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State Owned Enterprise PRINCIPLES FOR COUNTERING CORRUPTION

a MULTI-STAKEHOLDER INITIATIVE

LED BY tRANSPaRENCY INTERNATIONAL

15 May 2017

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soe bUSINESS pRINCIPLES FOR cOUBTERING cORRUPTION: dRAFT V1, 170120

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Transparency International

SOE Principles for Countering Corruption:

Consultation draft v3.3

15 May 2017

Transparency International is a global movement with one vision: a world in which government, business, civil society and the daily lives of people are free of corruption. With more than 100 chapters worldwide and an international secretariat in Berlin, we are leading the fight against corruption to turn this vision into reality.

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SOE Principles for countering corruption

Table of Contents

INTRODUCTION3

THE SOE ANTI-CORRUPTION PRINCIPLES6

THE CASE FOR COUNTERING CORRUPTION7

GUIDANCE FOR ANTI-CORRUPTION Best Practice8

1. TRANSPARENCY AND PUBLIC REPORTING8

2. THE ENABLING ENVIRONMENT10

3. DESIGN OF THE ANTI-CORRUPTION PROGRAMME18

4. RISK ASSESSMENT19

5. FORMS OF CORRUPTION20

6. TRANSACTIONAL RISKS23

7. PROGRAMME IMPLEMENTATION32

8. MONITORING, AUDIT AND EVALUATION36

GLOSSARY39

INTRODUCTION

State-owned enterprises constitute a significant portion of global business and social service delivery; meeting the needs of communities by providing crucial services like infrastructure, water and power supplies, natural resources, food, healthcare, banking and financial services. Governments can use SOEs as tools for development, strategic protection and to raise a country’s global profile. The largest commercial SOEs now rank among the world’s largest global companies and have a major impact on people, their countries and the global economy.

These SOE Principles set out comprehensive provisions for a best practice SOE anti-corruption programme. They are designed for SOEs of all types and sizes, whether engaged in economic activity or providing services, such as a national or regional health service provider.

Unique corruption risks

As economically and strategically important entities, SOEs can become targets for corruption. While SOE’s largely share the same corruption risks as other companies, they face additional and sometimes greater risks due to the potential interference from politicians and public officials as well as high risks of bribery in their own procurement processes and in cases of SOE being privatized.

he risks of corruption increase when SOEs are poorly governed, are subject to conflicts of interest among board members and managers, or when board members and employees are not selected on merit.

The impact of corruption in SOEs is also significant, as they provide critical services in many sectors. Corruption in an SOE can contribute to the corrosion of government and the rule of law, and it can distort markets when contracts are awarded through bribes or collusion, rather than quality, price or delivery. As wealth is siphoned off or stolen by corrupt interests, it is more likely that services will be delivered inefficiently and at higher costs. When these projects are in the security sector, for example, weaker measures can heighten risks of crime and terrorism.

Business Principles for Countering Bribery

The design of the SOE Principles draws upon the Business Principles for Countering Bribery[footnoteRef:1]. This guidance for business was developed by Transparency International with the support of a multi-stakeholder group and first published in 2002. It has contributed substantially to a range of other international anti-bribery initiatives as well as to tools produced by Transparency International and its chapters. [1: See: http://www.transparency.org/whatwedo/tools/business_principles_for_countering_bribery]

The SOE Principles have also been developed through a multi-stakeholder process with advice from a Working Group drawn from SOEs, companies, inter-governmental bodies and independent experts, as well as input from a public consultation. They have been designed to complement work on SOEs by the Organization for Economic Development and Cooperation.

The public entrusts SOEs to manage assets and provide goods and services. As such, SOEs should strive to the highest degree of integrity and transparency. This is not only because corruption threatens the reputation and effective operation of SOEs, but also because corruption facilitates the most troubling societal issues including the continuation of poverty, abuse of human rights, environmental degradation, people smuggling and trafficking, organised crime and terrorism. For these reasons, we need the SOE Principles to set the best practice anti-corruption standard.

Areas of focus

The SOE Principles set out comprehensive provisions for an SOE anti-corruption programme and there is particular emphasis on six areas. These include building a culture of internal integrity, promoting good governance, providing a positive tone from the top, managing conflicts of interest, countering corruption in public procurement, and supporting transparency and public reporting.

Transparency and public reporting should be given special attention as these are critical defences against the highest levels of SOE corruption, which include risks of interference by politicians and public officials, conflicts of interest, asset theft and corruption in procurement. Transparency and public reporting enable the public to see and judge how the SOE operates and hold to account those responsible for its governance failures.

We hope that the SOE Principles will be taken up widely by SOEs as guidance for developing best practice anti-corruption standards. They should stimulate SOEs to set standards for the market places and other sectors in which they operate and become the basis for the development of other standards and practical tools, including frameworks for assessing aspects of performance such as transparency and reporting.

STRUCTURE OF THE SOE PRINCIPLES

The SOE Principles: Ten guiding principles for countering corruption.

The case for countering corruption: Countering corruption is not only a responsibility for SOEs as publicly owned bodies, but it can bring substantial benefits by mitigating the risks of corruption.

Transparency and public reporting, section 1: These are critical defences against corruption related to SOEs.

The enabling environment, section 2: This is the framework for the anti-corruption programme and includes good governance, tone from the top, human resources management, organisational structures, assignment of responsibilities and stakeholder engagement.

Design of the anti-corruption programme, section 3: The anti-corruption programme is designed with provision for oversight and accountability by the board, detailed policies and procedures and in consultation with employees, employee representative bodies and other stakeholders.

Risk assessment, section 4: Risk assessment is the foundation for the design of the anti-corruption programme. Through regular risk assessments the SOE can identify and prioritise its corruption risks and then design anti-corruption controls to mitigate the risks.

Forms of corruption, section 5: Forms of corruption are defined and described comprising bribery, trading in influence, nepotism, favouritism, cronyism, patronage and fraud.

Transactional risks, section 6: This provides for controls for some SOE functional activities and transactions vulnerable to corruption. These include contracting, conflicts of interest, gifts, hospitality and expenses, charitable contributions, sponsorships, political engagement, threats to competitive behaviour, abuses related to information, data and intellectual property.

Programme implementation, section 7: Anti-corruption policies and procedures are detailed covering communication and training, advice and whistleblowing channels, internal accounting and asset controls, documentation, corporate responsibility, societal investment and anti-corruption initiatives and incident planning.

Monitoring, audit and evaluation, section 8: SOEs operate in dynamic environments and should keep all elements of the anti-corruption programme under continuous review to ensure they are working well and are efficient. A board committee, the board or equivalent body should receive regular reports from management on the results of reviews, and make an independent assessment of the adequacy of the anti-corruption programme.

Glossary: An extensive glossary of terms used in the SOE Principles.

THE SOE ANTI-CORRUPTION PRINCIPLES

As an entity belonging to the state and therefore owned by the public, the SOE shall follow the following principles:

1. Operate to the highest level of integrity and set a standard of exemplary anti-corruption practice.

2. Be transparent and accountable to its stakeholders and report publicly on its anti-corruption programme.

3. Build a trust-based and inclusive culture of ethics and integrity.

4. Prohibit corruption in any form.

5. Provide best practice governance of the SOE including oversight and accountability for the anti-corruption programme from the board of directors.

6. Promote the tone from the top for the anti-corruption programme, through the leadership, directors and management.

7. Carry out regular risk assessments for corruption risks and use the results to design and modify the anti-corruption programme.

8. Implement an effective best practice anti-corruption programme designed and improved based on recurring risk assessments.

9. Encourage and enable employees and other stakeholders to seek guidance or raise concerns on the application of the anti-corruption programme or corruption issues by providing accessible and secure channels and acting promptly and thoroughly on concerns raised.

10. Monitor the implementation of the anti-corruption programme with review by management and the board of the results of reviews and improvements made as necessary.

THE CASE FOR COUNTERING CORRUPTION

Corruption is a significant threat to the ability of many SOEs to live up to their responsibilities as the custodians of public assets and services. It means that they fail to achieve the highest standard of integrity and probity and to operate effectively.

By applying these SOE Principles, SOEs can position themselves best to gain substantial benefits, to mitigate the risks of corruption and avoid significant adverse consequences.

The benefits of a best practice anti-corruption programme

An anti-corruption programme should not be seen as just a method to counter corruption. It can bring significant benefits. For example it can help SOEs to fulfil their role and to operate with ethics and integrity, ensuring that services and products are delivered to the public at the minimum cost and with the highest quality. Bribes can add substantially to operating costs and ultimately the public pays the price.

Anti-corruption programmes reinforce the expectations of stakeholders for transparency and public reporting to prevent the misuse or theft of SOE assets. They can assist the board and management leadership to generate an internal culture where employees are motivated, act in the right manner, have trust in the integrity of the SOE and that the SOE will support them in resisting corruption. A strong stance on anti-corruption can also ensure effective management of critical data such as safety or quality measures.

Anti-corruption efforts also protect and build the reputation of the SOE with the state owner, the public and other stakeholders. They can enhance the SOEs ability to enter into associations and ventures with third parties and generate opportunities for commercial ventures. They can help in the recruitment of talented employees, contribute to continuous improvement of procedures, and enable the SOE to make better contributions to societies and sustainable development through more effective projects and services and also by helping to introduce integrity standards to business partners and communities.

An anti-corruption programme can help to prevent corruption investigations and prosecutions that delay or threaten projects or suppliers and perhaps lead to the loss of critical management and professionals. There can be legal consequences with prosecutions for corruption leading to fines and sanctions for an enterprise, debarment from markets and perhaps prison and fines for officers and employees. Some countries’ anti-bribery laws have extra-territorial reach, notably the US Foreign Corrupt Practices Act and the UK Bribery Act.

guidance for anti-corruption Best Practice

1. transparency and public reporting

Transparency and public reporting are critical and powerful anti-corruption tools for countering corruption related to SOEs. They enable stakeholders to judge how SOEs mitigate corruption risks, identify weaknesses and provide the information and knowledge they need to act on these concerns. Transparency and public reporting act as a powerful checks and balances on the SOE’s leadership and also the politicians and public officials associated with it.

Transparency means allowing the public access to information on the SOE’s operating systems and procedures subject to the requirements of commercial confidentiality, security, data and privacy laws. Public reporting is formalised communication on topics of material interest for stakeholders and is one of the ways in which the SOE is held accountable.

Transparency and reporting can bring the following benefits for countering corruption:

· Holding the state owner, shareholders, board and management accountable for their integrity and anti-corruption performance.

· Providing information to enable stakeholders to judge, question and challenge the SOE on its programme for countering corruption or related concerns.

· Opening processes and transactions to public view – this is important for processes vulnerable to corruption, particularly those for tendering and awarding contracts and appointments and recruitment.

· Protecting the SOE from improper intervention by politicians and public officials in the running of the SOE and preventing related corruption.

· Providing organisational transparency on the beneficial ownership of controlled entities and investments and governance, operations, financial information and impacts in countries of operation.

· Allowing benchmarking of the design and implementation of the anti-corruption programme against other entities.

1.1 The SOE should set and observe best practice in transparency and public reporting that at a minimum accords to internationally recognised standards and practice and aligns with government commitments to transparency, including the right to information and open access to information.

1.2The SOE should be transparent about its operations and activities and align to government commitments to transparency, including the right to information and open access to information.

The SOE should establish a policy for transparency, define how this is to be met and implement a procedure to put this into operation. The SOE should consult with stakeholders on the development and implementation of the policy and procedures.

1.3The SOE should be transparent in its implementation of procedures for transactions and functions that have been identified as vulnerable to corruption through risk assessments and stakeholder engagement.1.4The SOE should observe a high standard of public reporting on its anti-corruption programme, which aligns with global best practice. This would include reporting on the anti-corruption policy, the design and implementation of its anti-corruption programme, its risk assessment methodology and the results of risk assessments for corruption, measures of the effectiveness of the programme’s implementation and related stakeholder consultation and engagement.

Entities of all forms, SOEs, commercial companies, government departments voluntary organisations and other bodies are increasingly recognising that they should take a comprehensive approach to non-financial reporting, including reporting on their integrity and anti-corruption commitments and implementation measures.

Approaches for transparency and organisational public reporting have been developed, such as those by the Open Government Partnership and the Global Reporting Initiative’s Sustainability Reporting Standards. It is increasingly a requirement under company laws that listed companies report on non-financial risks and some countries have introduced legislation requiring corporate social responsibility or sustainability reporting. SOEs with commercial listings will need to comply with such laws, but in any event all SOEs should report voluntarily.

Non-financial reporting should include reporting on the anti-corruption programme as it will build the confidence of stakeholders in the design and implementation of the ant-corruption programme and can act as a deterrent to those thinking of acting corruptly. It is important to demonstrate the totality and quality of the SOE’s anti-corruption programme and support this by reporting on key aspects of the programme such as:

· The risk assessment process

· Training provided to board members, employees and third parties

· Procurement controls

· Whistleblowing

· How the monitoring process and that the programme is being improved on the basis of the results of reviews

· Illustrative descriptions and indicators

To enhance the credibility of reporting, such reports can be aligned to international reporting frameworks and also be attested to by an independent reviewer. SOEs should consider aligning public reporting to excellence or quality processes as the process of reporting will require setting aims, targets, measures and progress.

1.5The SOE should be transparent about the mandate the state owner has assigned to it and how the state owner has defined in legislation and other ways the provisions for corporate governance of the SOE. Any changes made to the SOE’s ownership, mandate or governance structure should be carried out transparently and reported on publicly.

The ability of the SOE to implement best practice governance will depend on the state owner. The SOE by being transparent about the governance structure can enable shareholders and other stakeholders to judge how the structure accords to global standards.

1.6The SOE should be transparent about its operational relationship with the state owner.

One of the high-risk areas for corruption related to SOEs can be interference and corruption by politicians and officials in the SOE’s governance, management and activities. Transparency can act as a deterrent to such poor governance and corruption risk and through stakeholder pressure may lead to improvements in the governance and operating arrangements.

1.7The SOE should publicly disclose of a) its holdings in subsidiaries, affiliates, joint ventures and other related entities; and b) key financial information on a country-by-country basis.

Some SOEs operate globally and they need to consider reporting comprehensively on their corporate holdings and their transactions with the governments of the countries they operate in. The legislative context and momentum for organisational transparency and country-by country reporting is advancing, with ever more countries passing laws covering sustainability reporting and considerable movement in the transparency requirements, both voluntary and mandatory, for commercial enterprises. This clause encourages two components of global SOE transparency.

First, global SOEs should consider disclosing exhaustive lists of their subsidiaries, affiliates, joint ventures and other related entities without limiting disclosure to material entities. Such transparency is important for many reasons, not least because organisational structures can be made opaque for the purpose of hiding the proceeds of corruption. It can also allow local stakeholders to know which companies and SOEs are operating in their territories, bidding for government licences or contracts, or applying for or obtaining favourable tax treatment. For global SOEs and their state owners, the lack of disclosure on payments to foreign governments and any use of offshore centres could pose corruption risks as well as generating adverse effects for the local communities in which the SOEs operate. By disclosing the basic financial data provided for in this clause, the SOE will be exercising its responsibility to be accountable to citizens and other stakeholders and will equip them with the information they need to understand the SOE’s relationship with government and public officials and to monitor and assess its activities, financial performance and transactions.

Second, the clause also encourages global SOEs to be accountable to local as well as global stakeholders by reporting in each country they operate in on their key country-level financial data. Through country-by-country reporting, an SOE should provide essential financial information such as its turnover, profits, number of employees, assets and all payments to governments including its taxes. Reporting can also assist investors and lenders, as they need to be able to assess the local operations, both for the business performance and understanding local circumstances and risks, including tax and banking regulations, economic, political and societal stability, and environmental and societal factors. By disclosing basic financial data provided for in this clause, the SOE will be more accountable to citizens and other stakeholders and enable them to understand its activities and monitor the appropriateness of its payments to government.

2. the enabling environment

The anti-corruption programme will succeed only if there is an enabling environment (in accounting terminology this is the “control environment”) that sets the tone and framework for the implementation of a system of internal controls. The purpose of these controls is to provide the board of directors with reasonable assurance on the reliability of financial reporting and the preparation of financial statements. The enabling environment is a set of standards, processes and structures that provide the basis for carrying out internal control across the organisation. This includes the internal controls comprising the SOE’s anti-corruption programme.

The clauses in this section are general control provisions and are not specific to countering corruption. The core components of the control environment are as follows:

· The SOE commits to integrity and ethical values and compliance with laws.

· The board of directors and the management leadership provide the tone from the top, supporting the commitment to values including ethical and integrity values.

· The board of directors demonstrates independence, both from undue influence from politicians and public officials and from management.

· The board of directors provides oversight and accountability for design and implementation of internal controls and assigns responsibility to senior management for their implementation.

· Management establishes organisational structures, reporting lines and appropriate authorisations and assignment of responsibilities in pursuit of the objectives.

· The SOE demonstrates a commitment to attract, develop and retain competent individuals in line with its objectives.

· The SOE holds individuals accountable for their internal control responsibilities.

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2.1Ethics and integrity culture

2.1.1 The SOE’s board should commit publicly to ethical values and integrity and a policy of prohibiting corruption.

Formal commitment by the board and senior management to a public policy prohibiting corruption and to implementing the anti-bribery programme sets the framework for the design and implementation of detailed anti-corruption policies and procedures. Undergoing a process of commitment is important for board members, as this will direct them to consider their roles and responsibilities for critical aspects of the implementation of the anti-corruption policy including:

· The positioning of countering corruption related to the SOEs values commitments

· Consideration of the risks from corruption (see section 4: Risk assessment)

· The statutory and fiduciary duties of the board to prevent corruption

· The risk approach

· The anti-corruption legal context

· Stakeholder expectations

· Oversight, resources and organisational requirements

As the policy will be a public commitment, the board needs to be sure that the SOE is ready to live up to its anti-corruption commitments. The board should ensure it understands the definition of bribery and the forms it may take, as this will define the scope for developing the programme. A policy of prohibiting corruption is also implicitly a commitment to zero-tolerance for corruption. This means that the SOE will invest resources and efforts to a high degree to prevent corruption and will deal with suspicions or incidents of corruption with prompt and due attention, including consistent disciplinary actions and remediation of any weaknesses in the anti-corruption programme.

2.1.2 The SOE’s board should commit to creating and maintaining a trust-based culture with no tolerance for corruption, based on the fundamental values of ethics and integrity, transparency and accountability.

An organisational culture of ethics and integrity is the basis for SOE governance related to countering corruption. The board should set the SOE’s values and policy prohibiting corruption, while recognising an SOE’s particular responsibility to act in the public good and perform to the highest ethical and integrity standards. The anti-corruption programme should be designed in this context.

2.2Governance2.2.1The governance of the SOE should be in line with internationally recognised standards.

Good corporate governance is a critical component in countering corruption. Corporate governance is the system by which an entity is directed and controlled. The purpose of SOE corporate governance is to facilitate responsible and effective entity management that is best placed to deliver the long-term success of the SOE according to the mandate and objectives set by the state owner.

There is general global agreement on what constitutes good governance and this is set out in many global, national and sectoral laws and codes. The ability of an SOE to meet the governance provisions of these SOE Principles will depend on the agreed role of the state owner in governance and its mandate for the SOE, laws and regulations and, if listed, legal responsibilities to shareholders. The governance arrangements agreed with the state owner should be made transparent to the public.

The SOE’s board of directors is responsible for the governance of the enterprise and this includes:

· Setting the SOE’s strategic aims within the mandate provided by the state owner

· Formulating high-level objectives

· Allocating resources

· Providing oversight, guidance and direction to management

· Providing accountability and transparency to stakeholders

2.2.2 Board directors should act in the best interests of the SOE in accordance with the mandate and objectives set by the state owner and consistent with their statutory duties and the SOE’s commitments to ethics and integrity. Board members should be held accountable for failures in the integrity and anti-corruption standards of the SOE.2.2.3There should be a formal, rigorous and transparent procedure for the appointment or reappointment of directors to the board in line with established selection criteria and with due diligence for integrity, conflicts of interest, competence, requisite skills and experience.

The SOE should strive to ensure its board members have requisite integrity, knowledge and expertise and are competent, fulfil statutory responsibilities and meet standards of fiduciary trust. Due diligence should be applied for all board appointments. A weak appointment process can be distorted in ways such as political interference, conflicts of interest, patronage, nepotism or cronyism. This can bring corruption risk through the appointment of directors who are beholden to politicians, are corrupt, negligent or lack the necessary skills and expertise to fulfil their duties to govern and lead the SOE including overseeing the anti-corruption programme.

2.2.4The SOE’s board should have an appropriate balance of skills, experience, knowledge and diversity to enable it to discharge its duties and responsibilities effectively and in particular to provide governance and oversight on the anti-corruption programme.

The SOE needs to ensure awareness and expertise of board members in all aspects of providing governance and specifically related to countering corruption. All board members should have an understanding of the risks posed by corruption, how they might apply to the SOE, how such risks are being countered and their role in overseeing the anti-corruption programme. Training and briefing of the board members will be important in achieving this.

2.2.5There should be an adequate balance of representation on the board of non-executive directors.

Non-executive directors, also called “independent directors” are important in bringing an independent view to the governance and oversight of the SOE and also for providing expertise and technical knowledge. Stakeholders should see non-executive directors as being clearly independent and capable. They should be free of any conflicts of interest, pecuniary or material interests, or relationships that could jeopardise or could be seen to jeopardise their exercise of objective judgement. This includes relationships with the SOE, its management, any other major shareholders, the state owner or state. Independent directors can be remunerated through fees, but should not have remuneration linked to aspects material to the operation of the SOE such as stock options in a commercial SOE.

2.2.6The SOE should implement controls to ensure that the board is free from influence from individuals who could act or be interpreted as acting as “shadow” or de facto directors.

A shadow director is a person on whose directions and actions the board rely and are accustomed to act on. A de facto director is similar and is a person who acts effectively as a director. There is corruption risk in this as the shadow director or de facto director has not been appointed through the procedures for appointing board members, may lack requisite competence and could have corrupt motives in manoeuvring the board’s decisions or using the board as a front for corruption. Such directors are also opaque in their influence on the board. Preventing the influence of such directors can include implementing a rigorous board appointment process, and ensuring transparency in the process, skills and experience of appointed directors, representation on the board of truly independent directors and full documentation of decisions by the board.

2.2.7The SOE should be transparent about the rules by which its board operates.2.2.8The SOE’s board should set strategy and supervise management. There should be a clear division of responsibilities between the governance role of the board and the chief executive responsible for leading the running of the SOE’s operations.2.2.9The SOE’s board should have responsibility for the appointment and dismissal of the chief executive officer or equivalent position.

A key function of SOE board should be the appointment and dismissal of the chief executive officer (CEO). Without this authority it will be difficult for the SOE board to fully exercise its monitoring function and assume responsibility for the SOE’s performance. In some cases, this might be done in concurrence or consultation with the state owner. Some countries deviate from this good practice and in the case of fully state owned SOEs, allow the state to directly appoint a CEO. In turn, the CEO must be the most prominent and highest ranking official in the SOE management who promotes anti-corruption, and sets the appropriate tone.

To ensure that the integrity of the board is maintained, good practice would at least require consultations with the board. Regardless of the procedure, appointments should be based on professional criteria and a competitive selection procedure. Particularly for large SOEs engaged in economic activities, the use of independent experts to manage the selection procedure is considered a good practice. Rules and procedures for nominating and appointing the CEO should be transparent and respect the line of accountability between the CEO, the board and the ownership entity. Any shareholder agreements with respect to CEO nomination should be disclosed.

2.2.10The SOE’s board should set executive remuneration levels that are in the long-term interests of the SOE and incentivise an ethical and integrity culture.

2.3Compliance with laws2.3.1The SOE should ensure that its activities are consistent with all the laws of the jurisdictions under which its activities fall relevant to countering corruption.

The anti-corruption programme will be designed to comply with legislation, as well as the value commitments of the SOE and the objectives it has set for countering corruption. This clause emphasises that compliance with all applicable laws and regulations, including relevant anti-corruption laws, is a legal obligation. A formal commitment to compliance with laws will signal that the SOE is comprehensive in its approach to being law-abiding and that this carries throughout its operations. It will also drive commitment to achieve compliance through a procedure to identify, understand and ensure compliance with relevant laws and review and oversight by the leadership.

2.4Tone from the top2.4.1The SOE’s leadership should demonstrate a clear and generally understood tone from the top with open commitments to anti-corruption policy and programming, as well as contributing to advancing the ethical and integrity culture of the SOE.

Strong visible leadership, commonly expressed as the “tone from the top”, is the way the top leadership – the chair, board members, CEO and senior management – communicate and support the anti-corruption programme in their behaviour and actions. It is an important component of good organisational governance and a critical driver for the anti-corruption programme. Directors and senior managers must live and be seen to live by the standards they promulgate.

The tone from the top applies not only to conveying the commitment to employees but to stakeholders as this will shape their views, build their confidence in the SOE’s measures to counter corruption and reassure them should there be a corruption incident. Setting the anti-corruption tone does not stop at the top. It needs to be expressed at all levels of management, from middle to the front line. The tone from the top can also be expressed in the way the leadership encourages the SOE to participate in and support anti-corruption initiatives.

2.5Organisational structures and assignment of responsibilities

The SOE should ensure that its organisational structure supports the design and implementation of the anti-corruption programme. The structure will be determined by business objectives and operational factors and this may pose challenges for implementing the programme. For instance, a centralised structure may send out strong consistent messages and procedures, but risk that the programme will be rigid and not reflect the needs of local operations. The consequences could be the loss of local commitment, inadequate controls to deal with local corruption risks and a compliance function remote from operations. A decentralised structure can bring local input to design and buy-in from employees and managers but policies and messages from the centre may be weakened or distorted. Powerful or autonomous subsidiaries, business units or operational functions may resist oversight and management from the centre and operate independently of other units.

For these reasons, the board, CEO and the chief compliance officer should drive the anti-corruption programme across the SOE’s operations, negotiate buy-in where necessary and require adjustment of organisational structures which block the effective implementation of the programme. Support functions, operational and operating units should be encouraged to work together in implementing the programme and management at all levels to promote and support the anti-corruption programme.

2.5.1The SOE’s board should assign responsibility to the chief executive officer for ensuring that the anti-corruption programme is carried out consistently with clear lines of authority.2.5.2A manager should be given specific and detailed responsibility for compliance and ethics and the implementation of the anti-corruption programme. The manager should have reporting access to the board or the board committee that oversees the anti-corruption programme and be given sufficient autonomy, resources and authority. The SOE should assign responsibilities for oversight and implementation of anti-corruption risk assessments.

2.6Human resources management2.6.1Human resources policies and procedures should be designed to support the anti-corruption programme.

The ethical and integrity culture and reputation of an SOE depend on the behaviour of its directors and employees. As such, the human resources function has a critical role in contributing to building an embedded corporate integrity culture and shaping human resources operations to support the anti-corruption programme. This will include organisational planning, workforce representation, recruitment, induction/orientation, employee contracts, line management, communications, training, incentives, remuneration, performance evaluation, promotion, recognition, whistleblowing and disciplinary procedures.

2.6.2The SOE should implement a policy that no employee will suffer for refusing to pay or receive bribes or collude in other corruption even if such a refusal may result in the SOE losing business or other adverse business impacts.

The SOE should have procedures to encourage and support an environment in which employees feel confident in the anti-corruption policy and that they will be protected when observing it. This includes setting achievable performance targets and ensuring that employees have the resources they need – such as time, money or managerial support – to carry out the tasks required of them.

Targets should be based on a realistic assessment of market conditions and business operations and available resources. Employees should not be penalised or harassed if they decline to pay bribes or use other corruption to achieve business targets. Also, in SOEs there can be an issue that front line employees are pressured by directors or managers to accept bribes as the leadership wish to reap the benefit. Training should be given to middle and lower management to sensitise them to the risks that pressure for target achievement might in some circumstances lead to bribery or other corruption.

2.6.3The SOE should encourage ethical behaviour and integrity from its employees and provide incentives, appraisal, and recognition.

Corruption risks are higher where an SOE has a poor ethical and integrity culture, applies misaligned incentives and there are opportunities for board members and employees to gain through corruption. This can be exacerbated by risk factors including:

· Operating in an environment where there is pressure for corruption from politicians and public officials

· Suppliers are prepared to pay bribes to win orders from the SOE

· Competitors are willing to use bribery to win orders

· Internally, an SOE sets demanding performance targets where employees may be drawn into bribery and corruption, manipulating accounts or falsifying data to meet management’s expectations or other corruption

· Employees are financially stretched and reliant on bonuses and other performance rewards

To counter these risks, the SOE should structure an environment where its formal incentives support the achievement of an ethical and integrity-based culture. As well as incentives based on financial or output performance, there should also be non-financial incentives which encourage behaviour in line with the SOE’s culture. The mandate of SOEs in providing public services should influence the design of incentives. Employees should be recognised and awarded for the way they incorporate integrity into their work – understanding the SOE’s expectations and requirements for integrity and anti-corruption standards, applying these when representing the SOE internally and externally and making suggestions for improvements to processes and their performance.

Measures can include ethical performance assessments, management recognition awards and requiring good ethical assessments to be a pre-requisite for promotion. A flexible approach is appropriate for appraisal of integrity performance, which does not lend itself to measurement or rankings. What an SOE should be looking for in employees is:

· Evidence of attitude, commitment and knowledge of how to act with integrity

· Commitment to public service and understanding of the trust embedded in public service

· Judging the employee as an ambassador for the SOE and its integrity commitment

· How the employee shows knowledge of the code of conduct and the anti-corruption programme

· How the employee has attended and performed in training and that the employee has acted with apparent integrity in all aspects of work

· Whether the employee has shown evidence or interest in continuous improvement in all areas including that of the anti-corruption programme: this would be important for functions at high risk of bribery and corruption such as procurement, contracting and marketing

2.6.4The SOE should make compliance with the anti-corruption programme mandatory for employees and directors and require them to report concerns and incidents of corruption.

The employment contract should require where possible that the employee must read and acknowledge the company’s code of conduct, anti-corruption policy and relevant anti-corruption legislation and that the employee must report corruption concerns and incidents.

2.6.5The SOE should apply a procedure to implement sanctions for violations of the anti-corruption programme by employees and board members. The procedure should ensure that sanctions are applied proportionately, consistently, fairly and transparently with appropriate review by senior management and an appeals process.

The SOE should have zero tolerance for corruption and reflect this in its disciplinary procedures. Sanctions should be applied proportionately and openly to show the SOE’s commitment to its no-corruption policy and to deter those who might consider acting corruptly. Applying sanctions can be complex and need to be carried out under supervision from the internal legal department and external legal advisers, documented fully and not rushed. Aspects to consider are:

· Reporting promptly material corruption incidents to the authorities

· Documentation will generally be disclosable in any litigation and therefore an investigation may need to be made under legal privilege. Considerations should include:

· Proving breach of a no-corruption policy can be difficult

· Adverse reputational consequences

· The risk of civil litigation by the employee if the sanctions process is carried out improperly or the evidence is lacking

2.7Stakeholder engagement2.7.1The SOE should identify its key stakeholders in relation to the anti-corruption programme and consult and engage with them regularly on its design and implementation.

Employee and external stakeholder engagement can provide a valuable dimension for shaping and communicating the anti-corruption programme. The SOE should be open and accessible to engaging with stakeholders with a material interest in the anti-corruption programme. The SOE should approach relationships with stakeholders as a positive, interactive process rather than a one-way channel by releasing the minimum necessary information. The SOE can use engagement for designing or improving its programme, debating aspects of the programme, identifying concerns, building community support, benchmarking, identifying emerging practices and innovative approaches and reinforcing communications on the programme.

2.7.2The SOE should encourage stakeholders to engage with respect to its anti-corruption commitment and programme and provide accessible ways for doing this.

Additional to stakeholder engagement, the SOE should provide channels whereby stakeholders can communicate with the SOE on the anti-corruption programme in an accessible way. This can be in ways such as appointing managers and employees as contact points for communication, publishing the contact points on the websites and in publications and providing hotlines.

2.7.3The SOE should identify, analyse, respect and protect any stakeholders’ rights related to the anti-corruption programme established by law or through mutual agreements.

In some countries, certain stakeholders are granted specific rights in SOEs, such as employee board level representation or decision-making rights for employees’ representatives and consumer organisations, for example through advisory councils. As a dominant shareholder, the state may control corporate decision-making and be in a position to take decisions to the detriment of stakeholders’ rights and with corruption risks. As such, stakeholders should be involved or consulted according to their rights on the design of the anti-corruption programme its implementation.

2.7.4If the SOE is listed with minority shareholders or has non-state investors, it should engage with them as with other stakeholders on the SOE’s anti-corruption programme and encourage them to express their views to the SOE and at the Annual Meeting.

Minority shareholders and other investors can be pressure points for improving the SOE anti-corruption programme and resisting improper intervention by politicians and public officials in the SOE’s operations.

3. design of the anti-corruption programme3.1The SOE’s board should ensure the design and implementation of an effective anti-corruption programme supported by adequate resources.

The programme should mitigate risks that could prevent it from meeting:

· The mandated objectives set by the state owner

· Its values, commitments, responsibilities and accountability to shareholders, investors, society and other stakeholders

· Achievement of its business and social objectives

3.2The anti-corruption programme should clearly and in reasonable detail and in accordance with the SOE’s risk approach, articulate values, policies and procedures to be used to prevent corruption from occurring in all activities under its effective control or in its transactions with third parties.3.3The SOE’s board should provide for oversight and accountability for the anti-corruption programme. This should include receiving regular reports from management on assessments and mitigation of corruption risks and reporting on its assessments of risks to the state owner and other stakeholders.3.4The SOE’s board should appoint a board committee, composed of independent and qualified directors, to oversee the design and implementation of the anti-corruption programme.

A board committee such as an audit, ethics or risk committee comprised entirely or by a majority of independent directors with various appropriate competencies will be valuable in bringing independent insight, technical skills and experience to oversight of a specialised topic such as anti-corruption practice. The use of SOE board committees varies across jurisdictions, but generally a board committee should be given the role of oversight of the anti-corruption programme.

3.5The programme should be developed in consultation with employees, trade unions or other employee representative bodies and other relevant stakeholders.

Trade unions or other employee representative bodies should be involved in the design and improvement of the anti-corruption programme, as they can have high interest in how the anti-corruption programme relates to their members. Their involvement can strengthen the programme as they can lend their expertise, knowledge and weight to the design and implementation of the programme. Involvement and consultation will depend on the SOE’s personnel policies and its recognition of unions or other employee representative bodies.

4. risk assessment4.1The SOE should design and improve its programme based on the results of recurring risk assessments, taking into account the SOE’s particular business risks, circumstances, culture and inherent risks such as the locations of the SOE’s activities, its business sectors and organisational risks such as size of the enterprise, organisational structure and use of third parties.

The risk assessment process should identify corruption risks and the factors that make the risks more likely. The risks should be prioritised and mitigated, within the SOE’s risk approach, by a range of general controls supported by tailored controls to mitigate specific forms of corruption risk. The general controls should comprise the anti-corruption programme described in section 3. When setting the risk approach (also called “risk tolerance” or “risk appetite”) it should be recognised that risks can never be reduced to zero. The SOE should manage risks to a level recognising its responsibility as an entity owned by the public to use its best efforts to counter corruption.

This means that the management and the board should determine how much to invest in anti-corruption controls and decide the measures by which they will judge whether or the extent to which they have implemented an anti-corruption programme of the right quality. Consultation with the state owner and stakeholders will contribute to the board and management’s ability to judge the extent to which they should invest in mitigating corruption risks. When making their decision on risk approach and allocation of efforts the SOE board should review how this would live up to a zero tolerance policy for dealing with any corruption suspicions or incidents. The ultimate test of whether the SOE has the right approach to risk and investment in countering corruption is to consider the public’s opinion of the approach.

Commonly identified risk factors are operations in countries with high levels of corruption, involvement with sectors known to be prone to corruption, awarding large public contracts, bidding for critical contracts or approvals such as telecommunications contracts or mining concessions. There are also operational processes and transactions, which can be vulnerable to corruption or used as channels for corruption. These are covered in section 6.

4.2The SOE should continuously improve its anti-corruption programme. This should include identifying emerging risks and best practice for countering corruption.

Countering corruption should be subject to quality or excellence management as for any organisational process and the leadership, as part of the tone from the top, should drive the attention given to evaluation and improvement of the anti-corruption programme. An SOE’s circumstances will change constantly and management should ensure the programme is monitored and tested, weaknesses and improvement areas are addressed and employees are incentivised to suggest improvements.

5. forms of corruption

This section covers the main forms of corruption risk that SOEs can face. Money laundering is not included as the topic is complex and already addressed in detail by extensive laws, regulations and codes. The forms of corruption covered here are:

· Bribery, in particular passive bribery associated with awarding contracts

· Trading in influence

· Nepotism, favouritism, cronyism and patronage

· Conflicts of interest (where it leads to corruption)

· Fraud

Section 6 provides clauses for the transactions where corruption commonly takes place.

5.1Bribery5.1.1The SOE should prohibit all forms of bribery, active or passive and whether they take place directly or through third parties. In particular, the SOE should take steps to counter risks of bribery, including the following:

· Bribery or kickbacks accepted by SOE employees (passive bribery) from bidders for SOE contracts

· Active bribery by SOE employees to win contracts, gain licenses or other business advantage

· Solicitation for bribes from SOEs by regional and local government officials related to local licenses and regulations

· Solicitation or demands for small bribes (commonly called ‘facilitation payments’) by SOE employees to secure or expedite routine or necessary actions to which the bribe payers are entitled.

·

Broadly, bribery can be defined as the request or receipt, directly or indirectly, by an SOE director or employee of a benefit or other undue advantage in order to act or refrain from acting in breach of their duties.

There are particular bribery risks that SOEs should consider:

· Passive bribery in awarding a contract: This is a significant corruption risk for many SOEs. It is the most common form of global bribery and involves public officials accepting bribes or kickbacks to award contracts. This might be for the right to access a bidding process or to influence the award of a contract to a briber. Kickbacks are an aspect of passive bribery and take place when a bidder promises a bribe to be paid to an SOE employee after a contract has been awarded. The funds for the bribe are created by an inflated contract fee or through additional contract fees generated in ways such as manipulating rush orders or varying contract terms.

· Active bribery commonly takes place in:

· Commercial SOEs when bribes are used to win contracts or obtain other business advantages such as critical licenses

· Countries with high levels of corruption where regional and local public officials solicit or demand bribes from SOE employees when seeking permission to operate or obtaining permits and licences

· Situations where intermediaries such as agents or consultants are used as they are common routes for such bribery

Small bribes (commonly called ‘facilitation payments’): These take place where bribes are solicited or demanded to secure or expedite routine or necessary actions to which the bribe payers are entitled. For instance, an employee of an SOE utility company might demand a bribe for connecting a customer speedily. In the other direction, there can also be risks that SOE employees may also pay such bribes particular in areas such as forwarding of goods through customs.

5.1.2The SOE should ensure that that no payment or in-kind benefit is offered, promised or given to a public official directly or through a third person with the intent of corruptly influencing the official to misuse their capacity as a public official, to obtain or retain business or an advantage in the conduct of business.

Many significant bribery cases have involved active bribery of public officials. SOEs should be aware of the specific risks posed by anti-bribery laws such the US Foreign Corrupt Practices Act and the UK Bribery Act in relation to bribery of foreign public officials.

5.2Trading in influence5.2.1The SOE should identify and counter the risks of trading in influence in its operations, in particular with regard to its appointment of board members, management and intermediaries and, if a commercial SOE, in bidding for contracts or seeking to unduly influence an environment favourable to its business.

Trading in influence (also called “influence peddling”) is a form of corruption carried out with the intent of using someone to unduly influence a decision-maker. The decision-maker may be unaware that influence is being peddled. It can be a significant risk for an SOE because of the interface between politicians, public servants and the SOE and the potential for manipulation or distortion of an SOE’s operations or its access to markets.

This may include, for example, influencing the appointment of an SOE’s board members with the aim of manipulating the SOE’s business to benefit a company, or influencing politicians to favour the award of contracts from the government to a commercial SOE. To counter such risks, the SOE should assess where it might take place and design mitigating controls such as the separation of duties and reducing the ability of one person, however senior, to sway decisions. For example, appointments to the board should be subject to review by a committee of the board composed of independent directors, or contracts should be awarded using established procedures and criteria and decided by award panels.

5.3Nepotism, favouritism, clientelism and patronage5.3.1The SOE should ensure that its transactions and operations are free from the influence of nepotism, favouritism, clientelism or patronage.

There is a risk that SOE directors or employees can make decisions that favour of a relative, friend or associate. Examples include appointments of friends to positions in the SOE or awarding contracts to a relative’s company. Another form of corruption is patronage, which is where a director or manager is beholden to a politician for office and returns the favour by making decisions benefiting the politician or providing cash or assets gained from the SOE’s operations. Even if there is no nepotism or related favouritism, the SOE should be aware that public perceptions might be that such activities take place. The SOE should implement well-designed, transparent processes for recruitment and appointments and other areas that could be vulnerable to nepotism and related forms of favouritism.

5.4Fraud5.4.1Recognising the significant threats from fraud for most enterprises, the SOE should establish an anti-fraud culture and develop a specific anti-fraud policy and programme, including continuous assessments of fraud risks, design, implementation and improvement of controls to mitigate fraud risks, and monitoring of the effectiveness of controls.

This section covers fraud but the controls listed can be applied largely to related forms of corruption such as embezzlement and theft.

Fraud is wrongful or criminal deception intended to result in financial or personal gain. It takes place through false representation, failure to disclose information and abuse of position. Fraud can represent a very high and increasing risk for all forms of organisation including SOEs. Fraud is most likely to be carried out internally by an individual acting alone. External threats from cybercrime are growing and this may be from individuals, activists, organised crime, terrorists or even governments.

Internal fraud typically takes place by overstating expenses or understating income and often involves relatively small amounts, which are difficult to detect but which cumulatively can represent substantial sums. External fraud can originate from misrepresentation or by cybercrime used for purposes such as data and financial theft. Information theft is a growing concern particularly for SOEs engaged in financial services and those possessing personal and financial data or with high value intellectual property. The methods used by fraudsters are ever changing as they seek to exploit vulnerabilities or opportunities created by changes in an organisation’s activities, systems, employee population and supply chain.

The damage from a serious fraud incident can be substantial and even catastrophic with loss of assets, damage to reputation and confidence in the enterprise and associated damage to those associated with the enterprise as well as communities. The theft of data through cybercrime has increased substantially the risk of major fraud (and the theft of intellectual property) and all enterprises must take preventive measures to avoid breach of their cyber and data security for fraud, theft or other criminal purposes. Section 6 provides clauses for prevention of corruption related to information, data and intellectual property.

Some important aspects for anti-fraud practice are:

Preventive measures: To mitigate risks identified through risks assessments.

· Ensuring due attention by the leadership in the SOE to the risk of fraud, in the form of board and management sensitisation to the risks and board oversight

· Providing resources for anti-fraud measures to reflect the prioritised risks

· Continuing risk assessments to identify the ever-changing risks from fraud

· Building awareness across the SOE’s employees of the risks of fraud through communications and training and encouraging them to report suspicions

· Implementing quality data and new technology systems resistant to illegal access

Detective controls: To identify fraud and act as a deterrent through raising the risk of detection and the application of disciplinary measures

· Using new technology to monitor and detect red flags and fraud

· Training management, support functions and employees to recognise indicators for fraud in personal behaviour, situations and systems vulnerabilities

· Strengthening and promoting whistleblowing channels, as these are likely to be the main route for exposure of fraud

· Undertaking internal and external audits, following a report from a whistleblower

Response and remediation:

· Providing response plans to deal speedily and appropriately with fraud incidents

· Applying sanctions with a zero tolerance approach

· Communicating and engaging appropriately to reassure the state owner and other stakeholders

· Correcting or improving anti-fraud controls in light of experience from instances of fraud or results of risk assessments

6. transactional risks

This section provides for controls for some SOE functional activities and transactions vulnerable to corruption, either to gain an undue advantage or to facilitate corruption such as bribery through the use of hospitality and gifts.

6.1Vulnerable functions6.1.1The SOE should design and implement tailored anti-corruption controls for purchasing and procurement and other internal operational functions with high transactional corruption risks.

The SOE should identify and mitigate corruption risks attached to high risk operating functions. In particular, purchasing and procurement and the awarding of large contracts should be provided with tailored controls as these functions have been shown in corruption scandals involving SOEs to be vulnerable to corruption. Other functions that can be vulnerable to corruption include human resources, finance, sales and marketing, health and safety and logistics. To prevent corruption risk, transactions in such functions should be made transparently and conform to an established publicly disclosed policy, strategy, criteria and approval process.

6.1.2The SOE should conduct its activities in a fair and transparent manner. In particular, it should operate transparent processes for transactions that have been identified in risk assessments as high risk for corruption or with high levels of public distrust in the integrity of the processes.

6.2Contracting and procurement6.2.1The SOE should make public full information on its contracting processes, with the exception of information that is legally protected for reasons such as national security or the protection of intellectual property or other confidentiality criteria.

One of the highest corruption risk areas for SOEs lies in passive bribery related to awarding contracts. There can be a range of corruption risks related to awarding contracts to suppliers and contractors including bribery, kickbacks, bid rotation and bid-rigging, trading in influence in decision-making and awarding contracts through nepotism and cronyism. Politicians and public servants may also use their influence to steer awards of contracts to suppliers. Offset contracts are also an area of corruption risk.

Transparency in contracting processes is a strong defence against corruption in public procurement. Information can be made available on the SOE’s website and also on the government’s open web portal if one exists. A reference for best practice is provided by the Open Contracting Global Principles, which gather norms and best practices for disclosure and participation in public procurement. They serve as a guide to advance open contracting around the world.[footnoteRef:2] For detailed guidance on managing public contracting, see Transparency International’s guidance, Curbing Corruption in Public Procurement: A Practical Guide.[footnoteRef:3] [2: See: www.open-contracting.org/get-started/global-principles/] [3: See: www.transparency.org/whatwedo/publication/curbing_corruption_in_public_procurement_a_practical_guide]

6.3Conflicts of interest6.3.1The SOE should implement a policy to identify, monitor and manage conflicts of interest that could give rise to a risk of corruption – actual, potential or perceived. The policy should apply to board directors, officers, employees and contracted third parties, such as agents, lobbyists and other intermediaries.

A conflict of interest occurs where a person or entity with a duty to the SOE has a conflicting interest, duty or commitment. Conflicts of interest do not necessarily involve improper or corrupt behaviour. Actual or potential conflicts of interest are common because people inevitably have many interests: family, friends, business, voluntary work and political affiliations and sometimes these clash with their work interests. Examples of risks from conflicts of interest are:

· Politicians and public officials are appointed as board members or executives: They may have interests or loyalties which conflict with those of the SOE and cause them to act in a manner not in the interest of the SOE or to act corruptly.

· Failure to advise a conflict of interest: A director, employee or contracted third party breaches the duty to the SOE by acting in consideration of another interest and without advising the SOE of this. This improper behaviour could expose the person to extortion demands or be the first step to more serious improper behaviour.

· Related parties: A related party transaction is a business transaction or arrangement between two parties that have a relationship with each other before the transaction. The close relationship between the involved parties could create a conflict of interest as the parties might act in a way that favours each other rather than the interests of the state owner, the public or other stakeholders.

6.3.2A procedure should be implemented to identify and manage conflicts of interest. The procedure should include controls to prevent conflicts of interest leading to political interference and corruption in the SOE’s operations.

The SOE should identify where risks for conflicts of interest could lie and implement a procedure to manage potential and actual conflicts of interest. Directors, employees and relevant third parties should be required to disclose any conflicts of interest before recruitment or appointment and then following appointment to advise the SOE of any changes. Conflicts of interest are not static and new conflicts can emerge or change in nature. There should be a process for maintaining an up-to-date register.

Anti-corruption preventive measures should be implemented including controls in recruitment, appointments and contracting supported by communications, training and audits. Communication and training should include information and guidance so that directors and employees understand what a conflict of interest is and can recognise when a conflict situation occurs and what to do about it. Employees should be encouraged to discuss potential conflicts of interest with their management. Even where there is no improper behaviour related to a conflict of interest, the public perception might be that something is not right. Therefore, the SOE should build public trust and make sure it is transparent about its policies and operations to avoid public suspicion of conflicts of interest.

6.4Asset transactions6.4.1The SOE should maintain efficient and comprehensive systems for recording the disposition of assets and controls for their use and access to prevent misuse or theft.6.4.2The SOE should institute a procedure that transactions of assets follow a transparent process and that transactions accord to market value.6.4.3A board committee comprised of independent directors should make an independent assessment of asset transactions.

Transactions of assets include mergers, acquisitions, divestments, refinancing, divestments, sales and write-offs. Transactions of assets can be a high-risk area for SOEs. Risks can include:

· Politicians or public officials manipulate valuations and decisions in transactions to extract value from the SOE for their own or another’s benefit or use the SOE as a vehicle for corrupt activity in transferring funds and resources.

· Privatisation of SOEs where SOEs or portions of their operations are sold at less than market value.

· The purchase of assets at inflated prices.

· Loan or access to use of assets: This can corruptly support a third party by providing resources for business operations or aiding a political party or politician by providing premises and resources such as telecommunications and printing.

The SOE should implement rigorous and transparent processes for vulnerable areas including business cases for transactions, ring-fencing those involved in transactions, due diligence, monitoring for abnormalities in transactions, independent review of transactions and valuations. Functions that need particular attention for controls in asset transactions include:

· Appointment of politicians or public officials to its board or executive positions

· Sales, marketing and contracting

· Mergers, acquisitions, refinancing and disposal of businesses

· Physical asset management

· Intellectual property management

The processes should be subject to independent oversight by a board committee or external monitor with internal and external audits. Transparency is a defence and procedures and transactions should be open subject to confidentiality restrictions for commercial reasons.

6.5Controlled entities, investments and mergers and acquisitions6.5.1The SOE should implement its anti-corruption programme in all entities over which it has effective control or material influence. It should use its influence to encourage an equivalent programme in business entities in which it has a significant investment.

A controlling interest in an enterprise gives an SOE the ability to take ownership over the operational and strategic decision-making processes of the company. An SOE can have effective control of an entity through one of the following:

· Ownership of a majority (50 per cent plus one) of the shares of the controlled entity

· A controlling interest through an ownership stake in the entity that is proportionately significant in relation to total voting stock

· A significant proportion of its voting shares

· Material influence such as appointing directors

6.5.2The SOE should carry out anti-corruption due diligence on a proportionate basis for all mergers and acquisitions and material investments including checks for beneficial ownership.

6.6Use of third parties

Third parties are prospective or contracted business associates including agents, distributors, lobbyists, brokers, consultants and other intermediaries, joint venture and consortia partners, contractors, vendors and suppliers. Third parties can represent a considerable corruption risk for SOEs as they may not operate to the standards of the SOE. The largest settled bribery cases have all involved bribery taking place between intermediaries and public officials. In particular, intermediaries acting for bidders can present a high risk of passive bribery.

6.6.1General

The general provisions listed below should be applied to all of the SOE’s third parties.[footnoteRef:4] [4: For guidance on anti-bribery management of third parties see: www.transparency.org.uk/publications/managing-third-party-risk-only-as-strong-as-your-weakest-link/]

6.6.1.1The SOE should maintain an up-to-date register and database of all its contracted third parties.

6.6.1.2All appointments of third parties should require prior approval of management with thresholds for approval and subject to satisfactory due diligence assessments and anti-corruption contractual terms.

6.6.1.3The SOE should undertake properly documented, risk-based anti-corruption due diligence on third parties before entering into a contract or transaction including mergers, acquisitions and significant investments. Due diligence should be repeated at regular intervals for higher risk third parties and appropriately on any reengagement.

6.6.1.4Contracts should be entered into with third parties only where the ownership structure is clear and publicly available.6.6.1.5The SOE should establish contractual rights in contracts with its third parties requiring a no-corruption policy, an anti-corruption programme equivalent to its own and rights to audit and inspect books and terminate the contract in the event that a third party engages in corruption or acts in a manner inconsistent with the SOE’s programme.6.6.1.6The SOE should provide tailored communications on its anti-corruption programme and training as appropriate for higher risk third parties and outsourcing contractors.6.6.1.7The SOE should perform anti-corruption risk-based relationship management and monitoring of its third parties. This may include audits and inspections of books and records. The SOE should document the monitoring of the application of its anti-corruption programme to its third parties.6.6.1.8In the event that the anti-corruption performance of third parties does not measure up to its own anti-corruption programme, the SOE should take appropriate action to correct deficiencies, including the application of sanctions or exiting from the arrangement.6.6.1.9Senior management and the SOE’s board should review regularly the results of the application of the anti-corruption programme to third parties and require amendments and improvements to the programme as necessary.

6.6.2Joint ventures and consortia6.6.2.1The SOE when entering into a joint venture or consortium, where it is unable to require or ensure that the third party has an anti-corruption programme consistent with its own, should develop a plan for taking appropriate action if corruption occurs or is reasonably thought to have occurred during the course of the venture or consortium. This can include requiring deficiencies to be corrected in the implementation of the joint venture or consortium’s programme, including the application of sanctions or exiting from the arrangement.

6.6.3Agents and other intermediaries6.6.3.1The SOE should ensure that its agents or other intermediaries are not used by the SOE’s officers or employees as channels for bribery or other corruption.6.6.3.2Compensation paid to agents or other intermediaries should be appropriate and justifiable remuneration for legitimate services rendered.6.6.3.3Agents and other intermediaries should agree contractually to comply with the SOE’s anti-corruption programme and be provided with appropriate documentation and guidance explaining the obligation.

6.7Gifts, hospitality and expenses6.7.1The SOE should implement a policy and procedures to ensure that all gifts, hospitality and expenses are reasonable and bona fide. The SOE should prohibit the offering, giving or receiving of gifts, hospitality or expenses whenever they could influence or reasonably be perceived to influence improperly the outcome of the SOE’s transactions or activities.

Gifts and hospitality and travel expenses (“promotional expenses”) are used as a way of building or cementing relationships and presenting products and services. There can be risks for SOEs related to promotional activities. A high risk for SOEs is that of passive bribery where a bidder for an SOE contract uses promotional expenses to influence an SOE buyer to award the contract in favour of the bidder.

Promotional expenses are troubling for enterprises to manage as they are a common business practice and in many societies there are deep-rooted customs for gifts and hospitality. It can be difficult to draw a line where improper conduct starts and laws cannot define precise boundaries. Best anti-corruption practice permits promotional expenditures where they are transparent, proportionate, reasonable and bona fide. An SOE in making such expenditures must ensure it has implemented appropriate risk-based policies and procedures and tested their design against applicable laws and public expectations.

6.8Charitable contributions, community investments and benefits and sponsorships6.8.1The SOE should ensure that charitable contributions and sponsorships are not used as a subterfuge for bribery or other corruption.6.8.2To prevent corruption risk, charitable contributions, community investments, community benefits and sponsorships should conform to a prior established publicly disclosed policy, strategy, criteria and approval process.

SOEs as commercial entities may institute a corporate responsibility policy to support the communities in which they operate through charitable donations and community investments. Sometimes commercial entities when bidding for a contract are required to commit funding to a community investment or benefit such as an infrastructure project or skills and training. Sponsorships are commercial activities and SOEs may use these to promote their reputation, brands or carry out other commercial marketing.[footnoteRef:5] There can be corruption risks attached to such transactions and examples are: [5: Note: charitable donations and CSR should not be confused with corporate responsibility, which refers to the guiding values of a commercial entity including responsible business conduct and not its community activities.]

· A donation or sponsorship is made to influence the award of a contract or to influence a decision benefiting the decision-maker’s favourite cause

· Kickbacks or in-kind benefits from the recipient of a sponsorship to the employee responsible for awarding sponsorship contracts

· A donation or sponsorship is made to benefit the constituency of a politician on the board of the SOE

· A community investment is made as part of a contract bid which favours a party political cause or policy area

· An employee makes a sponsorship or a donation to benefit a personal favourite cause or that of a relative or friend

· The SOE is pressured by the government to direct funds to a particular cause or project

6.8.3The board should review at least annually, a report from management on donations and sponsorships made.6.8.4The SOE should be transparent about its charitable donations, community investments and benefits and sponsorships and report publicly on those made.

6.9Political engagement6.9.1As a state owned entity, the SOE should not carry out political engagement activity other than responsible lobbying that is limited to providing expert comment related to its mandate.[footnoteRef:6] [6: See:www.transparency.org.uk/publications/wise-counsel-or-dark-arts-principles-and-guidance-for-responsible-corporate-political-engagement/]

6.9.2The SOE should implement a policy prohibiting political contributions whether direct or indirect, including contributions to political parties or organisations or individuals engaged in politics.6.9.3The SOE should prohibit its directors, employees, agents, consultant lobbyists or other intermediaries making political contributions on behalf of or related to the SOE.6.9.4If commercial, the SOE should ensure that no portion of its earnings or profits are returned as donations to a political party or funds diverted for covert donations.6.9.5The SOE should implement a policy that any advocacy and lobbying will comply with the terms of its mandate from the state owner, be responsible and transparent and restricted to the provision of expertise and information to inform public discussion and debate or to encourage legislation and regulation beneficial to the public.

Lobbying and advocacy are legitimate and valuable activities carried out in many countries, as they can result in laws and regulations that are well designed and create economic and social strategies and environments where businesses and societies can prosper. It can be valid for an SOE to contribute to a particular public debate where it will be in the public interest for the SOE to bring its skills and knowledge to a review or debate or to argue for a particular course of action. However, any advocacy contribution should be limited to providing information and arguments in a neutral and transparent manner.

The SOE should not use opaque or undue lobbying and should counter the risk that its internal external consultant lobbyists use opaque or undue methods. SOEs need to recognise the legal and reputational risks of inappropriate engagement. There can be public mistrust of lobbying and political engagement and the SOE needs to ensure that the public do not perceive its advocacy activities as improper, even if this perception is unfounded. An SOE should join lobby registers wherever possible and disclose its engagements with governments and regulators.

6.9.6The SOE should monitor and control any membership of a trade and other similar association to ensure the association does not make political donations or carry out political advocacy that uses the SOE’s membership payments or expertise or that associates the SOE with the political donations or lobbying.6.9.7The SOE should make an annual public statement that it has not made any political contributions and describe any lobbying undertaken including the main topics on which lobbying was made and the related activities.6.9.8The SOE should manage any conflict of interest related to a politician serving on its board or in an executive function to ensure that the SOE is not associated with government policy-making, a political cause, debate, campaign or contribution.6.9.9The SOE should implement a policy and procedure for managing transparently the movements and exchanges in either direction, between the SOE and government or the public service. The procedure should ensure appointments are made for valid reasons and that potential conflicts of interest are identified and managed.

Movements and exchanges of people between commercial entities and the political and public sectors (“the revolving door”) are a legitimate way for the public and private sectors to build and access skills and knowledge. Such movements can be common for SOEs with their close connections with the state, politicians and public officials. Movements can include appointments to the board or executive roles, secondments, short-term placements and career movements.

These movements, if not managed to acceptable criteria and transparency, run risks of conflicts of interest, public distrust, scandal or even improper engagement. There should be clear rules for recruitment and cooling-off periods for politicians and public officials. Attention needs to be paid to politicians and public officials moving into SOEs to ensure that they meet the criteria for the positions they are taking up and that due diligence is carried out for conflicts of interest and risks of personal enrichment.

6.10Information, data and intellectual property

Commercial information and intellectual property are prime areas for corruption. They include fraud, theft, insider trading, illegal information brokering of contract bid specifications and terms and intellectual property. Basic preventive actions include:

· Building an enabling culture in the SOE of integrity and anti-corruption practice

· Developing a strict policy regulating trading by directors and employees

· Ensuring close supervisory surveillance

· Training for those in high-risk areas on the risks, the SOE’s policies, the forms of corruption risks, actions that are required and the sanctions

· Ring-fencing access to knowledge or intellectual property to as few people as possible

· Closely monitoring transactions and checking for anomalies and detecting corruption

· Ensuring internal and external auditing

· Ensuring internal and covert security

· Encouraging whistleblowing

· Enforcing a clear sanctions policy

· Cooperating with the authorities on detection and investigation

6.10.1If listed on a stock exchange or having issued traded debt instruments, the SOE should prohibit directors and managers from engaging in illegal insider trading. The directors and senior executives of the SOE, or anyone in the SOE with privileged or non-public information, should be required to notify an appointed manager such as the chief financial officer or chief legal officer before making a trade.

Insider trading is the buying or selling of a security by someone who has access to material non-public information about the security. It can be legal for a company’s directors and employees to trade in an SOE’s stock or sell the stock with special knowledge as long as they disclose those transactions to a stock market regulator such as the US Securities and Exchange and that the commission and trades are disclosed to the public. Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, non-public information about the security. For instance, an SOE’s directors, employees or associated parties may give information to their friends, family or others on a forthcoming transaction such as the purchase of an entity to enable them to benefit by buying shares.

An insider trading policy should define clearly what insider trading entails and specify blackout periods when insiders are not allowed to buy or sell stock. Techniques to regulate transactions can be used such as requiring the leadership to sell their shares according to a pre-arranged schedule and appointing someone to monitor share transactions and talk to analysts about any suspicions in the market of improper activity. It can be difficult for an enterprise to counter insider trading and an SOE will need to work closely with the state owner and regulators on preventive and detection methods supported by sanctions. When there is an irregularity or there is suspicion of corrupt behaviour, the SOE should investigate in cooperation with the regulator as neces