Managing supplier-related corruption risks.

• Author: Thinnes, Jeffrey
• Position: Ethics Corner

Recent regulatory developments have placed companies across all industry sectors on alert that supplier relationships must be proactively managed to avert corruption risks.

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Increasingly, regulators in the United States and abroad are holding companies and executives accountable for the corrupt actions of their business partners. In 2015, the United Kingdom showed that its 2010 Bribery Act is not a paper tiger, for the first time levying fines against two firms for failing to prevent bribery. France recently announced sweeping legislative changes that will ramp up pressure on fighting corruption. Civil fines and criminal sentences continue to rise, even in countries that have historically demonstrated weak commitment to enforcement.

Companies in the defense sector operate in a particularly high-risk compliance theater when it comes to fighting corruption. Being in a heavily regulated industry with a myriad of security-related compliance exigencies, coupled with regular interaction with government officials and an increasingly competitive market, leaves defense contractors vulnerable to significant corruption risks. It's no wonder since the inception of the U.S. Foreign Corrupt Practices Act in 1977, nearly one in eight enforcement actions have involved companies from the aerospace and defense sectors.

Globalization and the use of outsourcing and offsets have increased defense contractors' dependency on suppliers. While this has led to efficiencies and access to new markets, it has also created additional legal, financial and reputational risks.

Large suppliers with worldwide locations, such as manufacturers of aircraft engines or avionics technology, are likely to have access to government officials and private business executives in countries where they are active. Many of these suppliers may have third parties working on their behalf to identify and compete for new business opportunities, and they often interact with public officials. So, how does a contractor manage the corruption risks associated with the activities of suppliers--and even with their suppliers' suppliers and third parties?

It is important to conduct appropriate due diligence on every supplier, its owners and key managers. This due diligence should include "hard" and "soft" checks. Hard checks require reviews of key documentation, such as the supplier's code of conduct and internal policies relevant to preventing, detecting and remedying corrupt...