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Reality checkFraud, bribery and corruption in India’s M&E industry

ForewordPreventing fraud before it happens is the ultimate goal of a successful prevention and awareness program.

India’s Media & Entertainment (M&E) sector has been growing at a fast pace. However, the current legal scenario in the country has made it imperative for top management members to take the right decisions to address complex issues relating to fraud, bribery and corruption in their organizations. They need to emphasize on the importance of ethical business conduct. How such organizations deal with any lapses is of paramount importance.

Since people involved in wrong-doing do not want to get caught, and wish to retain their ill-begotten gains, they exploit their knowledge of their employers’ controls and processes to continue committing crimes. To combat this, it is necessary for organizations to increase their perception of such risks, and put in place safeguards and solutions to prevent and detect such crimes. It is important for management to realize that fraud is an ongoing issue and cannot be resolved by “quick fixes.”

We conducted a survey of more than 45 M&E companies and found that employers are fully aware of the threat of fraud, bribery and corruption, but are still not managing these risks effectively. Organizations that fail to address their compliance-related weaknesses continue to take unnecessary risks in a world where there are an ever-increasing number of determined fraudsters and globally active regulators.

Much needs to be done still. We hope the findings of this survey will provide useful insights to those charged with taking up this challenge.

Farokh T. BalsaraPartner and National Leader Media & Entertainment Markets Leader - India

Arpinder SinghPartner and Head - India and Emerging MarketsFraud Investigation and Dispute Services

4 | Reality check

Table of contentsExecutive summary

Current state of fraud and bribery in Indian M&E companies

Key fraud scenarios in Indian M&E industry

Roadmap for compliance

Conclusion

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10

20

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2

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5Fraud, bribery and corruption in India’s M&E industry

Note:

• Some percentages in this report total more than 100%, since executives can make multiple selections.

• Not all the questions in the survey were answered by all the respondents. All percentage figures are derived from the total number of respondents who answered a particular question and not on the total number of overall respondents.

Introduction

About the survey

India’s M&E industry is beset with several problems today. Furthermore, slowing down of its economy has significantly affected the trajectory of its revenue graph.

Addressing the need for ethical business conduct and how organizations deal with fraud-related lapses is of paramount importance.

We conducted an online survey to provide relevant information on prevalent fraud, bribery and corruption trends in the country. We received pertinent feedback from more than 45 respondents from the M&E industry.

Our respondents represented a mix of Indian enterprises with domestic operations, as well as Indian and foreign multinationals. They were spread across different functional areas to enable us to gauge perspectives across the industry.

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6 | Reality check

Executive summary

Our survey provides a deep insight into the current corporate fraud and corruption scenario in India’s M&E industry. The feedback we received on current business risks is candid and revealing, particularly in today’s fast-growing and dynamic environment.

56%increase in

Fraudin the last Years


Our survey confirms recent fraud- related incidents in the industry:

• According to 56% of the respondents, the incidence of fraud in the Indian M&E industry has increased in the last two years.

• Content distribution and TV/film content production are areas that are highly vulnerable to fraud, bribery and corruption. These are followed by the finance and advertisement sales functions. Furthermore, the respondents indicated that the risk of facilitation and unethical payments is high in areas where the Government’s approval is required.

• One out of six respondents reported increased instances of fraud in their organizations.

• According to 83% of the respondents, a key concern for the industry is the kickbacks given for approval of increased talent-related and acquisition costs, carriage fees, IPR, and satellite rights. This also indicates the high risk of collusion between employees and external parties.

• At least 70% of the respondents believe that false invoicing and over-billing by third parties is another serious issue faced by the industry. This could be due to lack of adequate internal controls, a situation which is exploited by external parties with the connivance of “insiders” engaged in corrupt practices.

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Curbing corrupt practices a significant challenge for enterprises

Protecting information is the keyThe survey results indicate that there is significant flexibility for users, which increases the risk of compromising organizations’ confidential information.

Respondents indicated that they had made their IT networks secure.

Respondents reported that they had instituted penalties in cases where information was leaked by employees.

50% 26%

Respondents have access to personal emails and social networking sites76%

Respondents believe loss range between

Respondents believe loss range between

Respondents believe loss is more than

44%

52%

2%

98% 1%—5%

5%—25%

>25%

According to 98% of the respondents, incorrect and unethical practices in the M&E industry have resulted in significant loss of profits and/or inflated costs.


Despite the risk, companies are still not doing enough to prevent bribery and corruption. From responses to our survey, it seems that mixed messages are being communicated by management teams, with the overall tone often being diluted due to lack of widespread training.

Respondents reported that their companies did not provide training on the ABAC policy to their employees and vendors.

Respondents revealed that they were not aware of the difference between facilitation fees and illegal payments.

Respondents are unaware that both companies and third parties are jointly responsible for the unethical actions of the latter.

67%

59%

59%

Respondents indicated that they had adequate procedures in place in their organizations to determine non-compliance with the Anti-Bribery and Corruption (ABAC) policy.50%

Knowing who you are dealing with: effective third-party due diligence and compliance audits There is a need for increased transparency in the dealings of enterprises by their including and implementing their audit-related rights over third parties.

Respondents indicated that their companies conduct audits of third parties.13%

Furthermore, there is an urgent need for entities to implement background checks and due diligence procedures due to the increasing risk of payouts being made to non-existent vendors and service providers or employees with shady backgrounds.

10 | Reality check

1Current state of fraud, corruption and bribery in the Indian economy


1

12 | Reality check

Current state of fraud, corruption and bribery in the Indian economy

1

India’s M&E industry is taking giant strides. Proving its resilience when the global economy is going through tough times, the industry is at the cusp of a strong growth phase, backed by rising consumer spends and advertising revenues across all the sectors.

However, fraud, bribery and corruption have grown simultaneously, resulting in hidden costs for enterprises. These evils have been responsible for closure of businesses, retrenchment of employees during times of economic distress, organizations losing business due to an adverse environment and businesses witnessing less profit than earlier or not breaking even.

Figure 1: Incidence of increased fraud in last two years

89%

56%

17%

11%

44%

83%

In India

In the Media &Entertainment

industry

In yourompany

Yes No

Public awareness of fraud, bribery and corruption has never been greater in India than at present.

Considering its projected growth rate, the M&E industry has come a long way from being tagged as an “unorganized sector” to its adopting a “corporate culture.” However, there is a continuous need for it to evolve in tandem with government regulations and for management teams to comply with these. This is especially important due to the significant expansion of the industry, which is witnessing continuous dynamic and radical changes, resulting in increased risk of a breakdown in governance in general, and fraud, bribery and corruption in particular, in organizations.

Indian economy distressed of fraud and corruption

• According to 89% of the respondents fraud and corruption have significantly increased in India in the last two years.

• Around 56% of the respondents believe that fraud and corruption have grown exponentially in the M&E sector during this period and constitute a major cause of concern. (Please refer to Figure 1.)


Business entities are falling victim to unethical practices. Are they doing enough to identify such problems or have these become an acceptable norm, and therefore, they feel they do not need to take proactive action to counter them?

Figure 2: Extent of loss of profits or inflated costs due to fraud, bribery and corruption

2%

44%

35%

17%

2%

Nil

1%-5%

> 5%-10%

>10%-25%

>25%

Negative effect of hidden costs on industry and the economy

In the M&E industry, the commercial function is highly challenging, since it is widely believed that no scientific methodology has been devised to determine the value of certain services or intangibles. Furthermore, the auction and bidding process is not widely used to facilitate transparency in dealings, which increases the risk of closed door negotiations with select buyers on the basis of “back of the envelope” calculations. The industry still has a long way to go in recognizing the need for a balance between creativity and commercial aspects, since both are equally important for its survival.

Curbing corrupt practices a significant challenge

• According to 98% of the respondents, the M&E industry has witnessed significant loss of profits and inflated costs due to incorrect and unethical practices.

• Furthermore, 54% believe that the percentage of loss of profit and/or inflated costs in the industry are much higher than disclosed and exceed 5%. (Please refer to Figure 2.)

Kickbacks a top concern for the industry

• According to 83% of the respondents, the issue of kickbacks is a key concern in areas including carriage fees, satellite rights, Intellectual Property Rights (IPR) and production budgets.

• More than half of the respondents reported that overbilling and fake or false invoicing is very common in the industry. Our experience indicates that this does not happen on consistent basis without collusion with insiders.

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Collusion between placement teams and MSOs or LCOs to defraud broadcasters:

A large media company had been the victim of carriage fees-related fraud where the key placement team members responsible for negotiations were in collusion with carriage vendors to secure kickbacks. There was no segregation of duties and funds were routed through “shell” companies, which were not even engaged in the cable operation business. Furthermore, some the carriage deal values were substantially higher than those of the company’s peer operators fulfilling similar parameters or criteria. An investigation revealed that kickbacks were in the range of 5%–15% of deals, depending on the nature of relations between the two parties. We have provided below some of the key indicators of fraud, based on our experience in the industry:

• Misrepresentation of subscription details to justify higher carriage fees

• High % of carriage fees to subscription – operator peer comparison

• One time deals with operators without adequate justification

• Payouts to entities not in the business of cable operations

• Split deals

• Background check information indicating potential red flags towards ethics & credibility issues – Employee & Third Party

• Non agreement to include audit clause in the contract

• Change in employee lifestyle/Living beyond means

Figure 3: Common types of fraud in India’s M&E industry

83%

78%

70%

67%

46%

43%

39%

39%

26%

9%

Kickbacks on approval of higher talent costs,carriage fees, satellite rights, intellectual…

Over billing - excessrates and charges

Fake/false invoicing

Bribery & corruption

Non provision of servicesas per contract/plans

Misappropriation of assets and resources(including Intellectual Property Right thefts)

Kickbacks on appointment offreelancers, retainers and consultants

Kickbacks for releasingprompt/advance payment to vendors

Intentional misrepresentationof financial statements

Money laundering

Carriage fees constitute a major cost for broadcasters. The Government’s recent regulations and the digitization process have resulted in a significant reduction in these fees, although not to the extent expected by regulators and broadcasters. As explained earlier, this area of operation is a high-risk one and has seen some of the biggest broadcasters in the country falling victim to carriage fee-related fraud.


Taming talent costs:

In a normal scenario, we have on one side actors or models and their agencies and/or managers. On the other side, there are agency producers and their clients (could be an advertiser, film director, photographer or production company). The actors/models employ the agents/managers to maximize their fees and the incentive is that they earn a direct percentage on what the former negotiate. On the other hand, agency producers usually have a tight deadline and no tangible incentive to negotiate the lowest possible

fees beyond doing the right thing by their clients. They are also under pressure to deliver the actors/talent film directors/photographers want to work with, as well as answer to agencies’ creative directors, who are focused on the creative outcome and not the cost. This scenario is highly vulnerable to fraud risks, as an agency producer and/or the production manager may collude, which may result in high costs for a production company/advertiser.

Talent-related costs for film, television and print is a major spend for producers as well as advertisers. There are some myths about talent-related fees that often stop a rigorous process from being implemented and in which the negotiation process is flawed.

The film distribution business is another area of concern and is highly vulnerable to fraud. It is possible that most movies seem unprofitable or not very profitable, even when they are making a significant amount of money. The details can be complex, but a simplified version is that box office collections may be underreported, and moreover, business statements may be misrepresented to avoid sharing profits. However, distribution houses also face their own set of issues and are

vulnerable to the fraud risk of vendor-employee and exhibitor-employee collusion. Moreover, distribution houses are critical intermediaries in the whole process of revenue generation. For the film industry, it is pertinent for film producers to have the right to audit clauses in distribution contracts to ensure that they do not suffer due to accounting tricks and fraudulent activities.

On 20 September 2013, the Telecom Regulatory Authority of India (TRAI) notified amendments to interconnection regulations applicable for Digital Addressable Systems (DAS) as well as to the tariff order relating to the latter. The draft of these amendments were released for discussion in the industry on 4 June 2013.

Some changes were made in the amendments following receipt of feedback from the industry. These include:

• Removal of the requirement for minimum channel-carrying capacity of 500 channels for MSOs

• Clarification on whether subscribers can opt for channels on a-la-carte basis, bouquets or a combination of both, according to their choice

• MSOs not being allowed to request broadcasters for channels and their being asked for carriage fees for these

• The Interconnection regulation applicable for DAS has the following safeguards with regard to charging of carriage fees:

• Carriage fees to be transparently declared in the RIO of the MSO, uniformly charged and not to be revised upwardly for a minimum period of two years

• Details of the carriage fee to be filed with the authority, which has a right to intervene in cases it deems fit

• Sub-regulation 3(10) of the interconnection regulation for DAS mandates that the MSO carries channel(s) if it is in the regional language of the region in which it is operating or if it is in Hindi or English. Therefore, in other words, there is a “must carry” provision for regional language channels (specific to a region) and channels in Hindi and English. If channels fall within these categories, the MSO has to carry them.

With these provisions, the concerns of the broadcasters regarding MSOs creating artificial scarcity of channel- carrying capacity to justify their charging unreasonable carriage fees are adequately taken care of.

Carriage fees — recent key updates:

16 | Reality check

A leading advertising company suspected its production manager of incurring excess costs in its creative department and wanted to investigate this. Production costs were going beyond budgets agreed on with clients. This led to multiple negotiations with and approvals needed from clients for unexpected cost overruns leading to financial, business, credibility and commitment-related losses. The company wanted to evaluate and assess budgeted and actual costs from forensic point of view, since everything seemed perfect from the perspective of documentation. On-site review

of documents, background checks and gathering of market intelligence revealed the following:

• The production manager had an understanding with vendor to add 10% to the invoice value. This would be paid to him as a kickback.

• Transactions were entered with sister concerns/related parties of the production manager, wherein services were sub-contracted and invoices raised at high costs. In some cases, invoices were approved where no services were provided.

Employee-vendor nexus in an advertising company:

An employee-vendor nexus is a common risk in any industry. This is however a potentially high risk area in the M&E industry due to its culture of placing too much reliance on individuals (based on trust), resulting in work being more person-dependent than process-driven. There have been too many instances of

fraud committed by employees in collusion with third parties in the sector. Companies have learned the hard way to invest in timely fraud assessment to proactively guard themselves against such eventualities.

• Misrepresentation of box office collections on theatrical distribution

• Relationship-based arrangements without an emphasis on cost-benefit analysis for sale of rights to preferred distributors (at non-competitive price), resulting in loss of revenue

• Excessive bundling of rights

• Business statements manipulated and unreliable without an independent review

• Collusion between employees for approval of increased/fictitious expenses and incorrect undertakings

• Unexplained write-offs of outstanding amounts in return for favors

• No sub-distributor/exhibitor agreements entered to enforce revenue-sharing arrangements

• Excessive marketing costs accounted without supporting and/or at inflated charges

Revenue leakages in film-distribution arrangements: A large media conglomerate faced an instance of fraud in its distribution business in its domestic and overseas territories. The key aspects of fraud were follows:


Since collusion is often the most difficult fraud to uncover, companies need to be innovative and vigilant to identify and manage this risk.

A leading advertiser with huge marketing spends suspected its advertising agency, which had a longstanding relationship with it. The contract gave the advertiser the right to an audit clause, which was enforced. On-site review of documents, background checks and gathering of market intelligence revealed the following:

• ►Excess amounts were being charged to the advertiser by way of “pass-back” as compared to actual costs incurred by the agency, which provided supplier invoices that were fictitious.

• The advertiser was not provided Agency Volume Bonifications (AVBs), which resulted in its non-compliance with the terms of contract.

Defrauding the advertiser:

Bribery and corruption all-pervasive in the M&E industry

The respondents of our survey suggested that content distribution and production of TV/film content are areas that are highly vulnerable (18%) to fraud.

• Some of the respondents also highlighted the fact that event-related promotions, including all types of on the ground activation, are highly vulnerable to fraud.

• According to 27% of the respondents, the risk of bribery and corruption is high in areas where the Government’s approval is required.

* includes placement/carriage fees, print and digital distribution

Figure 4: Business functions that are most vulnerable to fraud, bribery and corruption

18% 18%

15%16%

17%

27%

*Content distribution Content/Film production Finance

FraudBribery

18 | Reality check

It is common for M&E companies to look for and rely on third party agents/intermediaries to help them obtain approvals required from regulatory authorities. While these relationships help in driving their business, they could also expose the companies to significant risks under the Foreign Corrupt Practices Act (FCPA), the UK Bribery Act and local anti-corruption laws.

• Charges more than the market price for its services

• Demands cash payment or some other special arrangement

• Has a poor reputation in the market

• Provides inconsistent invoicing or over-bills

• Provides invoices without reasonable justification/details of services provided and prices charged

• Has little or no relevant business experience

• Refuses to agree to audit rights

• Has familial relationships with government officials

• Receives or requests fixed lumpsum payment and “unusual” fees for transactions

The majority of reported FCPA cases involve third-party intermediaries. Potential red flags to watch out for include instances where the third party:

A major television production company was making huge losses since its actual production costs were exceeding its budgeted costs. Preliminary line-item wise comparison of its budgeted vs its actual costs identified certain major cost elements, such as those incurred on junior artists, hiring of equipment and locations, and production costs, which needed to be reviewed thoroughly. A detailed review revealed the following:–

• Quotations were not available and no or inadequate supporting documentation was attached to vendors’ invoices.

• Independent quotations were obtained for equipment hiring by the production company and

it was noticed that the actual rates charged were exorbitant.

• A review of the attendance records of junior artist revealed that the same number of junior artists had been entered multiple times under the same or different names for the same shoot schedule. Furthermore, the rates charged were higher than the rates prescribed by the association.

• Further inquiry revealed that the employee had defrauded the production house by inflating costs in collusion with vendors by exploiting the company’s weak internal controls.


Confidentiality of information is of utmost importance in the M&E industry. Our survey results indicate that there is significant flexibility given to users, which increases the risk of compromising company-related information.

Protecting information the key in this industry

Insider threat

In our experience, incidents of stolen data and fraud have been raising concerns about privacy and data protection.

Some key risk-prone areas:

• Increased vulnerability due to “anytime and anywhere accessibility”

• Leakage of company and customer’s confidential information by current or ex-employees

• Loss of confidential data due to external vulnerability

• Manipulation of procurement, accounting or other IT-based processes or systems

Although insider threats are easy to understand, they are hard to detect as compared to external ones. Employees perpetrating fraud are generally allowed or authorized to access sensitive information or data to execute their routine duties. To identify an individual who is misusing information is like looking for a needle in a haystack blindfolded. It is even more difficult than detecting the unauthorized access of an external hacker or intruder.

Figure 5: Protection of confidential information by organizations

• According to 76% of the respondents, they have access to personal emails and social networking sites. This is detrimental for maintenance of confidentiality in organizations.

• Only half of the respondents indicated that they have secured IT networks.

• Only 26% of the respondents reported that they had penalties for cases where information was leaked (on the basis of their internal policies and procedures).

63%

50%

24%

24%

24%

Internal communication and training

Secured IT network (encryption, Disabling of USB, ports, etc)

No access to personal email, social networking sites and other access controls

Penalties for cases where information is leaked

No significant steps or procedures

20 | Reality check

2Key fraud scenarios in M&E industry


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Key fraud scenarios in M&E industry

2

Segment Fraud scenarios Key fraud Indicators

Television Distribution

• Kickbacks received by employees from MSO/LCO on high carriage fee payouts

• Unusual receivable write-offs allowed in return for favors

• Channel activation without corresponding invoicing to operators in return for kickbacks

• Channel activation invoiced at special rates to ineligible operators

• Embezzlement of funds• Misappropriation of assets• Channels carried by MSO/LCO at lower than agreed

on frequency – no deduction in lieu of kickbacks• Under-declaration of subscriber base• Fake invoices submitted by vendors for distribution

of commission and/or carriage fees

• Misrepresentation of subscription details to get the business case approved by management

• High percentage of carriage fees to subscription, as compared to peer operators

• One-time deals with operators without adequate justification• Payouts to entities not in the cable operation business • Split deals• Background check-related information indicating past history

of potential red flags for ethics- and credibility-related issues —– employee and third party

• Vendors refusing to include audit clause in contracts• Non-reconciliation of IRD inventory with activation and invoicing

module • Sudden change in employee’s lifestyle — high standards of living

Television Broadcasting & IPR

• Employee-third party collusion• Kickbacks on content acquisition resulting in high

costs to company• Sale of FCT at discounted rates against possible

favors• Syndication of IP rights at reduced value in return

for favors• Overbilling and kickbacks on construction of set

property and equipment hired on lease• Embezzlement of funds by employees• Fake invoices/supporting documents submitted

against advances given for shoots or to reimburse employees

• Overbilling for post-production work (edits, voice overs, promos, branding, graphics, etc.)

• Kickbacks on production costs incurred at higher than market rates

• Acquisition of equipment at higher than market rate• Kickbacks on talent-related costs and hiring on a

contractual basis• Kickbacks received by employees from marketing

agencies• Infringement of IPR

• Procurement without obtaining quotations from suppliers • Contracts awarded to preferred selected vendors• Follow-ups for payments made by employees on behalf of selected

vendors• Development of new vendors • Hiring without reference/background checks• Overstated production budgets• Overruns in actual over budgeted production costs • Non-budgeted costs incurred without adequate justification• Unplanned production schedules• Unaudited cost control• Huge advance payments with prolonged delay in settlements• Delay in submission of invoices• Invoices submitted without proof of delivery or services rendered • Too much reliance for cost control on external auditors • Lack of emphasis on having production controllers for each

project• Too much emphasis on creative requirements without evaluating

the commercial aspect• No review process for contractual compliance• Lack of control over maintenance and safe-keeping of libraries• Lack of transparency in dealings and segregation of duties

Advertising • Agency Volume Bonifications (AVB) not passed on to clients (AVB are discounts/rebates given by media providers to advertising agencies for meeting certain objectives)

• Overbilling on account of mismatches in actual vs client- approved estimates/agreements or on account of inflated production/creative charges

• Collusion with vendors — resulting in non-competitive costs and increased “pass through” to clients

• Embezzlement of funds

• Unusual business relationship with preferred vendors/agencies• Unusual expenditure incurred around cut-off dates• Costs higher than market rates• Lack of transparency in dealings – closed door meetings with

agencies/third party vendors• Overstated budgets• Cost overruns • No segregation of duties


Segment Fraud scenarios Key fraud Indicators

• Kickbacks received by advertiser’s employees from vendors/agencies

• Kickbacks received by agency’s employees from vendors

• Misrepresentation in account statements• Fake invoicing —charges for services not rendered • False supporting documents provided as proof of

completion of work

• Payouts higher than market rates• Lack of justification supporting cost estimates • Development of new vendors that lack experience, although there

are multiple options regarding this in the market• Background check-related information indicating past history of

potential ethical and credibility-related issues• Employees living beyond their means/sudden changes in their

lifestyles

Film production and distribution

• Employee–third party collusion• “Shell” entities created to “book” notional costs to

avoid profit-sharing• Embezzlement of funds• Misappropriation of IPR or IPR infringement including

piracy• Kickbacks on talent-related costs• Kickbacks on production payouts (especially

property and equipment costs)• Misrepresentation in business statements • Fake invoicing – charges for services not rendered or

“dummy” entity setups• Theft of sensitive information• Revenue deals in favor of “related” entities or

kickbacks on revenue/syndication rights favoring end customers

• Overstated production budgets• Overruns in actual over budgeted production costs • Non-budgeted costs incurred without adequate justification• Unplanned production schedules• Unaudited cost controls• Huge advance payments with prolonged delay in settlements• Revenue leakages at the level of intermediaries • Excessive bundling of rights• Lack of internal controls• Lack of segregation of duties• Payouts higher than market rates• Lack of justification to support cost estimates• Business case justification inadequate to support revenue

projections• Too much reliance on selected preferred vendors• Resistance to inclusion of audit clause in contracts• Background check-related information indicating past history of

potential wrongdoing relating to ethical and credibility-related issues

• Living beyond their means/sudden change in employees’ lifestyles• Inadequate controls and monitoring mechanisms for theatrical and

digital distribution

Print Media • Revenue leakages on circulation figures• Wastage — over/under reporting• Circulation over-statements• Employee–third party collusion• Misappropriation and/or infringement of IPR

embezzlement of cash • Fake invoicing – charges for services not rendered or

“dummy” entity setups• Revenue deals in favor of “related” entities or

kickbacks on sale of advertisement space favoring agencies at discounted rates

• Write-offs without adequate justification in return for kickbacks from debtors

• Procurement-related fraud

• Increase in subscriber base without corresponding increase in revenue

• Overstated newsprint costs• Lack of internal controls• No segregation of duties• Payouts higher than market rates• Lack of justification to support cost estimates • Too much reliance on selected preferred vendors• Background check information indicating past history of potential

wrongdoing relating to ethical and credibility-related issues• Employees living beyond their means/sudden change in their

lifestyles

Note: One or more fraud indicators together may be indicative of fraudulent scenarios.

24 | Reality check

3Roadmap for compliance


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26 | Reality check

Roadmap for compliance3

An internal audit department is increasingly seen as a key corporate defense against fraud. Expectations of internal audit are high, but the following points need to be considered for its evaluation:

• Departmental budgets have failed to keep pace with the changing and expanding nature of the role of internal audit.

• Heads of internal audit have sought to prioritize their workloads to enable them to handle the many conflicting demands made on them.

• They need to ensure that their employees have sufficient knowledge and training to be able to make the right decisions to recognize and handle instances of fraud or corruption.

Internal controls and internal audit continue to be seen as a company’s main line of defense against fraud by most of the respondents of our survey.

The role professional services firms are playing in helping senior management in the area of bribery and corruption is increasing, perhaps due to resource-related pressures on internal audit and compliance. There is an increasing recognition that external advisors can contribute to the effectiveness of a company’s compliance management system. More enterprises are using the services of forensic accountants and fraud investigators, solely because of their competence in technology and the tools they bring to the table. Moreover, relying on independent advisors assures boards that matters will be handled in a professional manner with the least reputational damage to organizations. It also makes easier identification of the root cause and extent of financial irregularities and can help them take immediate corrective measures. Companies are recognizing the importance of taking pro-active measures by conducting fraud risk assessments in high-risk areas.

Without adequately trained employees, the ability of companies to identify issues or robustly investigate and act on allegations is likely to be diminished.

According to the results of our survey, only 24% of the respondents have regular reviews conducted by external law firms or specialist consultants.

An alarming 52% of the respondents have not been trained on ABAC’s policies.

According to 59% of the respondents, they emphasize on background checks and third party due diligence.

An alarming 57% of the respondents do not have a mechanism in the form of a whistleblowing hotline through which complaints can be lodged with the assurance that the identity of the person will not be disclosed.

It is an important step for organizations to avoid any future surprises for their senior management and comply with ABAC policies. The requirement for due diligence may be decided according to the internal policies of a company, based on its risk profile. The need for due diligence may also be triggered on receiving negative feedback about an individual or entity.

This is an important tool in the hands of senior management to assure and communicate its commitment and support for initiatives on managing fraud, bribery and corruption risks. Entities need to recognize the importance of setting up this mechanism by which aggrieved parties or employees can provide information without any fear of retaliation. Most issues can be identified by key management through this mechanism and help in timely resolution of the risks mentioned above.


Figure 6: Mechanisms used to mitigate fraud and monitor compliance

78%

59%

48%

43%

24%

11%

Review and/orimprove internal controls

Conduct pre-employment screening/backgroundchecks on staff, suppliers & business partners

Conduct anti-bribery/corruption & ethics training

Have a whistleblowing hotline

Regular reviews by externallaw firms or specialistconsultants

None of the above

28 | Reality check

Weak control environment

Bribery and corruption have consistently topped the list of hot topics in Asia in recent years, with the implementation of the UK’s Bribery Act and increasingly aggressive enforcement of the Foreign Corrupt Practices Act by the US. Over the past few years, both the U.S. Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) have continued to aggressively bring cases against companies and individuals for violation of the Foreign Corrupt Practices Act (FCPA). Companies with potential exposure to FCPA should understand recent enforcement trends and become familiar with measures they can take to ensure their compliance with the FCPA because the heightened focus and aggressive stance on pursuing FCPA violations show no signs of abating. Recent trends in enforcement-related actions include investigation of individuals, industry-wide sweeps, an increase in penalties and use of tools such as deferred prosecution agreements by the SEC.

We have probed the FCPA-related knowledge of our respondents for this reason.

Almost 41% of the respondents had little or no knowledge about anti-corruption laws.

• While 60% of the respondents indicated that ABAC policies and codes of conduct are in place in their organizations, nearly half of them reported that their companies lack adequate procedures to determine non-compliance with the ABAC policy. An equal number stated that there are no clear penalties for non-compliance with ABAC policies.

• In addition, alarmingly less (only 33% of the respondents) indicated that their companies provide training to employees and vendors. This clearly highlights the lack of tone at the top.Figure 7: Knowledge of statutes prohibiting bribery

24%

35%

17%

15%

9%

Have a very good knowledge

Have a fair knowledge

Have little knowledge

Just heard about it

Have no knowledge

Despite the risks, companies still fail to take adequate measures to prevent bribery and corruption. From the responses of our survey, it seems that mixed messages are being given by management, with the overall tone often being diluted by lack of widespread training.

The ABAC policy and codes of conduct are important tools that are created to provide employees and business partners clarity to enable them to understand corruption-related risks and obligations in order to actively combat real and perceived corruption risks. The policy and its implementation mirror the tone at the top.


Figure 8: Preparedness for anti-bribery and corruption laws

Training: need for extensive coverage and two-way communicationTraining provides another key element in a company’s fraud risk management program by building on its clear and consistent communication. Our findings from the survey suggest that more work needs to be done in this area.

53%

60%

33%

47%

47%

40%

67%

53%

There are adequate procedures in place todetermine the non compliance to ABAC policy

We have an ABAC policy/code of conduct governing this

We provide ABAC trainingto our employees and vendors

There are clear penalties fornot adhering to ABAC policies

Yes No

• According to 15% of the respondents, their companies do not provide any training to their employees to enable them to understand and implement anti-fraud practices.

• Furthermore, 67% of the respondents stated that they provided training, but did not hold interactive sessions that included case studies and scenarios, and their training sessions were conducted with insufficient material.

The implication of this was confirmed by answers to our next question on their employees’ awareness about the difference between facilitation payments and bribes.

30 | Reality check

Figure 9: Knowledge of difference between facilitation fees and corrupt payments

43%

24%

17%

15%

Limited(e.g. group

discussion, team debrief,recommendatory nature)

Average(e.g. periodic

web based,some meetings)

Extensive(e.g. extensive sessions -

online, case studies,interactive sessions)

None

Insufficient knowledge about ABAC lawsCompanies that generally pay facilitation fees, and who have anti-fraud policies in place, indicated that they communicate these to their management and staff, but still need to make significant progress in this area.

The FCPA’s prohibition of bribery makes a narrow exception for “facilitating or expediting payments” made further to routine governmental action. This exception however only applies when a payment is made to further “routine governmental action,” which involves non-discretionary acts. However, the UK Bribery Act, 2010 makes no distinction between facilitation and other payments, such that any payment (facilitating or otherwise) can be considered a bribe.

Figure 10: How robust is your training initiative?

According to 59% of the respondents, they were not aware of the difference between facilitation fees and corrupt payments.

41%

33%

26%

Yes

No

Don’t know

Stick to your standardsEffective implementation of policies and procedures require an in-depth understanding of a company’s business model, including its products and services, third-party agents, customers, interactions with the Government, and industry and geographic risks.

Among the risks a company may need to address are the nature and extent of its transactions with foreign governments, including its payments to foreign officials; use of third parties; gifts, travel and entertainment-related expenses; charitable and political donations, as well as its facilitating and expediting payments. For example, some companies with global operations have created web-based approval processes to review and approve routine gifts, travel and entertainment involving foreign officials and private customers with clear monetary and annual limits. Many of these systems have a built-in flexibility so that senior management or in-house legal counsel can be apprised of and, in appropriate circumstances, approve unique requests. Such systems can be a good way of conserving corporate resources if properly implemented, and help companies prevent and detect potential violation of FCPA in their operations. Regardless of the specific policies and procedures implemented by them, these standards should apply to personnel at all levels in their organizations.

Only half of the respondents have in place specific procedures to mitigate the risk of corruption while dealing with intermediaries.


Figure 11: Risk mitigation during companies’ dealings with the Government, agents and third parties

Figure 12: Liability of company for actions of third-party agents

Nearly two-thirds of the respondents were unaware that companies and third parties bear the joint responsibility for the unethical actions of the latter.

According to 87% of the respondents, they do not have in place the requisite processes for auditing third parties.

60%

51%

43%

40%

49%

57%

Government officials

Consultants or third partiesbeing used as intermediaries

Customers or vendors who aregovernment/quasi government bodies

Yes No

How are payments to third-parties treated?The FCPA expressly prohibits corrupt payments made through third parties or intermediaries to mischaracterize improper expenditure in invoices. Some examples include no provision for a detailed description of services provided, lump sum charges in invoices (without adequate break-downs), etc. However, it needs to be noted that purposeful mischaracterization of expenditure may also indicate a company’s corrupt intention and it will be fully responsible for the default.

37%

22%

28%

13%The company and 3rd party have joint liability for the actions of the3rd party

The company is liable for the action of its 3rd party agents

The 3rd party only isliable for its own actions

Don’t know

Knowing who you are dealing with: effective third-party due diligence and compliance auditsIn order to monitor relationships with agents, intermediaries and business partners in an effective and timely manner, it is important to obtain and exercise a right to audit in such contracts. This is particularly true in the M&E industry, where companies have a decentralized operational structure and most deals are entered on trust. An area that needs to be considered is the way payments to business partners or agents are structured and calculated. Payments without effective controls on budget reviews can limit transparency, particularly if the business lacks visibility on potential spends, which may be less in comparison with projected ones. In addition to using audit rights, businesses should therefore conduct analyses of payments, for example, by obtaining independent third-party quotations and conducting due diligence and background checks on these to monitor the conduct of employees. There is an increased risk of payments being made to companies that are either dummy operators or registered, but not in the specific area of operations required. These entities are mainly used as a vehicle to defraud organizations, and more often than not, this is with the knowledge of insiders with substantial authority, who are aware of the companies’ weak controls in conducting due diligence procedures.

With the current inconsistent growth of the market and increasingly active local enforcement, businesses in the industry need to take action to address bribery and corruption risks. Furthermore, it is important that the conduct of intermediaries and business partners is considered as part of this process.

32 | Reality check

Figure 13: Risk mitigation for dealings with third parties

61%

50%

26%

13%

Undertake a backgroundcheck or due

diligence checks

Check on ownership, askfor financial statements

None of the above

Audit the third party

Need for determining the root cause of the problem and not just “quick-fixing” itAccording to 30% of the respondents, they appoint external fraud experts; the same percentage of respondents report fraud in their organizations to law enforcement agencies.

Companies’ reasons for not reporting such crimes to law enforcement agencies could be to avoid the additional cost of filing claims and coordinating with enforcement agencies, and more importantly, to avoid reputational risk. Furthermore, organizations frequently have information, which is a rumor, and therefore, cannot be supported legally. Some companies initiate investigations and others action by terminating relationships based on rumors. However, while it is good to take immediate action, that taken on the basis of half-baked information can have serious implications.

Most companies prefer to conduct internal investigations, but there is a lack of complete independence in such initiatives. It is quite possible that results are based on pre-conceived notions, without an equal opportunity being given to suspected parties. This may result in the root cause of the problem going undetected.

However, the importance of an organization appointing an external fraud expert is now widely acknowledged, particularly since fraudsters are becoming more and more sophisticated in their modus operandi. Furthermore, companies are aware that they need forensic experts with specialized tools, who are competent to conduct and lead investigations independently in an unbiased manner, gather concrete evidence, and finally unearth the extent of irregularities.

At least 80% of the respondents indicated that they conduct internal investigation in suspicious circumstances and dismiss or suspend the suspects immediately.


Figure 14: Management’s response to fraud

89%

80%

59%

30%

30%

2%

Conduct an internal investigation

Dismiss/suspend employee/terminatecontract of third party

Initiate action for recovery

Report it to law enforcement agencies

Appoint an external fraud expert

No action

34 | Reality check

4Conclusion


4

36 | Reality check

Conclusion4

The bottom line

Recent fraud-related issues witnessed in the M&E industry and feedback received from our respondents clearly indicates that entities have been struggling with an upsurge in fraud and corruption.

Assess your organisation

The Anti-Fraud, Anti-Bribery and Corruption (AFABAC) maturity self-diagnostic model will help you assess your current state of affairs and the risks to which your organisation is vulnerable.

The AFABAC maturity model is used to assess the “current” state of leading practices in each of its components in your organisation. You can assess the state of your organisation using the maturity model scale as shown below.

1. indicates that your organisation is more prone to fraud2. indicates that your organisation is moderately prone to fraud3. indicates that your organisation is less prone to fraud

What our respondents said… How entities can mitigate their risks and resolve issues in this scenario…

Fraud, bribery and corruption are problematic issues faced by organizations. Kickbacks constitute a major concern for the industry. Another concern is detection of increasing collusion between employees and external parties to defraud entities.

This can be achieved by instilling a collective culture of risk management, with a specific focus on fraud- and corruption-related matters, in organizations. Proactive measures that need to be implemented:• Creation and implementation of anti-fraud policy and fraud-response plan• Fraud risk assessment of current state of vulnerable processes• Development of continuous monitoring mechanism for high-risk processes and transactions, including

data analyticsReactive measures:• Investigation of alleged fraud to identify suspects and extent of irregularity• Use of forensic technology to Investigate alleged abuse perpetrated against entity including the

following:• Identification of sources of electronically stored information (ESI)• Preservation of evidential integrity of ESI• Analysis of ESI to obtain information relevant to facts

There is the increasing risk of pay-outs to non-existent vendors and service providers, and employees with shady backgrounds.

There is a need for entities to be vigilant by establishing clear policies and procedures relating to management of third-party risk, particularly in relation to background due diligence, which is critical for risk mitigation.

Inadequate training is provided to employees, third parties and business partners, and the tone at the top is lacking or inappropriate.

Initiatives that need to be implemented:• Comprehensive communication of board’s pronouncements• Benchmarking and preparation of code of conduct and business ethics standards, which are well-

publicized• Regular and extensive compliance-related training and reviews • Setting up of hotline and whistleblowing serviceThese will go a long way in educating employees, third parties and agents, and making sure that everyone has a part to play in an effective anti-fraud and anti-corruption program.

Lack of compliance with anti-bribery and corruption regulations

There is the need to implement the following:• A corporate compliance program, including compliance with anti-corruption regulations• A corporate compliance risk-assessment program• Improvement in corporate compliance • A corporate compliance monitor

1

2

3

4


AFABAC enabler

Enterprise that is more prone to fraud, bribery and corruption risks

Enterprise that is less prone to fraud, bribery and corruption risks

Assess your organisation

Strategy • Key management is reactive to fraud and ABAC violations,

• Business strategy is not linked to compliance requirements.

• Senior management lacks commitment to preventing fraud, bribery and corruption

• Business strategy is aligned with ABAC policies,• Execution of strategic and operational business

decisions in compliance with high ethical standards.

• Senior management articulates “zero tolerance” for fraud, bribery and corruption

1 2 3

Stakeholders and Governance

• Inadequate compliance and risk controls are established,

• Anti-Fraud and Anti-Bribery & Corruption risks are not perceived as a strategic function by stakeholders

• Anticipate and manage fraud and ABAC risks that have a direct impact on the strategy,

• involvement of all relevant stakeholders in acceptance of ABAC program

1 2 3

Programs • Lack of anti-fraud and anti-corruption programs• Lack of whistle blowing mechanism and hotline

to identify red flags/complaints

• The anti-fraud and anti-corruption programs are consistent with all applicable laws and adapted to changing business environment and

• Effective training is provided to the employees and business

• partners with facility of effective hotline mechanism

1 2 3

Policy • Fragmented, non-standardized, inefficient policies are laid out

• Lack of implementation• Policies are not updated with changes in

government regulations

• Policies are globally standardized, locally• customized and regularly reviewed and updated

1 2 3

Process • Unclear ownership,• Improper controls,• Multiple exceptions• Undocumented processes

• Integrated end-to-end process ownership with single point of contact, effective controls and fraud risk assessments 1 2 3

Performance Management

• Limited KPIs and metrics, unable to track costs, effectiveness.

• Lack of trainings

• Established service level agreements and proactive management, effectiveness is constantly measured

1 2 3

Data • Lack of ownership of responsibility• Multiple databases,• Lack of audit trail and data preservation

• Defined ownership, operating procedures,• data is converted into business insights

(dashboards) to enable decisions,• data analytics performed, data preservation

enabled

1 2 3

Organization • Duplication, inconsistency, manual activities, undefined roles,

• Segregation of duties conflict

• Well-defined, automated workflow, leveraged resources,

• clear demarcation of roles1 2 3

Technology • Multiple sub-systems, limited integration,• Low ROI on technology implementation.• Lack of monitoring mechanism

• Integrated technology environment,• workflow and web enabled 1 2 3

People/Partners

• Skill and competency deficits within organization,• Limited resources in certain roles and locations.• Lack of background checks, due diligence

• Right level of competent resources deployed properly within the service delivery model.

• Effective due diligence and credibility checks1 2 3

38 | Reality check

Our team

Arpinder SinghPartner and Head - India and Emerging MarketsFraud Investigation & Dispute Services

Arpinder leads the Fraud Investigation & Dispute Services practice for EY India. He has an extensive experience spanning 19 years and specializes in the area of Anti-Bribery and Anti-corruption compliance across different sectors, specifically as it relates to FCPA investigations, due diligence and training. In the course of his financial and investigative experience, Arpinder has worked with a number of corporates and other stakeholders to address issues pertaining to fraud, bribery and corruption. He has also worked with regulators in India on a number of high profile investigations.

E-mail: [email protected]

Ashish Pherwani is a Partner with EY’s Advisory practice. He has served clients in the media and entertainment sector for over 12 years, helping them to identify business and operating risks and develop systems to mitigate risks, including improving the efficiency and effectiveness of their key business processes.

Ashish is the segment champion for print, outdoor media, radio and events at EY.


Mukul Shrivastava is a Partner and heads the Forensic Technology Discovery Services practice in India. He oversees the three technology divisions - Data Analytics, Digital Evidence Recovery and Software License Forensic. Mukul has an extensive experience spanning 18 years and specializes in the Media & Entertainment sector.


Mukul Shrivastava Partner Fraud Investigation & Dispute Services

Ashish Pherwani Partner Advisory Services

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This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

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