbuzz directors were suspended. The supervisory board also instructed De Brauw to carry out an additional investigation into the possible involvement of the CEO and attempt by the CEO to influence the previous investigation. Based on the findings of this investigation, the supervisory board decided to dispense with the services of the CEO. Further, the chairman of the supervisory board resigned. The financial damage is not quantifiable, but the irregularities had a huge impact not only financially, but it also damaged the trust in NS of passengers, stakeholders and staff.
Impact, Response and future prevention
This case resulted in the departure of the chairman of the board under whose responsibility the irregularities have taken place. In addition, there is a criminal procedure against some former directors and NS.
Commissioned by the supervisory board and the Minister of Finance in one’s capacity as shareholder, research and consultancy firm Alvarez & Marsal carried out a thorough analysis of the effectiveness of the existing internal procedures, risk management, compliance and checks within NS and all its subsidiaries. NS has taken additional measures based on the Alvarez & Marsal report to refine internal procedures and checks and it has drawn up an action plan preventing bribery and corruption in the future.
The board of directors of NS has been expanded with a portfolio holder Governance, Risk and Compliance. Internal procedures and codes of conduct for procurement (and compliance with them) have been tightened.
Source: Materials provided by the Ministry of Finance of the Netherlands.
Conflict of interest rules
Respondents in companies with conflict of interest (COI) rules are slightly more likely to report having seen corruption or other irregular practices transpire in the last three years compared to companies without specific conflict of interest rules (42% versus 40%, respectively). However, respondents in companies with COI rules think it is less likely that conflicts would go undeclared in the present or future. Companies who report that non-declaration of COI is more likely to occur face obstacles to integrity that are more to do with company reputation, and proximity to government. For instance, these respondents report the following obstacles to integrity (more than those who do not see non-declaration as an issue):
a lack of integrity in the public sector
a lack of clarity in the reporting lines between management and the board
the relationships between their company or the company’s board and political officials to be more of an obstacle to integrity.
It is possible that companies with conflict of interest rules have them in place because of previous instances (in the past three years), and thus judge their future risks as lower. The results suggest that the mere presence of conflict of interest rules alone is not enough to encourage declaration of conflicts.
What next?
The SOE Guidelines state that there may be a case for political oversight of SOEs that are carrying out important public service obligations. Objectivity and professionalism of such political oversight is important, particularly in view of the above findings. For SOEs engaged in economic activities without public policy objectives it is good practice to avoid board representation by the highest levels of political power including from within the government and the legislature, without precluding civil servants and other public officials from serving.
Declaration of conflict of interest of not only the board, but of other decision-makers in an SOE on a cyclical basis would be beneficial to mitigate opportunities for it to go unnoticed.
Where actions are influenced: Interference in decision-making and favouritism in state-owned enterprises
Interference in decision-making is representative of a weakness in controls and in the SOEs’ protection from competing interests that detract from its objectives. It is not ipso facto corruption, but, like conflict of interest, can represent a situation that may lead to the abuse of entrusted power for private gain. Undue interference may occur in strategic or operational processes, and may be borne out of internal or external forces to the company.
Favouritism, on the other hand, may be a concrete manifestation of conflict of interest or result of influence in decision-making, whereby an individual who has the power to make decisions prioritises personal interest over the interest of the company in actions in the form of nepotism, cronyism or patronage. Favouritism side-steps integrity mechanisms, such as merit-based board or CEO appointments, transparent procurement procedures or active and professional ownership by the state. It may be representative of an underlying conflict of interest, or of other influence in decision-making.
Interference in decision-making was rated as amongst the top three risks for respondents:
in companies operating in agriculture and fishing and oil and gas
in positions of executive management and “other” (namely, corporate secretaries)
that consider themselves to be public officials.
The perceived impact of interference in decision-making was rated as greater than of favouritism, suggesting that interference in decision-making may include, but extend beyond, favouritism.
Respondents that are heads of integrity or “other” (namely, corporate secretaries) assigned higher likelihood to the risk of interference in decision-making and favouritism. This suggests that the decision makers themselves are less aware of the risk of interference in their processes, disagree with colleagues about the likelihood of the risk, or were less willing to report it.
Box 1.3. Case study: Board detection and follow-up in a Colombian state-owned enterprise
This case involves the bribery of a former official of the Colombian state-owned enterprise Ecopetrol S.A, who was in charge of the approval and the assigning of contracts by Ecopetrol S.A. He received bribes from three former executives of PetroTiger Ltd (PetroTiger is a privately held British Virgin Islands company with operations in Colombia and offices in New Jersey) in order to obtain approval to enter into an oil-related services contract.
Detection
In 2010, the Board of Directors of PetroTiger started noticing a series of inconsistencies in the financial and operational results of the company. Subsequently, the Board of Directors conducted an in-depth restructuring process and ordered a forensic external audit. Prior to the audit, the external audit company received training from the Secretariat of Transparency on the scope and aim of the OECD Anti-Bribery Convention, particularly with respect to the role of auditors in the prevention and detection of foreign bribery.
The external audit detected undocumented transactions performed from one of PetroTiger’s bank accounts in the United States. The audit findings revealed that, between the period June 2009 and February 2010, three executives paid bribes on behalf of PetroTiger to the Ecopetrol official in order to secure the approval for an oil service contract and to obscure the payments that were made. These payments later involved the official’s wife who, while a stylist and owner of a spa in Colombia, received several payments under the guise of business consulting services for the firm that were never performed. In order to secure this oil services contract (worth approximately USD 39.6 million) the ex-executives of PetroTiger paid an amount of around USD 333,500.
Impact, response and future prevention
In Colombia seven prison sentences were given to former employees. Additional actions included fines handed to executives of PetroTiger, debarment of PetroTiger and increased monitoring within Ecopetrol by its compliance division.
Source: OECD (2017c), The Detection of Foreign Bribery, OECD Publishing, Paris, www.oecd.org/corruption/the-detection-of-foreign-bribery.htm; and materials provided by the Colombian Ministry of Finance and Public Credit.
Respondents considered to be public officials were slightly more likely to report that the risk of the likelihood of interference in decision-making could occur, but their status had no bearing on the perceived risk of favouritism in the company.
Those who reported a higher risk of interference in decision-making, as well as of favouritism, were more likely to see the “relations between your company or board and political officials” as an obstacle to integrity in their company. Respondents in companies with a higher average proportion of independents on the board, and a lower proportion of political or other state figures:
rank the risk of interference in decision-making as lower than average
rank the risk of influence in appointments occurring lower than average
rank the risk of favouritism occurring as lower than average.
Bribery and personal relations can be used to sway decisions in the best interest of the company. The case (Box 1.3) of a Colombian Oil company shows how bribery, intermingled with favouritism and nepotism, led to sanctioning of one SOE.
Where the bribes are: state-owned enterprise officials receiving, or being offered, bribes
The 2015 revision of the SOE Guidelines contains an explicit reference to preventing corruption: “The boards of SOEs should develop, implement, monitor and communicate internal controls, ethics and compliance programmes or measures, including those which contribute to preventing fraud and corruption. They should be based on country norms, in conformity with international commitments and apply to the SOE and its subsidiaries” (OECD, 2015a: V.C).
One of the most common focuses of the discussion on corruption with regards to SOEs centres on bribery. This was made more prominent following the release of the Foreign Bribery Report (OECD, 2014), which found that SOE officials were bribed in 27% of cases and received 80% of total foreign bribes between 1999 and 2014. The next largest recipient group were heads of state, which were bribed in a total of 5% of cases but received 11% of total bribes. This highlights a vulnerability of SOE officials to foreign bribery over other public officials.
Figure 1.4. The risk of receiving and offering bribes in state-owned enterprises: Likelihood and impact
Note: Based on responses of 347 individuals, across 213 companies, ranking the risks of receiving or offering bribes for their likelihood of occurrence and the impact if it materialised as low, medium or high. The list of risks put forth for assessment are found in Annex 1.A1.
Source: OECD 2017 Survey of anti-corruption and integrity in SOEs.
Risk perceptions on receiving bribes
SOEs rate the likelihood of receiving bribes as slightly higher than offering them, but see their negative impact similarly high. Figure 1.4 demonstrates the likelihood and impact of bribery in respondents’ SOEs.
Box 1.4. Case study: Bribery
Snamprogetti Netherlands BV (“Snamprogetti”) had a 25% participation in the TSKJ Consortium. The remaining participations were held in equal shares of 25% by Halliburton/KBR, Technip and JGC. Since 1994, the TSKJ Consortium has been involved in the construction of natural gas liquefaction facilities at Bonny Island in Nigeria.
Snamprogetti SpA, the holding company of Snamprogetti Netherlands BV, operated as a wholly owned subsidiary of Eni SpA until February 2006, when an agreement was entered into for the sale of Snamprogetti SpA to Saipem SpA (at the relevant time 43% owned by Eni SpA). Snamprogetti SpA was merged into Saipem SpA as of October 1, 2008. In connection with the above-mentioned sale, Eni SpA agreed to indemnify Saipem SpA for losses resulting from the investigations (see section “Detections” below). Eni SpA is 30% owned -- considering direct and indirect participations -- by the Italian Ministry of Economy and Finance.
According to court documents, Snamprogetti authorised the joint venture to hire two agents to pay bribes to a range of Nigerian government officials, including top-level executive branch officials, to assist Snamprogetti and the joint venture in obtaining the Engineering Procurement Contracts (EPC). At crucial junctures preceding the award of contracts, Snamprogetti’s co-conspirators met with successive holders of a top-level office in the executive branch of the Nigerian government to ask the office holders to designate a representative with whom the joint venture should negotiate bribes to Nigerian government officials. The joint venture paid approximately USD 132 million to a Gibraltar corporation controlled by one of the agents and more than USD 50 million to the other agent during the course of the bribery scheme. According to court documents, Snamprogetti intended these payments to be used, in part, for bribes to Nigerian government officials.
Detection
In 2004 the US Securities and Exchange Commission (SEC), the US Department of Justice (DoJ) and other authorities, including the Public Prosecutor’s Office in Milan, started investigations for alleged improper payments made by the TSKJ Consortium to certain Nigerian public officials between 1995 and 2004.
The company reached a resolution with both the SEC and DoJ. Under the terms of a resolution with the SEC, Eni and Snamprogetti were enjoined from violating the securities laws and agreed to jointly and severally disgorge $125 million of profits. Under the terms of a deferred prosecution agreement (DPA) entered into in July 2010, the DoJ agreed to defer prosecution of Snamprogetti for two years. Snamprogetti, its then parent company, Saipem SpA, and its former parent company, Eni SpA, agreed to ensure that their compliance programmes satisfied certain standards and to cooperate with the DoJ in ongoing investigations. In particular, the companies agreed to conduct a review of their then existing internal controls, policies and procedures in compliance with the DPA. In addition, where necessary and appropriate, the companies further agreed to adopt new or to modify existing internal controls, policies and procedures in order to ensure that it maintained: (a) a system of internal accounting controls designed to ensure that the companies make and keep fair and accurate books, records and accounts; and (b) a rigorous anti-corruption compliance code, standards and procedures designed to detect and deter violations of the Foreign Corrupt Practices Act of 1977 (US federal law) and other applicable anti-corruption laws. The DPA did not require the implementation of any independent compliance monitor (as it occurred, on the contrary, to the other companies participating in the TSKJ Consortium). At the conclusion of the two-year deferral period, all charges against the companies in the United States were dismissed.
Source: Materials provided by the Italian Ministry of Economics and Finance, Department of Treasury.
Receiving bribes was rated as amongst the top three more probable risks to materialise for respondents in banking and related financial services. In addition, receiving kickbacks was a top three for SOEs in the energy sector.
To get a better understanding of who is involved in corruption and bribery, Table 1.7 summarises culprits found in this study as well as in the OECD Foreign Bribery Report and a study by the Ethics and Compliance Initiative. The studies cannot be directly compared due to the different audiences (the latter two focused on more than SOEs), and that this survey did not distinguish specifically whether bribery was observed. However, it becomes clear in all studies that senior management have been involved to a degree. Moreover, Box 1.4 provides a case study that looks at these issues in practice, at improper payments made and the detection and response by the company as a result.
Table 1.7. Which level of the organisation is involved in bribery and corruption? A comparison of various international studies
Note: The categorisations used in the three studies vary and thus their comparison is limited.
Source: OECD 2017 Survey of anti-corruption and integrity in SOEs; OECD (2014), Foreign Bribery Report; Ethics and Compliance Initiative (2016), Measuring Risk and Promoting Workplace Integrity, Global Business Ethics Survey 2016, www.ethics.org/ecihome/research/gbes/gbes-form.
References
Association of Certified Fraud Examiners (ACFE) (2016), Report to the Nations on Occupational Fraud and Abuse, 2016 Global Fraud Survey, www.acfe.com/rttn2016/docs/2016-report-to-the-nations.pdf.
Ethics and Compliance Initiative (ECI) (2016), Measuring Risk and Promoting Workplace Integrity, Global Business Ethics Survey, Ethics and Compliance Initiative, www.ethics.org/ecihome/research/gbes/gbes-form.
Georgetown University (2017), Impact, Likelihood and Velocity, https://riskmanagement.georgetown.edu/RiskAssessmentMeasures.
International Monetary Fund (IMF) (2017), The Role of the Fund in Governance Issues - Review of the Guidance Note - Preliminary Considerations - Background Notes, Policy Papers, the International Monetary Fund, www.imf.org/en/Publications/Policy-Papers/Issues/2017/08/01/pp080217-background-notes-the-role-of-the-fund-in-governance-issues-review-of-the-guidance-note.
OECD (2017a), Government at a Glance 2017, OECD Publishing, Paris, www.oecd.org/gov/govataglance.htm.
OECD (2017b), The Detection of Foreign Bribery, OECD Publishing, Paris, www.oecd.org/corruption/the-detection-of-foreign-bribery.htm.
OECD (2016a), Risk Management by State-Owned Enterprises and their Ownership, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264262249-en.
OECD (2016b), Preventing Corruption in Public Procurement, www.oecd.org/gov/ethics/Corruption-in-Public-Procurement-Brochure.pdf.
OECD (2015a), OECD Guidelines on Corporate Governance of State-Owned Enterprises, 2015 Edition, OECD Publishing, Paris, www.oecd.org/corporate/guidelines-corporate-governance-soes.htm.
OECD (2015a), Corporate Governance and Business Integrity: A Stocktaking of Corporate Practices, OECD Publishing, Paris, www.oecd.org/corruption/corporate-governance-business-integrity-stocktaking-corporate-practices.htm.
OECD (2015b), G20/OECD Principles of Corporate Governance, OECD Publishing, Paris, www.oecd.org/corporate/principles-corporate-governance.htm.
OECD (2014), OECD Foreign Bribery Report: An Analysis of the Crime of Bribery of Foreign Public Officials, OECD, Paris, www.oecd.org/corruption/oecd-foreign-bribery-report-9789264226616-en.htm.
OECD (2008), Corruption: A Glossary of International Standards in Criminal Law, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264027411-en.
OECD (2007), OECD Guidelines for Managing Conflict of Interest in the Public Service: report on implementation, OECD Publishing, Paris, www.oecd.org/gov/ethics/managingconflictofinterestinthepublicservice.htm.
OECD (2004), "OECD Guidelines for Managing Conflict of Interest in the Public Service", in Managing Conflict of Interest in the Public Service: OECD Guidelines and Country Experiences, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264104938-2-en.
PwC (Price Waterhouse Coopers) (2016a), Adjusting the Lens on Economic Crime: Preparation brings opportunity back into focus, Global Economic Crime Survey 2016, www.pwc.com/gx/en/economic-crime-survey/pdf/GlobalEconomicCrimeSurvey2016.pdf.
PwC (2016b), Redefining Business Success in a Changing World: CEO Survey, 19th Annual Global CEO Survey, www.pwc.com/gx/en/ceo-survey/2016/landing-page/pwc-19th-annual-global-ceo-survey.pdf.
PwC (2015a), State-Owned Enterprises: Catalysts for Public Value Creation?, www.pwc.com/gx/en/psrc/publications/assets/pwc-state-owned-enterprise-psrc.pdf.
PwC (2015b), A Marketplace without Boundaries? Responding to disruption, www.pwc.com/gx/en/ceo-survey/2015/assets/pwc-18th-annual-global-ceo-survey-jan-2015.pdf.
Annex 1.A. List of corruption risks and other irregular practices in the OECD State-Owned Enterprise Survey
Table 1.A1.1. Risks of corruption and other irregular practices: Question options from the state-owned enterprise survey
Response options to the following questions: (i) “in your personal assessment, please rate the below integrity risks for their likelihood of materialising/occurring and the impact they would have on your company?” and (ii) “in your assessment, did any of [these] risks materialise into activities/actions in the last three years in (or involving) your company?”
Note: Likelihood is the possibility/probability that a risk event may occur in, or involve, a respondent’s company. Impact is the affect that the risk event would have on achievement of the company’s desired results or objectives. For instance, high impact would have a severe impact on achieving desired results, such that one or more of its critical outcome objectives will not be achieved. Low impact would have little or no impact on achieving outcome objectives
Source: OECD 2017 Survey of anti-corruption and integrity in SOEs.
Notes
← 1. Out of 343 valid individual responses for this survey question, 146 respondents said yes, 153 said no, and 44 “did not know” whether corruption risks had materialised in their company in the last three years. The weighted average for the sample is also 42%. When dropping all country responses where less than five, or more than the requested ten company responses were provided, this number falls to 39%.
← 2. In 106 of 209 companies that provided a response to this question, at least one respondent said yes. When dropping all country responses where less than five, or more than the requested ten company responses were provided, in 45% of companies at least one respondent reported to have witnessed corrupt or other irregular practices in their company in the last three years.
← 3. A comparison is made with agriculture and fishing, information and communication technology, and banking and related financial services. While respondents from other sectors participated, responses from sectors with less than ten responses were dropped from the sectoral analysis (aerospace and defence, chemicals, construction and engineering, healthcare, hospitality and leisure, manufacturing, pensions and insurance, real estate, retail and wholesale and other).
← 4. A PwC survey of economic crime in 2016 showed that 24% of private companies suffered from bribery and corruption, registering as the third largest form of economic crime behind asset misappropriation (64%) and cybercrime (32%) (PwC, 2016). PwC’s 2016 survey of Global Economic Crime includes 6,337 completed surveys across 115 countries in industrial, consumer sectors, technology and other sectors, and financial and professional services.
← 5. Likelihood is the possibility/probability that a risk event may occur in, or involve, your company. Impact is the affect that the risk event would have on achievement of your company’s desired results or objectives. For instance, high impact would have a severe impact on achieving desired results, such that one or more of its critical outcome objectives will not be achieved. Low impact would have little or no impact on achieving outcome objectives (Georgetown University, 2017)