Outsource Magazine

In the current economic environment the move towards outsourcing, particularly offshore, is unsurprisingly attractive. Suppliers, staff or distributors may be cheaper, know how to navigate a foreign business culture or language and have demonstrated success and contacts in a highly competitive climate. This can bring costs down and help with entry into new markets.

However following new UK bribery laws, companies outsourcing but not asking the right questions of their new business partners could be hit with huge fines or imprisonment. The introduction of the Bribery Act in July means companies must now clearly demonstrate that they have "adequate procedures" in place to address third-party risks – including their outsourced business. Firms can no longer rely on excuses that their business partner acted without their consent if accused of bribery or corruption.

Following the Bribery Act and a number of high profile cases involving large-scale fines, Ernst & Young have launched a background checks service in response to the demand from firms who require due diligence for outsourced parts of their business. We now estimate that global firms carry out around 10,000 to 20,000 background checks on third parties every year, with demand rising due to compliance requirements across a number of sectors. Some of the sectors we have identified with clear risks are healthcare companies that are heavily regulated and maintain large amounts of sensitive data, and transportation and food companies that undertake employee checks because of their business model.

In an analysis of 225 background checks we have recently carried out on behalf of companies seeking to vet new business partners, we were able to pinpoint the main bribery or corruption risks flagged against potential suppliers, distributors or staff, which raised "red flags". This revealed the top risks from potential new partners were: corrupt government links (50 per cent of flags); signs of litigation (11 per cent); political connections (7 per cent); and reports of illegal activities (4 per cent).

It is important that such checks are taken as a method to raise suspicion, especially as outsourcing can occur in countries with higher corruption risks. Indeed, some of the positive selling points of business partners need to be reassessed before appointing suppliers or distributors that will ultimately be acting in a company’s name. For instance, how did a potential supplier really achieve such strong levels of success in a highly competitive market? How will they represent your business? What is their track record? Could there have been an interplay of bribery or corruption?

The consequences of not applying the same tests on partners that are routinely addressed in other parts of a business can be severe. The UK authorities have made public their intention to act strongly and tackle bribery and corruption, but this should not be the only motivation.
Clearly, failure to do basic due diligence, even in cases where cultural or language barriers might hide obvious risks, can create unforeseen burdens and means risks are not spotted until they have caused serious damage. This may be enforcement, but also reputational damage, or company failures.

The message of the new law is that you can outsource parts of your business, but not your accountability for bribery and corruption.

About the Author

Paul Walker is a partner with Ernst & Young leading their Forensic Technology and Discovery Services group which includes Forensic Data Analytics, traditional Computer Forensics and Electronic Discovery. With over 12 years of experience in working with clients in the design, build and implementation of Technology solutions, Paul is a recognised leader in the field of Forensic Technology.

Paul is focused on the development of proactive and predictive fraud solutions, working with leading technology vendors to bring innovative solutions to clients. He has experience of a number of sectors including telecommunications, insurance, retail banking, utilities, pharmaceutical and legal.