A requirement to declare and document a conflict of interest is an integral part of an organisation’s compliance framework. So why does it continue to be a significant risk for many organisations?
Fundamental honesty is the keystone of business
In the intricate web of modern business relationships, two closely related yet distinct ethical challenges often arise, conflicts of interest and corruption. While conflicts of interest can arise from normal business dealings, corruption represents a significant breach of ethical boundaries. This article delves into the fine line that can separate conflicts of interest from corruption in business relationships, exploring their definitions, implications, and strategies for maintaining ethical integrity.
DEFINING CONFLICTS OF INTEREST AND CORRUPTION
Conflicts of interest arise when an individual or entity holds competing interests that could potentially compromise their impartiality, judgment, or decision-making. These interests can be financial, personal, or professional and they often emerge in situations where an individual's duty to one party conflicts with their allegiance to another. Conflicts of interest are not inherently unethical, but they require careful management to ensure that they do not unduly influence business decisions.
Corruption on the other hand, involves the abuse of power for personal or other private gain, often through dishonest or fraudulent means. It can encompass a wide range of unethical behaviours, including bribery, procurement fraud or other associated financial crime. Corruption not only distorts fair competition but also undermines the principles of transparency, accountability, and fairness that are essential for a healthy business environment.
NAVIGATING THE FINE LINE
While conflicts of interest and corruption are distinct concepts, the line between them can sometimes be blurred. What separates the two is primarily the intent of an individual and the extent to which ethical boundaries are crossed:
Deliberate intent: Conflicts of interest typically arise unintentionally, driven by the nature of business interactions. Corruption, on the other hand, involves deliberate and often concealed efforts to gain an unfair advantage.
Direct impact: Conflicts of interest can lead to biased decisions but might not always result in harmful outcomes. Corruption, however, almost invariably leads to negative consequences, harming stakeholders, damaging reputations, and eroding trust.
Transparency and accountability: Addressing conflicts of interest requires transparency and proactive measures to manage potential biases. Corruption, by its very nature, thrives in secrecy and abuse of position.
Influence and process: In situations where an individual uses their position to manipulate decisions or organisation procedures, a step may have been taken from conflicts of interest to corruption where there is a personal benefit.
Corruption thrives in the absence of accountability and transparency
THE INSIDER THREAT
The insider threat continues to be highlighted as one of the key risks that an organisation may face from data theft, asset misappropriation or money laundering, and when we look at procurement fraud and corruption linked to influencing vendor selection and award of contracts, areas of conflicts of interest can have significant financial or reputation impact when they are uncovered.
An area of verification and detection is at the vendor vetting and onboarding stage and is generally one of the main points at which conflicts of interest are assessed, checked and validated.
CONFLICTS OF INTEREST EXAMPLES
There are several areas of conflict of interest that should be known by organisations particularly by individuals whose role it is to protect the organisation from this risk, whether it is in procurement policy compliance and monitoring any manipulation of the procurement route or the tender board and the manipulation of scoring. Conflicts of interest are always high risk and one of the key areas where procurement fraud and corruption risk can hide.
Cronyism and the improper influencing in the award of a contract to a friend, are not unusual, particularly if the individual is a senior public or government official.
Nepotism and the granting of favours to family in a commercial or political setting can be common for individuals in positions of power or influence.
Tribalism and loyalty to individuals or groups that can arise where individuals expect to receive contracts where a staff member or executive is in a position to award contracts.
Revolving door is also a common risk where individuals move in and out from the public sector to the private sector. The business links and loyalties they have or in many cases where individuals in the public sector are looking for employment in the private sector, use their position in influencing contract award in an attempt to ingratiate themselves with a potential new employer. This can be seen where individuals share sensitive commercial data with a bidding company or to influence a procurement route from competition to single source. On many occasions, such a hidden relationship may only comes to light when an individual goes to work for a supplier.
THE VALUE OF CONTROLS
On many occasions, governance and failure in conflicts of interest verification and controls can be tracked to organisation management and their attitude towards compliance. Compliance can be seen, on occasions by management as a hindrance to getting things done and the perception that it causes delays.
When it is clear that the executive pays little attention to non-compliance with organisation policy and procedures, at what point does it become a culture that ultimately undermines any reprimand for breaching the policy.
The Association of Certified Fraud Examiners highlight in their annual report to the nations, that in a third of the 2504 cases of fraud assessed were caused by control weaknesses.
The value of conflict of interest controls can’t be overstated, they not only act as a preventative measure in highlighting to staff and vendors that an organisation takes a strong stance against fraud and corruption, but it also creates an environment where unusual behaviours such as unexplained or unusual favouritism towards a particular contractor or vendor raise suspicion.
Areas such as excessive gifts and hospitality or employee personal relationships with vendors or contracting staff living beyond their means, suddenly take on a different meaning. Checking new vendor data at the onboarding process against staff and supplier information may provide an indication of a bigger risk of corruption or collusion between suppliers.
CASE EXAMPLE
An individual was recruited into an executive position within a national business and during this process didn't disclose that they were part owner in a business consultancy. Adequate due diligence wasn't conducted on this individual that meant he was able to recruit other individuals within his consultancy. Due to their positions and roles within the new company they were able to influence the award of contracts to their consultancy.
It can be argued that during the recruitment process there wasn't a need to make a conflicts of interest disclosure and it is not known whether it was their intention at the recruitment stage to manipulate the award of contracts to their own company or whether the opportunity arose once they were introduced into the new role, however, it did very quickly step into corruption. A proactive disclosure requirement and checks of company formation information would have identified the individuals as linked to the consultancy and at the very least, preventive action could have been introduced.
NUANCES
One of the key differentiators is intent. Conflicts of interest may arise inadvertently due to overlapping roles or relationships, whereas corruption typically involves a deliberate intention to subvert ethical standards for personal gain. Additionally, the degree of transparency plays a crucial role. Addressing conflicts of interest openly and transparently can help mitigate their negative impacts, whereas corruption often thrives in secrecy.
CONFLICTS OF INTEREST RISK MITIGATION
Although a number of the control measures may be similar to those introduced in anti-corruption, a consistent approach will include:
Codes of conduct: Establishing and enforcing comprehensive codes of conduct can provide guidelines for ethical behaviour and help individuals navigate potential conflicts.
Proactive disclosures: An approach should be taken for individuals in positions of influence to disclose any relevant interests, allowing for transparent evaluation and appropriate decision-making.
Due diligence: Within a recruitment and supplier onboarding process, checks should be carried out of staff connection to suppliers. These checks might include comparing company executive and shareholder information against staff data, assessing company formation data against other suppliers and staff information.
Recusal from decisions or influence: Publishing procedures for situations where a conflict of interest might compromise objectivity and/or infer improper conduct, recusal and stepping aside from decision-making is a responsible course of action.
CORRUPTION RISK MITIGATION
Due to the nature of the illicit behaviour and activities of corrupt individuals, a broader scope of control measures should be considered.
Anti-corruption policies: Develop and implement robust anti-corruption policies, outlining a zero-tolerance approach and consequences for any non-compliance.
Compliance framework: Introducing a framework and approach to risk identification through non-compliance with laid down policies and procedures including ethical standards.
Hotline and protection: Implementing a reporting route for staff and suppliers to report non-compliance and/or criminal behaviour including a policy and anonymous reporting, where appropriate, to protect the identity of individuals.
Transparency and accountability: Holding individuals accountable for their decision making and actions including regular audits, can help detect misconduct through greater transparency.
PREVENTION THROUGH DESIGN
Designing prevention strategies is integral in the fight against procurement fraud and corruption. The simple act of introducing a requirement to make conflict of interest declarations can have a number of positive results, not only in protecting an organisation from inappropriate or illicit personal and professional relationships but also protect its reputation and its employees from the inference of impropriety where such conflicts are identified or reported.
Leaders must set the example for compliance and the culture and attitude toward conflicts of interest and anti-corruption. Lapses in judgement and influencing procurement policy for the benefit of a friend or family member can have significant reputation damage to an organisation should such findings become public.
Protecting organisation and national revenues must start with individuals written declaration outlining professional or financial relationships that might impact their role or the organisation and are the foundation on which governance frameworks are built.
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