THE BLOG
11/20/2012 11:33 am ET Updated Jan 20, 2013

How to Stop Fraud and Corruption in Your Organization

By Richard Leblanc and Deborah Nixon

The Walmart bribery probe has widened beyond Mexico to include China, Brazil and India. The RCMP is investigating the SNC Lavalin bribery allegations, on which Richard advised a law firm suing the company.

Richard blogged about Sino-Forest, a case of alleged Chinese fraud by a Canadian-listed company. In Quebec, the corruption inquiry has cost the Mayors of Montreal and Laval their jobs and this is only the beginning. There are allegations of kickbacks in cash that may reach other more senior politicians. And Ontario is not immune either. A senior Canadian director remarked that Ontario has a reputation for being "the best place to carry out a stock fraud in the industrialized world."

What is going on here? As immersed as the business community is in ethics and corporate governance, are these organizations just not getting it? Our gut reaction is to dismiss these organizations as exceptions to the rule, but then we see Walmart on the list. Walmart, whose revenue is larger than the GDP of Norway, has klout. When Walmart resorts to bribes, we wonder who else is playing that game. More importantly, how do we stop it? How did it start?

Like so much unethical behaviour, the misdeed usually starts out small. As humans, we are very good at rationalizing bad behaviour and distancing ourselves from our lies. As Dan Ariely states in his new research, as long as we can rationalize things to a higher degree, then we can lie more. The rationalization of bad corporate behaviour doesn't operate in a vacuum. It has lots of support and endorsements along the way. It requires that numbers of people either sign off or turn the other way when evidence of unethical behaviour comes to light. So, the fraud and corruption continues to grow.

What should boards do? Six things. First, boards must make it crystal clear to management that the company is not going to bribe and management must walk away from certain business. The board must support this and not have incentives that promote bribery. Second, the internal controls over financial reporting must be strong in all markets, both domestic and international. Third, if you are doing business in a market in which you know that fraudulent behaviour is the norm, you need a director with extensive on-the-ground experience at the board table, who can tell you and management what the hotspots are.

You should move a board meeting to the jurisdiction once a year so directors can get a first hand look. Fourth, boards must have their own experts to scrutinize off-balance sheet and related-party transactions and complex structures, and validate and assure internal controls. If dealing with international markets, provide foreign language document translation. Fifth, local auditors in foreign markets should have the same oversight and scrutiny. Last, a policy of zero tolerance needs to be communicated - and when necessary demonstrated - by the board to each employee and supplier.

Clearly, more work needs to be done. It starts at the board level but it is the responsibility and obligation of every employee to adhere to ethical principles and practices.