Blockchain for anti-corruption: are your business associates putting you at risk?

How can the blockchain can help organizations secure their anti-corruption efforts in an efficient way?

Blockchain for anti-corruption is a double win: in addition to delivering on a number of anti-corruption requirements imposed by regulators (eg: FCPA, UKBA, SAPIN, Law Decree 231), it offers organizational efficiency for routine tasks. Our goal here is to see how the blockchain can help organizations secure their anti-corruption efforts in an efficient way.

 

Corruption and bribery are among the world’s most destructive and challenging issues, with over US$ 1 trillion paid in bribes each year. It generates negative outcomes such as introducing uncertainties into commercial transactions, increasing the cost of doing business, the cost of goods and services, and diminishing the quality of products and services, which overall reduce quality of life, increases poverty and erodes public trust. Virtually every industry sector is exposed to corruption problems. For example, corruption in capital/infrastructure projects may take such forms as bribes, kickbacks, substitution of inferior materials, poor workmanship, or theft. Though each company is unique, there are common stages where corruption pressure points emerge.

In order to tackle bribery and corruption, countries have passed a number of legislations: FCPA, UK Bribery Act, Loi Sapin, Law Decree 231, etc. ISO, the International Organization for Standardization, has released the ISO37001 standard specifying a series of measures to help organizations prevent, detect and address bribery. These regulations have in common the requirement for a solid data management (compliance, training, risk assessments, due diligence, etc.) and traceability of processes, decisions and documents. The key pillars in anti-bribery management systems are the understanding of the organization’s context, the leadership & governance, the controls, the performance evaluation and improvements.

 

Your business associates: a sensitive point in anti-bribery management

To monitor and detect potential corruption risks, and to respond to them, a company must first determine external and internal risks factors that are relevant to its anti-bribery management system. This includes the organization’s business associates which are external parties with whom the organization has, or plans to establish, some form of business. The list comprises: clients, joint ventures, partners, providers, contractors, consultants, sub-contractors, suppliers, vendors, advisors, agents, distributors, representatives, intermediaries and investors.

To make corruption more difficult, solutions adapted to modern, global and digital are required. They should ensure transparency and auditability of operations are required. Despite advancements in digital technologies in the last 15 years, anti-bribery management still faces challenges of effective deployment. Those include for example siloed databases, lack of visibility in inter-business operations, or poor reporting, just to name a few.

Blockchain is a new technology that enables businesses to store information in a secure distributed registry that is traceable and can’t be modified. The transparency and immutability it provides ensures that transactions and agreements are verifiable, providing accountability among involved partners, such as a company’s business associates. From approvals, reviews and digital ID to tracking inventory and assets, blockchain technology delivers a new level of trust and transparency while enabling huge operational benefits.

 

How to use blockchain to implement procedures for due diligences on business associates?

blockchain antibribery ISO37001
blockchain for anti-corruption & anti-bribery

For compliance reasons, and in particular with ISO37001, a due diligence of business associates is required to further evaluate the scope, scale, and nature of risks. A key requirement is that business associated have also implemented an anti-bribery management system, or their own anti-bribery controls. etc.

For example, a procurement or vendor management team would be interested in examining the nature, scale and complexity of the business associate profiles. This process is otherwise known as Know-Your-Suppliers, or KYS. It can include basic information, or sensitive information either difficult to collect, or generating a lot of back-and-forth. For example: shareholders/beneficiaries, financials, licenses and certificates to operate, labour inspection results, the controls on activities which can carry specific bribery risks, key customers, suppliers, agents or intermediaries with whom business associate deals, and the nature and frequency of interactions with domestic or foreign public officials.

Know-Your-Suppliers is obtained through cumbersome and repetitive administrative processes. For example, in project financing with a business associate, the validation and qualification of suppliers before raising a valid purchase order will generate several interactions to collect documents. Records are often kept in different data silos increasing the risks of fraud and decreasing efficiency. Duplication and desynchronization of information may happen with multiple stakeholders not located at the same place or working in different departments (legal, risk & compliance, vendor management, business). For the owner of the process, difficulty to trace collected information is frequently observed for the same reasons.

In contrast, blockchain provides with a shared visibility of the processes. It works as a single point of truth for all the process participants together with real-time synchronization of information, confidentiality and privacy of shared data. It brings end-to-end traceability of each step by defining Who, What, When, Where and Why at each step. The execution is independently verifiable and immutable.

 

One stone, two birds: achieve concrete improvement for both compliance and operations.

As a real-life example of Know-Your-Suppliers, our firm advises on the use of a blockchain-based solution on top of the organization’s existing infrastructure and processes. This involves only marginal and negligible change to what is already in place. Thanks to the visibility, automation and accountability, the blockchain solution provides specific and measurable operational improvements. In specific instances, we observed between 30% and 40% improvement over existing processes. The savings come from the decentralized nature and execution this process, removing the overhead of centralized management. This provides every stakeholder with a visibility of the progress and accountability for executing certain tasks. When multiplied by the number of suppliers and stakeholders internal to a firm, the saving is substantial. The scope and nature of relationships with business associate can be efficiently re-assessed on routine basis as part of the organization’s risk management requirements.

anti-corruption blockchain process
anti-corruption blockchain process

Blockchain – a step towards the future of anti-corruption

The use of blockchain for anti-corruption and anti-bribery management systems is not only advantageous for managing processes with business associates but also provides an unprecedented level of security of the information and the integrity of records managed. It’s a double win: in addition to organizational efficiency on routine tasks, it delivers on anti-bribery management system requirements. It guarantees non repudiation and proof of execution. It further eliminates opportunities for falsification. It sends a clear message about the organization’s commitment over anti-bribery rules and contributes to preventing any legal issues due to fraudulent activities.

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