ISO 37001 is the international standard for anti-bribery management systems. Included in the ISO are elements which can be used to improved procurement governance and prevent corruption. Other instruments including AI and blockchain are also mentioned briefly.

1. IMPROVING PROCUREMENT
VIA
ISO 37001:2016
Anti-Bribery Management System
Dr Mark Lovatt
CEO, Trident Integrity Solutions Sdn Bhd
www.trident-integrity.com

2. Business Corruption Risk Areas

3. Is it so serious?
• The World Economic Forum estimates that corruption increases
the cost of doing business by up to 10% on average.*
• WEF also estimates corruption costs are up to 25% to the cost of
procurement contracts in developing countries.**
• PKNS: Saved RM427million over 4 years by improving tendering
procedure, incl. Integrity Pacts.***
• 27% of US companies experienced procurement fraud in
2013****
Sources:
*OECD, ‘CleanGovBiz: The Rationale For Fighting Corruption’, 2014
**WEF, ‘Good Business Is Clean Business’, 2008
*** PKNS 2018 figures, taken from 2012 onwards
**** PWC Global Economic Crime Survey 2014

4. Case Study:
Grand corruption
through procurement

5. Petrobras: background
• Formed in 1953 as Brazil’s national oil company, Petróleo
Brasileiro
• One of Latin America’s largest companies; No. 75 in 2017
Fortune Global 500 list (dropped from 28th in 2014)
• The government (Workers Party, or PT) holds a majority stake,
also listed in São Paulo and New York
• Thousands of ordinary Brazilians are shareholders

6. Operation Car Wash: what went wrong?
• Political appointees from ruling Workers Party (PT) and coalition
partners took Petrobras’ most important executive positions
• Appointees collaborated with 16 of Petrobras’ contractors to
secretly divert funds, valued at up to 3% of all contracts, to the PT
and its coalition partners
• Some of the directors accumulated funds of more than $100m in
Swiss bank accounts while others put the money into extravagant
art collections.

7. One example of the disaster: Comperj, Brazil
Comperj, a giant refinery and petrochemical complex built by
Petrobras in Itaboraí, Brazil.
The unfinished project was originally planned to cost $6.1 billion,
but a state audit put the price closer to $50 billion.

8. The risk of Bribery & Corruption is not new

9. Bribery & Corruption is ongoing in the business sector
EY Asia Pacific Fraud Survey 2017
This means your procurement personnel are
being offered these items on a regular basis

10. What about Procurement?
5 categories of
procurement fraud

11. 1. Kickbacks
Kickbacks: A payment made by the winning bidder to the
decision-maker, in return for help in securing contract
• Often 3% to 25% of the contract value (but can be higher)
• Can be monetary, but can also take the form of goods or
services such as expensive gifts, credit cards, property, house
renovation, payment of school fees, etc.
Warning signs:
• The selection of the contractor appears unjustified
• A broker / middleman involved in where it isn’t needed
• Approval of high prices and low quality goods
• A member of the procurement team receives gifts or seems to
enjoy a sudden and unexplained increase in wealth

12. 2. Corrupt influence
Corrupt influence: where a key member of the team
influences the outcome in return for personal gain
Examples:
• Approving a contract with higher prices than market rates
• Tailoring specifications so that only one bidder can win
• Qualifying / approving an untested or unqualified supplier
while excluding qualified bidders for clear reason
Warning signs:
• The selection of the contractor appears unjustified
• Contracts are awarded with little or no transparency
• Inflated departmental costs as compared to the norm
• Acceptance of over-priced, low quality goods & services

13. 3. Collusion and manipulation by bidders
Collusion (bid-rigging or cartel operation): involves groups of bidders working
together to submit complementary bids benefit a preferred bidder, sometimes on a
rotation basis.
• Involves collusion and sharing of information between bidders
• Often involves staff within the procuring party, with kickbacks
• May include accepting late bids submitted after the deadline
Warning signs:
• Most bids are significantly higher than the benchmarked / expected price
• Unexpectedly low number of bids, or parties expected to bid do not do so
• Deadlines are not enforced, extended unnecessarily or bids are accepted late
• The late bidder is also the lowest bidder by a small margin
• High-quality bidders are disqualified for unclear / questionable reasons

14. 4. Conflicts of interest
Conflicts of interest: A member of the procuring organisation fails to
disclose their interests with a contractor or supplier, liaises with them
unofficially, or accepts gifts or payments.
Warning signs:
• Contractor/supplier receives the order through personal
recommendation of decision-maker, despite there being better bids
• Contracts are renewed automatically upon the recommendation or
instruction of the decision-maker, without price checking
• Resistance by decision-maker(s) to standard procurement
procedures to obtain multiple quotes etc.
• Decision-maker shows signs of extravagant lifestyle beyond his/her
means (new cars, luxury holidays, house renovation etc.)

15. 5. Billing / Delivery fraud
Billing and Delivery fraud occurs where contractors and suppliers overcharge
the company in one way or another, often with the assistance of a member of
the procurement party’s team
• Variation abuse: contractor submits a successful low bid (in collusion with
a procurement executive). Subsequently, contractor submits multiple
Variation Orders to inflate the price, supported by procurer’s staff
• Fraudulent contractors may flaunt contract specifications by delivering
sub-par goods or services.
• Suppliers submit false, exaggerated or duplicate claims
Warning signs:
• Multiple Variation Orders signed off by a single individual
• Warehouse inventory shows less items in stock than deliveries indicate
• Records (invoices, expense claims and receipts) are missing or
duplicated/photocopied
• Unauthorised or excessive use of cash for reimbursements

16. What might this problem
look like
outside the front door?

17. Water hole in brand-new road (Kuala Lumpur)

18. A close-up of the hole

19. How does corruption arise?
Corruption arises from:
1. Weak systems
2. Poor enforcement
3. Acceptance culture
You have to change the first two to impact the
third

20. Combatting procurement fraud:
ISO 37001:2016
Anti-Bribery Management
System

22. What does ISO 37001 include?
A series of measures and controls to help prevent,
detect and respond to bribery, among them:
✓Bribery risk assessment
✓Top management leadership
✓Anti-bribery policy and procedures, including high risk
areas like gifts & hospitality
✓Due diligence on projects and business associates
✓Robust financial and non-financial controls
(procurement)
✓Training and communication
✓Reporting, monitoring, investigation and review
✓Corrective action and continual improvement

23. ISO 37001:2016 Main elements

24. ISO 37001:2016
PROCUREMENT
MEASURES

25. Preventative measures for Procurement
ISO 37001
1. Bribery risk assessment
2. Basic procurement good practice
3. Guidelines on gifts & hospitality
4. Conflict of interest declaration procedure
5. Reporting lines (whistleblowing)

26. Bribery risk assessment
• The assessment needs to cover the main
corruption risk areas:
– Procurement, Finance, Legal,
– Agents / business associates
– Specific projects & large transactions
– Company strategy
– High-risk positions (procurement, sales)
– HR procedures: appointment, incentives/bonus
schemes and promotion

27. Bribery Risk Assessment
CF-011
CF-001
CF-002
CF-003
CF-004
CF-005
CF-006
CF-007
CF-008 CF-009
CF-010
CF-012
CF-014
CF-013
CF-015
CF-016
CF-017

28. Procurement essentials covered by the ISO
✓ Pre-qualification process for suppliers / bidders
✓ Assessing whether the services were properly carried out
✓ Fair, competitive quotation or tender process between at least
three competitors
✓ Min. 2 persons to evaluate quotations / tenders, approve the award
and authorise payments
✓ Separation of duties, so the order, acceptance and payment of
goods and services are done by different parties
✓ Signatures of at least two persons on contracts, changes to
contracts and VOs
✓ Protecting price-sensitive information, with restrictions on access
✓ Tools and templates such as practical guidance, do’s and don’ts

29. High Risk areas
• Gifts & Hospitality
• Political donations
• Charitable donations &
sponsorships
• Support letters
• Facilitation payments

30. What kind of ‘gifts’ are we talking about?

31. Conflicts of Interest Management
• Where personal
interests conflict with
the company’s interests,
especially:
• Board of Directors
• Procurement, Sales
• Other key roles, eg Internal
Audit
• Clear guidelines needed
when conflicts arise to
ensure they are brought
out and managed well
© 2009 20th Century Fox Film Corp

32. Does conflict of interest matter?

33. Access confidential
reporting lines
(Whistleblowing)

34. Impact of hotlines for detection of fraud
(Source: 2016 Report to the Nation, ACFE)
Schemes were detected
by tip in 47.3% of cases
at organizations that had
hotlines, but in only
28.2% of cases at
organizations without
them.

35. Why should companies encourage whistleblowing?
• Whistleblowing reports can expose frauds, misconduct,
bullying and other costly malpractices and an early stage,
before they take root and become highly destructive
• Whistleblowing can be done by anyone in the company,
and so utilises the presence of people throughout the
organisation who know what is really going on
• Whistleblowing is low-cost: a specialist team is not required
to conduct audits and investigations to identify where the
issues are occurring
• Whistleblowing done internally can be kept within the
organisation, so effective action can be taken before it
becomes public and very damaging
• Simple to set up; difficult to make it work

36. Whistleblowing procedure

37. Why is blowing the whistle
on wrong behaviour
important?

38. Case Study
Whistleblowing
(or lack of it)

40. ‘Dieselgate’: what did VW do?
• Scandal erupted 18 September 2015
• United States Environmental Protection Agency (EPA)
issued notice of violation of the Clean Air Act to
Volkswagen Group
• EPA had found that VW had intentionally programmed its
diesel engines to activate emissions controls during
laboratory emissions testing.
• The programming caused the vehicles' Nitrous Oxide (NOx)
output to meet US standards during regulatory testing but
emit up to 40 times more NOx in real-world driving.
• Volkswagen deployed this programming in about 11 million
cars worldwide, and 500,000 in the United States, during
2009 to 2015

41. What happened next…
• Volkswagen became the target of regulatory investigations in
multiple countries
• Volkswagen's stock price fell in value by a third in the days
immediately after the news.
• Volkswagen Group CEO Martin Winterkorn resigned
• Suspensions:
– Head of brand development Heinz-Jakob Neusser
– Audi research and development head Ulrich Hackenberg (resigned)
– Porsche research and development head Wolfgang Hatz (arrested)
• Volkswagen group:
– Announced plans to spend €16.2 billion (US$18.32 billion) on
rectifying the emissions issues, and
– Prepared to refit the affected vehicles as part of a recall campaign

42. Massive impact on share price
.
Impact of
emissions scandal

43. The incident is proving extremely expensive
“According to our estimates, the net present value of the
cost of the entire ‘dieselgate’ scandal for Volkswagen,
including government fines and settlements, private
settlements, recall expense, and future loss of
sales, could be up to $34.5 billion. ”
Forbes Investing, 28 Sept 2015

45. The moral of the story…
All this could have been
prevented if VW had
encouraged
whistleblowing

46. The day-to-day impact of issues which go unreported
can be huge – and a volcano preparing to erupt

47. ADDITONAL MEASURES TO
CONSIDER

48. Procurement profiling

49. Integrity Pacts
▪ Used worldwide by Transparency International to great
effect
▪ Targeted at tendering & procurement sectors of the
company
▪ Builds integrity into bidding and contract management
▪ Can be standalone or incorporated in main contract
▪ Must have teeth:
– Clear codes of behavior (COBE etc.)
– Monitoring & whistleblowing line
– Sanctions for breaking the pact,
including non-payment, termination

50. Looking further ahead

51. Innovation can solve a lot of problems

53. Dr Mark Lovatt
mark.lovatt@trident-integrity.com
www.trident-integrity.com
+6 013 297 4450
THANK YOU