When business conditions are tough, outsourcing can seem a good way to reduce costs to maintain margins. It may involve procuring goods or services locally or offshoring in countries with lower costs. The benefits of outsourcing are obvious. Less obvious are the risks, particularly when offshoring.
A significant governance risk for companies that outsource overseas relates to bribery and corruption. Not only does distance make day to day oversight difficult, but different cultural assumptions may result in business practices happening at a local level that are risky at a global level.
There has been a global focus on enacting anti-bribery and corruption legislation since the 1997 ratification of the OECD convention on Combating Bribery of Foreign Public Officials in International Business Transactions.
The most well known examples are the US Foreign Corrupt Practices Act and the UK Bribery Act 2010. Lesser known are the equivalent anti-bribery and corruption provisions enacted in Australia in the Criminal Code (Cth).
Given the criminal liability risk (including imprisonment for individuals), the large monetary penalties available against companies, their officers and directors, and the potential for reputational damage, this is an area that directors of multinational and Australian companies with any offshore exposure cannot ignore.
Outsourcing offshore, particularly to emerging economies where there are likely to be significant costs savings, brings with it the risk of conduct by agents which may fall foul of anti bribery and corruption laws.
The Panalpina story neatly illustrates this point. A number of oil services companies outsourced aspects of their freight forwarding and customs clearance in Africa to Panalpina, a Swiss company. Panalpina and a range of its clients were investigated for violation of US Laws.
Despite arguing that they were facilitation payments, Panalpina was proven to have made improper payments to customs officials on behalf of its clients and, in 2010, Panalpina and a number of its clients, including Shell, were fined more than $US200 million between them.
Companies can sometimes avoid liability for the acts of their employees or agents if they can demonstrate they did not expressly or tacitly approve the conduct and/or they had adequate measures in place to prevent bribery and corruption by the company, its agents and associated entities. Such measures must include an appropriately risk based and robust, top led compliance program.
Clearly, outsourcing is not a way of removing the risk of doing business in countries where bribery and corruption is part of the local landscape, nor is it a risk-free way of minimising overheads.
Rather, it is important for companies to recognise that outsourcing offshore brings with it new risks which need to be addressed both in the procurement process (through adequate due diligence, risk assessment and contractual provisions) and more broadly in its corporate compliance program.
With the right advice and the right compliance measures the risks of outsourcing can be minimised and the benefits more safely enjoyed.
The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.