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
THE DOWNSIDE OF OFFSHORE OUTSOURCING
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
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
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
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
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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