The Compliance Without Borders Handbook

1. Strengthening integrity in SOEs: the case for peer-to-peer learning

Abstract

This chapter introduces the Compliance Without Borders programme – a peer-learning exchange between representatives of state‑owned enterprises and private firms. It makes the case for using collective action to promote integrity in SOEs and a level playing field, and why this new pair in peer learning can work together towards achieving these outcomes.

Compliance Without Borders – A collective action initiative

Compliance Without Borders in a nutshell

Compliance Without Borders is a peer-learning exchange programme – whereby an anti-corruption compliance expert from the private sector volunteers to engage in virtual meetings for a three to six month period with a state‑owned enterprise (SOE). Together, the peers brainstorm on good practices to create opportunities to strengthen anti-corruption compliance and overall business integrity in the SOE.1 The programme supports the implementation of the good practices contained in the OECD Guidelines on Anti-Corruption and Integrity in State-Owned Enterprises (ACI Guidelines) – the first international instrument to offer the state owner support in fighting corruption and promoting integrity in SOEs. A core feature of this international consensus is that SOEs should be operated as similarly as possible to good practice listed firms, and this programme facilitates the sharing and transfer of knowledge of those practices. Chapter 3 provides a step-by-step guide on how the programme works.

The programme was co-developed by the OECD and the Basel Institute of Governance, together with industry leaders under the B20 2018 Argentina presidency, to support the G20 commitments to foster public-private co‑operation and enhance compliance capacity in SOEs. The programme was recognised as a good practice in subsequent B20 Summits including those of Saudi Arabia in 2019, Italy in 2021 and Indonesia in 2022. According to the 2022 Indonesian Presidency of the B20:

“Public-private partnerships and collaborative approaches can provide leading examples for transparent interactions based on best practices of integrity including SOEs, and MSMEs as well as large companies and the public sector. For example, the OECD’s Compliance Without Borders programme (which grew out of the B20 2018 Argentina Recommendations), provides practical capacity building to SOEs and mutual learning opportunities for the private sector”. (B20 Indonesia, 2022[1])

The programme relies on the in-kind support of private sector compliance experts who have the will to both share their insights and learn. The programme is supported financially by the U.S. State Department’s Bureau of International Narcotics and Law Enforcement Affairs’ “Global Initiative to Galvanize the Private Sector as Partners in Combating Corruption”. This global initiative aims to mobilise the private sector as critical actors in the fight against corruption, help level the playing field and promote a rules-based international business climate.

1. For the purposes of the Compliance Without Borders programme, corruption can be generally understood to cover the offenses included within the scope of the United Nation’s Convention Against Corruption (e.g. bribery, embezzlement, trading in influence, money laundering, obstruction of justice, etc.). This means that there is a wide variety of subjects that can be covered by each peer exchange, depending on the interests of the SOE and the expertise of the private sector peer.

1.1. The need for anti-corruption compliance

In the last decade an increasing number of companies around the world have established anti-corruption compliance systems to prevent, detect and respond to corruption risk. Compliance has greatly matured from its traditional focus on regulatory health and safety standards.

Anti-corruption compliance was a topic of interest in a limited number of countries ten years ago, but the past decade has seen the emergence of anti-corruption compliance systems in companies across the globe (OECD, 2020[2]).

Both state‑owned enterprises (SOEs) and private firms have evolved to include anti-corruption compliance, driven primarily by the need to align with legal and regulatory requirements, but also because of enforcement risk, reputational risk and company and cultural change (OECD, 2020[2]).

In a 2017 OECD survey of over 200 SOEs around the world, most SOEs reported having arrangements in place to identify and manage risk, but one in ten SOEs did not explicitly treat corruption risks in its risk management processes. The SOEs conducting risk assessments annually were less likely to report witnessing corruption or related irregular practices in their companies than SOEs that conducted risk assessments less frequently (every two to three years, or more). Despite having some mechanisms in place, about half of the participating SOEs reported losing an average of 3% of annual corporate profits to corruption and other irregular practices in the prior year (OECD, 2018[3]).

The costs of failing to manage corruption risk usually go beyond immediate profit loss, particularly in jurisdictions where engaging in corruption leads to civil and criminal penalties and sanctions, including fines, disgorgement and imprisonment. SOEs that engage in corruption may also be excluded from financing at the international level (e.g. from international finance institutions and export credit agencies). Tangible costs aside, engaging in corruption may damage the reputation of SOEs and make it harder to attract new talent. Certain SOE‑related controversies in the last decade have also left stains on the reputation of the state as an economic actor, particularly when involving large and economically important SOEs.

Private firms, for their part, are shown to be driven to establish anti-corruption compliance programmes namely to either protect company reputation and/or to avoid prosecution, or to memorialise their company culture in writing (OECD, 2020[2]). Both drivers may be catalysed by the increased scrutiny that many firms are facing from customers and investors, who are placing greater demands on companies for more responsible conduct and transparency. Trust in business is slow to build and easy to lose, so many firms are choosing to lead the way regardless of what is expected of them by law.

Whatever the driver, the benefits of anti-corruption compliance “are clear” according to international compliance expert Gemma Aiolfi of the Basel Institute on Governance.

For companies that… now have mature and well-functioning compliance programmes, the benefits are clear. Not only are they much better able to adapt to evolving legal and reputational risks, but they can also defend themselves should a bribery issue arise. They are better placed to demonstrate to new generations of activist shareholders, customers and other stakeholders that they are not exacerbating bribery and kleptocracy in foreign markets. Those that continue to believe that they have everything under control without an anti-corruption compliance programme may find customer and investor pressure will cause them to rethink, even if the risk of prosecutions and fines seems remote (Basel Institute on Governance, 2023[4]).

Whether companies want to keep up with regulation, respond to growing stakeholder expectations or lead by example, they must continue to evolve their anti-corruption compliance to stay abreast of the rapidly changing demands of the 21^st century.

Implementation of good international practice in this regard can be particularly challenging for SOEs, which are subject to a complex web of regulations and public policy requirements, including public sector legislation, statutory or SOE‑specific laws, sectorial regulations, rules applied to incorporated entities and listing requirements when relevant. Many state owners and SOEs around the world have demonstrated or expressed a need for support.

1.2. The need for improved integrity in SOEs

One-fifth of the world’s largest 500 enterprises are state‑owned – three times higher than at the turn of the century. In almost all economies, SOEs are on average larger than private firms (OECD, 2019[5]). As SOEs’ roles as global competitors amplify, it is more important than ever that SOEs operate with transparency and efficiency – for the benefits of the state (and other) shareholders, for private firms competing with SOEs and for citizens as the ultimate owner and as recipients of public services SOEs often deliver.

SOEs can be particularly susceptible to corruption owing to their proximity to the state and their involvement in the issuance and as recipient of large concessions, and where protected from the disciplining market forces that other firms face. Box 1.1 unpacks some of these challenges.

The OECD developed in 2019 the OECD Guidelines on Anti-Corruption and Integrity in State‑Owned Enterprises (“ACI Guidelines”),1 as a follow-on to the G20 High-Level Principles on Preventing Corruption and Ensuring Integrity in State‑Owned Enterprises.2 The ACI Guidelines set a high level of ambition for integrity in the state‑owned sector, putting the onus on both the state owner to act with integrity and ensure enforcement of relevant laws, as well as on SOEs to ensure they meet high standards at the company level.

The OECD’s extensive body of work on corporate governance and integrity in SOEs has shown some promising developments since the adoption of the ACI Guidelines in 2019 – notably in the professionalisation of SOE boards that are ultimately responsible for the governance and performance of the enterprise and with regards to transparency and disclosure. However, public controversies have shown that SOEs remain vulnerable to being exploited for personal gain and political aspirations of individuals or groups. Information gathered through OECD country reviews and regional networks point to some lingering weaknesses in corporate governance and ownership arrangements that can expose SOEs to such exploitation. This can include, for example, appointing members of the boards of the SOEs based on party affiliation or political patronage or an absence or lack of effectiveness of company-internal controls, ethics or compliance measures (OECD, 2023[6]).

The OECD has worked for decades on improving integrity in the public sector in a way that will parlay improvements in the exercise of ownership. Now, it is working with the support of the Basel Institute on Governance, together with SOEs and private sector leaders in anti-corruption to improve integrity at the corporate level.

Box 1.1. Corruption in state‑owned enterprises

It is notoriously difficult to estimate the scale of corruption at the domestic or international level; and doing so in the state‑owned sector is no exception. The OECD’s 2018 study – State-Owned Enterprises and Corruption: what are the risks and what can be done? – aimed to shed light on the corruption risks and vulnerabilities that SOEs face. It consolidated the responses of over 350 SOE board members and executives in over 200 SOEs around the world.

No less than 42% of SOE respondents reported observing corrupt or other irregular practices in their company in the three years prior. These instances involved mostly employees and mid-level managers, but also board members and third parties, among others. SOEs in the extractive, energy and transportation sectors reported higher risks, as did those with public policy objectives. For SOEs, their greatest obstacles to integrity have to do with a (at least a perceived) lack of integrity in the public and political sector, and with opportunistic behaviour of individuals.

The report surmised that while private firms may face many of the same incentives and opportunities to engage in corrupt practices, SOEs can face heightened risks for a number of reasons. This can include a “too public to fail” mentality in which SOEs are protected by their state ownership, their market dominant position or their involvement in the delivery of public services. They can be insulated from the same threat of bankruptcy and hostile take‑over that private companies face. Furthermore, SOEs’ operations in sectors with high value and frequent transactions may give rise to opportunistic behaviour, particularly in complex regulatory environments that, when poorly designed, can provide a smokescreen for noncompliance.

Undue influence by the state in SOE operations, or politicisation of SOEs, is a pervasive challenge in many countries. Employees and managers may come under pressure to circumvent rules in favour or those in positions of power. The report noted that SOEs with public policy objectives may be more able to justify illicit activity to compensate for financial losses or reduced profit margins that can be associated with delivering on policy objectives. Alternatively, SOEs (and other firms) with entirely commercial objectives may try to justify corruption because of the pressure to remain competitive or to perform.

Examples of how state‑owners are working to combat these challenges are contained in the OECD’s Implementation Guide that accompanies the ACI Guidelines.

Source: OECD (2018[3]) State‑Owned Enterprises and Corruption: what are the risks and what can be done? https://doi.org/10.1787/9789264303058‑en .

1.3. The case for collective action: state‑owned enterprises and private sector experts

A pioneering programme – the Compliance Without Borders initiative – provides a platform for private sector experts in leading international firms to support SOEs in strengthening compliance on a range of corruption-related issue areas. For a period of three to six months, a private sector anti-corruption compliance expert and a host SOE engage in a series of virtual meet ups to exchange on good practices in business integrity, with a view to operationalising improvements in the SOE’s anti-corruption measures. Compliance Without Borders is both a form of peer-to-peer (P2P) learning and “collective action”, as it brings companies together to share knowledge and raise business integrity (Basel Institute on Governance, n.d.[7]). More information on “Collective Action” is found below.

Compliance Without Borders: A collective action initiative

Compliance Without Borders is a form of collective action – which is a collaborative multi-stakeholder approach to addressing corruption risks, raise standards of integrity and promote fair competition in business (Basel Institute on Governance, n.d.[7]) Collective action is increasingly becoming an internationally recognised standard instrument in the fight against corruption and an integral part of mainstreaming anti-corruption efforts. The OECD has explicitly recommended the use of collective action initiatives with private and public sector representatives to address corruption in its revised Recommendation on Further Combating Bribery of Foreign Public Officials in International Business Transactions. It is similarly advocated for in the standards and activities of other standard-setting organisations and international organisations such as the UNODC, European Union, UN Global Compact, World Bank Group and World Customs Organization.

Compliance Without Borders relies on peer-to-peer learning, which is of particular benefit for networking organisations with the mutual interest of exchanging on methodological, didactic and sector-specific issues. Additional advantages of peer-to-peer-learning is that it puts knowledge into context, that expertise can be multiplied after being disseminated through respective networks and that peers garner a greater understanding for risks and solutions in other organisations. The exchange can also trigger processes that generate new knowledge and skills.

Note: See UNGC, “Anti-Corruption Collective Action,” https://www.unglobalcompact.org/take-action/action/anti-corruption-collective-action (24 April 2023)

A collaboration between the state‑owned and private sectors may be initially counterintuitive, insofar as SOEs with commercial objectives and private firms can compete on the domestic or international market.3 Yet the benefits are numerous and flow in both directions.

First, there is a rich experience to be shared by good practice private firms – notably those that adhere to the G20/OECD Principles of Corporate Governance. Indeed, international best practice holds that SOEs should operate with similar efficiency, transparency and accountability as good practice private enterprises. SOEs should observe high standards of transparency and be subject to the same high-quality compliance standards as listed companies (OECD, 2015[8]).

The private sector in many countries often has a deeper history in compliance, where most corporate governance approaches and practices around audit, accounting and risk management were born. SOEs have often traditionally been, and in some cases continue to be, operated more closely to public entities. In the last decade, SOEs have increasingly been required to adopt standards and practices born in the private sector – such as adopting IFRS, subjecting the annual financial statement to external audit or establishing internal audit units – through their inclusion in public enterprises laws or by subjecting SOEs to company law, for example. Good practice private firms should be well placed to advise on adoption of international standards in general, and on anti-corruption specifically. SOEs are often subject to a complex web of checks and balances that can include requirements of laws bearing on both markets as well as public entities despite often having economic objectives. Even SOEs with leading anti-corruption compliance frameworks should stand to benefit from the relative agility of the private sector.

Second, Compliance Without Borders, as a collective action initiative, aims to level the playing field. An ongoing concern surrounding SOEs continues to be the degree to which SOEs are in an advantageous or disadvantageous position due to their state ownership – which could manifest in being shielded from repercussions of illicit conduct or in being exploited for personal or related-party gain. Indeed, the OECD’s 2018 study showed that SOEs were less risk averse and less likely than private firms to take mitigating actions in face of known corruption risks.

Specifically, SOEs were less likely to report ceasing business operations in a jurisdiction, revising a business project, or severing a relationship with a business partner (OECD, 2018[3]). This may be owing to a “too public to fail” mentality in which SOEs are protected by their state ownership, or to an inability to abandon their position in the market including their involvement in the delivery of essential public services. This possibility only places greater emphasis on the need for SOEs to behave as closely as possible to private firms, so that the terms of market engagement are the same.

Finally, the Compliance Without Borders programme is proving to be a valuable professional development opportunity for the private sector expert and state‑owned enterprise counterpart alike. Private firms seconding their experts are also benefitting from engaging with the international anti-corruption arena, demonstrating a leadership and willingness to raise the bar on anti-corruption and responsible business conduct more broadly.

“Corruption is a threat to all of us – to the public sector, the private sector and to societies at large. Different approaches have been chosen to combat bribery. However, history has shown that individual intervention by either the public sector or private sector alone is not enough. A multi-stakeholder approach like the “Compliance without Borders” programme offers new opportunities to drive change by breaking silos, by building capabilities in SOEs through the discussion of challenges, and by sharing knowledge and experience related to good and effective compliance risk management. We – the private sector – together with our partners, need to incessantly exercise our responsibility in promoting integrity and in enabling a level playing field across the globe. The Compliance Without Borders programme will allow me to do this. For personal development, it has been a rewarding and fulfilling experience by allowing me to gain a deeper understanding of compliance challenges outside the private sector, and positively expanded my professional network with other like‑minded ethics, risk and compliance experts at SOEs” – the Global Head of Corporate Compliance for a multinational pharmaceutical company based in Switzerland

Both the host SOE and the private sector peer gain a deeper understanding of global and regional compliance risks in company operations as well as international best practices on anti-corruption and integrity. From a broader perspective, the good practices identified during the exchange between the private sector compliance expert and the SOE can be shared by the compliance expert in the business community and by the SOEs in the state-owned sector as well as with the state ownership entity. This helps to multiply the lessons learned and ultimately enhance the prevention of corruption and promoting integrity at the state and enterprise level on a greater scale. SOEs’ experiences with Compliance Without Borders, and the benefits derived, can serve as an example for other SOEs and encourage ongoing support by the state to take such steps to build a culture of integrity across its SOE portfolio.

The programme is helping to remove geographic and sectoral siloes. Success of the programme’s pilot stage could translate into scaling the programme and replicating it amongst different bodies and in different sectors or spheres. The potential for growth and sustainability of Compliance Without Borders is exemplified by successful collective action initiatives that have come before it, such as the mentoring programme of the World Bank Group’s Integrity Compliance Office discussed in Box 1.2.

Box 1.2. Mentorships for Sanctioned Companies Seeking to Reform

A programme by the World Bank Group’s Integrity Compliance Office

One example of effective peer-to-peer learning is the mentorship programme established by the World Bank Group (WBG) Integrity Compliance Office (ICO). As background, the WBG imposes administrative sanctions on entities that have engaged in fraud and corruption-related misconduct in connection with WBG-financed projects. Notably, the most common types of sanction are debarment with conditional release and conditional non-debarment. In both cases, the release from sanction is not automatic after a set period. Rather, the sanctioned entity must satisfy certain conditions to be released. In almost every case, the entity’s establishment and implementation of specified integrity compliance measures, to the satisfaction of the ICO, is a principal condition to ending the sanction.

Over the years, more than 140 sanctioned entities – including many SOEs – have implemented integrity compliance measures to the ICO’s satisfaction and thus have achieved release from WBG sanction. The ICO engages collaboratively with such entities throughout their periods of sanction. Often, entities also engage independent integrity compliance experts, advisors, or monitors during their periods of sanction, either voluntarily or as a condition of release. In many cases, entities enter their periods of sanction with little or no compliance experience but emerge with significant knowledge and expertise in the implementation of integrity compliance measures.

After release from WBG sanction, the ICO may request a released entity to consider serving, voluntarily, as a mentor to other sanctioned entities working with the ICO to implement integrity compliance measures. Most entities respond positively to that call, which has led to many fruitful relationships between “mentor” entities and the “mentees” that they assist.

Types of interactions between mentors and mentees may include the mentor sharing sample documents and materials, reviewing a mentee’s drafts or proposals, providing integrity training to the mentee’s employees, or simply chatting with the mentee about the process of developing and implementing integrity compliance measures and engaging with the ICO. Both mentors and mentees have reported benefits from such engagements, including not only increased knowledge in the integrity compliance area, but also improved understanding of business environments and challenges faced by business partners, and a broadening of business relationships. Indeed, many formerly sanctioned entities continue to collaborate with the ICO or their former mentors to promote integrity compliance in their industries and regions of operation, with some mentees even becoming mentors themselves after their own release from WBG sanction.

Source: authored by the World Bank Group’s Integrity Compliance Office.

Notes

← 1.  The ACI Guidelines are the first international instrument to offer states, in their role as enterprise owners, support in fighting corruption and promoting integrity in SOEs. They provide concrete recommendations on strengthening integrity both at the state ownership and enterprise level, and on the overall ownership structure. The Guidelines are accompanies by an Implementation Guide with good practices and useful insights for countries, corporate management of SOEs and the broader community of stakeholders that can strengthen the integrity of the SOE sector. The ACI Guidelines complement and supplement the OECD Guidelines on Corporate Governance of State-Owned Enterprises. They also draw on and aim to complement others OECD legal instruments pertaining to anti-corruption and integrity, notably the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions as well as the Recommendation of the Council on Public Integrity.

← 2.  http://www.g20.utoronto.ca/2018/final_hlps_on_soes.pdf.

← 3.  Actual or “would-be” competitors or business partners cannot be matched. Chapter 3 provides more information on how efforts are made to minimise the potential for conflicts of interest, including prohibiting matches between companies in the same sector.