Companies need to enter into third-party relationships with eyes wide open

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Many companies operating in Asia are highly reliant on third parties to do business. Photo: AFP

Published: 1:47pm, 27 Feb 2014Updated: 1:48pm, 27 Feb 2014

Despite the number of serious fraud incidents across Asia, companies are still falling short in mitigating avoidable risks when managing third-party relationships. EY’s latest survey Knowing your third party – Asia-Pacific Fraud Survey 2013 shows that many companies across Asia-Pacific are failing to adopt even the most basic controls, with 26 per cent of our respondents yet to put systems or processes in place to manage and monitor third-party relationships.

For some companies this figure may not be alarming but for those operating in Asian markets it should act as a wake-up call. Many companies operating in Asia are highly reliant on third parties to do business, especially when navigating new markets, where the need for local contacts and procurement expertise is high. By not managing third parties with the correct processes and systems, companies will find it difficult to detect fraud, bribery or corruption.

So which third-party groups represent the biggest risk to businesses? Our survey finds that two distinct groups pose the biggest risks: vendors and suppliers, those supplying the goods or services to a company; followed by agents, those authorised to act on the company’s behalf.

We have seen examples of businesses becoming unstuck. For example, when an agent remunerated on a performance-related basis intentionally or unintentionally offers an inducement to a business associate or government official by way of gift, entertainment or financial reward in return for a business favour or contract.

This type of activity can lead the company into breaching its anti-bribery and corruption policy as well as into contravening local laws. If the company is a multinational corporation with connections to the UK or the US, it may have also infringed the UK Bribery Act and/or the US Foreign Corrupt Practices Act (FCPA). Of the FCPA cases reported last year, 90 per cent involved third parties.

In Asia-Pacific, this type of case is often linked to the cultural tradition of gift-giving and entertainment – which is part and parcel of business culture – making it difficult to separate the two. Companies need to be cautious of these practices, which may appear to produce a short-term gain but may lead to fines and reputational risk in the longer term.

Although fines make headlines, they do not tell the whole story. Companies also bear hidden penalties such as investigation costs, diversion of management resources, reputational damage, loss of business opportunities whilst undergoing the investigation, the risk of class action litigation and the cost of remediation. A lot is at stake, which management at some companies do not seem to appreciate.