Freight transport and, in particular, shipping is the lifeblood of the world economy, or at least it was until we had two years of Covid disruption and now the most challenging sanctions regime ever seen.
The disruption is creating a dramatic rethink about where products and services are sourced and sold.
We have seen a significant shift away from China for example, with many North American firms in-sourcing investments back into NAFTA countries, resulting in a wave of inward investment in Mexico in particular.
The impact of global developments on shipping
The war in Ukraine is pushing many organisations to rethink their relationships with Russia and some former Soviet Union states. This is having a knock-on effect on supply-chains, with the need to avoid legally sanctioned individuals and entities adding an extra layer of complexity. Markets such as oil, gas, wheat and precious metals have seen prices soar, leading to significant rises in the cost of food and transport, all of which will have a complex and unpredictable impact on supply chains
Furthermore, many organisations are going beyond the legal requirements and are applying a moral judgement about doing business with entities in Russia or with those connected to its armed forces.
For organisation in the UK the impacts are further complicated by Brexit.
The latest OECD figures suggest that world trade recovered strongly in 2021 but fell sharply in the same period for the UK.
Covid restrictions also remain in many markets, adding further complexity to travel and trade.
These dramatic developments are changing the landscape for any organisation shipping goods around the world. Where major changes happen at speed, the risk of corruption escalates significantly, so companies looking to change suppliers rapidly should see this as a potential red flag and prioritise anti-corruption checks and monitoring.
In the past 10 years, the Maritime Anti-Corruption Network received over 45,000 reports of corruption demands in over 1,000 ports across 149 countries, given the changes we are seeing, these figures are likely to rise.
‘Logistics is undoubtedly one of the sectors most at risk from corruption’
Corruption risks in global shipping
Moving goods across borders requires a complex tapestry of permits, licences and authorisations from public officials. In addition, shipping companies will also face demands for port charges, special product licences, police and security charges, as well as the more obvious customs clearance fees. Covid impacts mean that for individuals, travelling is more complex, and as we have seen, for certain goods and services the current sanctions regimes are making shipping even more complex. Third parties are regularly used to obtain customs documents and licences and, in many parts of the world, “unofficial payments” are routinely asked for to expedite the process and/or ensure the provision of these regular services.
So, are the risks from corruption so great that businesses should ignore the global marketplace and concentrate their operations in their domestic market? Not at all.
Businesses involved in shipping products around the world need to be clear where the risks lie and what steps they should take.
For any business, working with third parties continues to be the single biggest corruption risk.
Almost one-in-two enforcement actions concluded since the OECD Anti-Bribery Convention came into force in 1999 has been the result of bribery through sales agents, intermediaries, distributors or brokers, all commonly used in shipping.
In response to the OECD, the last decade has seen anti-corruption legislation strengthened in many jurisdictions. Common to these new laws is the requirement for specific anti-corruption due diligence of third parties. While many logistics providers have gone to great lengths to strengthen their anti-corruption controls, seeing the ability to demonstrate robust anti-bribery procedures as a competitive advantage, others, as the statistics show, are less well advanced.
Need for anti-corruption risk assessments
Any business using third parties to ship products around the globe must therefore take steps to identify potential corruption risks and put appropriate mitigation measures in place. While this may seem daunting for smaller businesses, particularly those without access to in-house compliance or legal teams, taking a proportionate and risk-based approach ensures that time and resources are focussed on the greatest risks.
The first step is to conduct and document a simple risk assessment to demonstrate that the company has considered the bribery risks within its operation. All too often, companies get this wrong, only considering they might be at risk if they fail to put an anti-corruption system in place, rather than systematically identifying the actual corruption risks their business might face.
GoodCorporation’s most recent report on the effectiveness of anti-bribery controls found that 40 per cent of the risk assessment procedures evaluated were inadequate. Any company, regardless of size, which fails to conduct a robust and specific bribery risk assessment cannot be confident that its anti-corruption programme would be sufficient to prevent corruption.
6 questions to ask to assess shipping corruption risk
To be effective, an anti-corruption risk assessment must ask the following questions:
- Does the company operate in a high-risk industry prone to corruption such as extractives, oil and gas, defence, pharmaceuticals?
- Are the products being shipped in and out of ports in high-risk parts of the world?
- Are the products being shipped exclusively on the company’s behalf?
- Is the company using other third parties to obtain any necessary licences permits or authorisations?
- Do the logistics company and other agents interact with government or public officials when shipping goods?
- Is the origin of the goods and the supply-chain well known and stable? Or will it be changing because of Brexit, Covid, the Ukraine war or other factors?
Key anti-corruption mitigation measures
Where the answers are yes, the company should:
- Ensure that it has understood any changes to the suppliers, brokers and intermediaries being used
- Ensure that its website and other published materials communicate the company’s zero-tolerance approach to corruption and to facilitation payments. This should include statements from senior management demonstrating the company’s top-level commitment to an anti-bribery stance
- Communicate its zero-tolerance of corruption to all employees, customers, suppliers and if necessary, agents and other third parties and intermediaries
- Ensure that anti-corruption clauses are included in all high-risk contracts with the logistics firm and any other agents
- Use a simple checklist to consider if further anti-corruption controls are needed
Conducting risk-based anti-corruption due diligence on third parties
Once the risks have been identified, anti-bribery due diligence is needed on any high-risk third parties such as shipping companies being used, especially if these are new relationships.
Start with a tailored questionnaire to obtain reliable data:
- Ownership information
- Management structure
- Third parties used to obtain licences and permits
- Copies of their own anti-bribery policies and relevant codes of conduct
A failure to obtain any of these is a red flag in itself and should prompt further investigation into the history and reputation of the logistics provider.
Once the documentation has been reviewed and verified, do take up references to rule out any further red flags.
Effective due diligence almost always raises some concerns. However, this does not mean that the relationship cannot move forwards. Liaise with the company to identify whether mitigation measures can be put in place to reduce risk and enhance anti-corruption controls.
Ensure that auditing rights are negotiated as part of the contract and that anti-corruption clauses are included in any agreement.
Logistics is undoubtedly one of the sectors most at risk from corruption. Understanding what the risks are, when a company might be exposed and how to mitigate the risks is vital. For most small businesses, these risks are relatively easy to identify and when a proportionate approach is taken, low cost to mitigate. For those organisations failing to recognise this, there is a real danger of unwittingly walking into corruption and fraud risk.
The current situation and the considerable disruption being wrought upon supply-chains means that good planning and risk assessment are even more essential.
Leo Martin is founder and director of business ethics and anti-corruption advisers GoodCorporation