Around the world, social pressure against public corruption is resulting in huge demonstrations, investigations and legislation. And that is rebounding on multinationals that face their own pressure to keep business above board while trying to expand in countries where bribery is often necessary to get permits and permission.
A survey of CFOs and board members by Ernst & Young found that 95 percent of the respondents were “very” or “fairly” concerned about the potential liability resulting from fraud and corruption in Latin America — the area that offers the most concern.
Not far below were the Middle East and Africa, at 87 percent, and Central and Eastern Europe, at 84 percent.
While laws are almost universally clear — don’t do it — the risks are increasingly complex, as anti-corruption laws and their enforcement evolve both in the United States and overseas.
In the United States, investigators appear to be scouring industries that traditionally have not attracted notice, according to attorneys and experts in the field.
Retailers have been in the spotlight, for instance, ever since news surfaced in April 2012 of a probe into Wal-Mart. The retail giant is alleged to have paid bribes in Mexico to speed growth there.
Enforcement is intensifying in other countries as well, pushed along by public protests as well as by an anti-bribery convention overseen by the Paris-based Organisation for Economic Co-operation and Development. Forty countries, including Argentina, Russia and South Africa, have signed the OECD convention since it was drafted in 1997.
Today, more than 300 investigations are underway in 24 countries, according to Patrick Moulette, head of the OECD’s anti-corruption division. “It has not doubled from last year or the year before, but it’s 10 or 20 more every year, so maybe this is a positive sign,” said Moulette, who hopes greater attention will spur countries to crack down harder.
Other nations, notably China, are dusting off their own anti-bribery laws, exposing U.S. companies to potentially costly legal action on new fronts.
“It’s very hard to find a country anywhere where bribery is legal,” said Brian Loughman, Americas leader for Fraud Investigation and Dispute Services with Ernst & Young. “The challenge is always, what’s the enforcement like.”
To top it off, foreign prosecutors today are more likely to share information with their U.S. counterparts. “The world is smaller for prosecutors, too,” Loughman said.
For decades, U.S. companies only had to worry about the Foreign Corrupt Practices Act of 1977, or FCPA, which bans bribery of public officials in other countries. American executives often complain they are disadvantaged by the statute, as it does not apply to businesses based outside the United States.
Enforcement eventually prompted stronger controls and tougher policies, but investigators remain aggressive, according to Michael Himmel, an attorney and chair of the litigation and white-collar criminal defense departments at the law firm of Lowenstein Sandler.
“More and more cases are being investigated, and prosecutors are tending to take harder lines,” said Himmel. Over the last five years, he said, investigators have asked companies to open up more of their operations to review. “That’s obviously going to be a greater expense,” he said.
Equal Opportunity Scrutiny
Investigators also seem to be eyeing new sectors, expanding beyond defense, energy and mining to include pharmaceuticals and retail.
It’s a costly occurrence for the probed companies. The ongoing probe into Wal-Mart so far has cost the company more than $150 million, according to company filings with the U.S. Securities and Exchange Commission.
The SEC and the Department of Justice, which enforce the FCPA, do not explicitly target industries, said Timothy P. Peterson, a partner in the Washington, D.C., office of Murphy & McGonigle. But as investigators dig into one company’s operations, they may follow a trail to others in the same sector.
“The real danger for retailers is that when there are very large investigations, the government is going to start to get familiar with how that business works,” Peterson said. “They may, as they get more familiar with the business, decide they want to find more companies that operate in a similar way.”
It’s not just government investigators. Corporate rivals are another source of FCPA-related allegations, said Brett W. Johnson, a partner in the Phoenix office of law firm Snell & Wilmer. Companies may arouse suspicion if they are moving goods or opening stores more quickly than competitors, especially in countries where corruption is considered rife.
“The default is, ‘He’s paying somebody off,’ ” Johnson said.
For retailers, corruption risks extend throughout the supply chain, and they are compounded by the pressure to stock shelves in time to meet buyers’ needs. Bathing suits don’t sell well in November, at least in the northern hemisphere.
“Keeping the supply chain flowing is critical to a retailer, especially one that has any kind of seasonality,” said Randy Stephens, vice president of the Ethical Leadership Group of NAVEX Global Inc., a compliance technology firm based in Portland, Ore.
Foreign customs officials often recognize the time pressure — and the power it can give them to demand bribes, Stephens said.
“If you give them the sense that you’re going to participate in that scheme, at any level, you only open yourself up to more trouble, because you look like somebody who’s going to play that game,” Stephens said.
In addition to training employees and establishing clear policies, retailers need to examine internal incentives, Stephens said. If executives overseas are rewarded solely for growing revenue, opening more stores or hitting other bottom-line goals, they may overstep ethical boundaries.
Compensation should be tied, in part, to actions that avoid fines, penalties or stains on a company’s global reputation, Stephens said.
“You’ve got to be willing to let people make decisions that could negatively impact your supply chain, yet comply with the law.”
Another risk arises from the use of third-party agents, a requirement for doing business in some nations. When those agents pay bribes to expedite deals, the U.S. business is on the hook for any FCPA violations.
As a result, companies seeking overseas growth must know their foreign business partners and regularly audit their operations, as well as know the country’s laws and norms.
“You’ve got to be willing to let people make decisions that could negatively impact your supply chain, yet comply with the law.” —Randy Stephens, vice president, Ethical Leadership Group of NAVEX Global Inc.
What’s legal in one country may not be legal in another. And companies can no longer focus on the FCPA alone, attorneys said.
A Tangled Web of Compliance
The United Kingdom adopted a tough anti-bribery statute in 2011. And Brazil enacted a stringent new law this year, following public protests that coalesced around government corruption. In addition to increased penalties, the law allows companies to be found guilty of bribing public officials. Previously, only individuals could be found guilty of that crime.
“Very few companies today can comply, or attempt to comply, with just one home jurisdiction,” said Michel Léonard, chief economist and senior vice president of Emerging Markets for Alliant. “It’s a bit like antitrust laws. These days, mergers need to be approved in the U.S. and Europe as well.”
Experts said U.S. companies should partner with local attorneys who can can train employees, navigate the nuances of a country’s laws, and react quickly to problems.
“You’re not going to have the same processes; you’re not going to have the same protections,” said Joe Martini, co-chair of the White-Collar Defense, Investigations and Corporate Compliance Practice Group at the law firm of Wiggin and Dana.
Given the potential costs of an investigation, specialized insurance coverage is the next step in corporate compliance, said Machua Millett, a senior vice president with Marsh USA Inc. The brokerage firm introduced a specialized product in 2011.
In the past, Millett said, companies sought coverage for FCPA-related expenses under D&O policies. But underwriters and carriers hesitated, due to the size of the potential exposure.
Cooperation with the government does not necessarily lessen the expense. Although Ralph Lauren Corp. voluntarily disclosed bribes made by a subsidiary in Argentina, it still faced a penalty of $882,000.
Companies should focus first on compliance, with insurance as a backstop, Millett said. “At the end of the day, you might be able to show that you acted well.”
A Not-So-Microscopic Risk
Why don’t lifeguards wear white stuff on their noses anymore?
We’re more aware of the dangers of sun exposure than ever before. You’d think folks exposed to the sun would want the best protection possible. And you’d be right. The thing is, a thick layer of white zinc oxide is no longer the best thing going … because of nanotechnology.
Nanotechnology is the understanding and control of matter at dimensions between approximately 1 nanometer and 100 nanometers, according to the U.S. National Nanotechnology Initiative. One nanometer is one-billionth of a meter. For comparison purposes, if a marble were a nanometer in diameter, then one meter would be the diameter of the Earth.
At the nanoscale level — down to 1/100,000th the width of a human hair — materials exhibit different properties than what is detectable in the everyday “macroscopic” world.
For example, nanomaterials can have greater strength, lighter weight and greater chemical reactivity than their larger-scale counterparts. Scientists have learned how to rearrange atoms of carbon, silver, titanium, silicon, gold and zinc to leverage these nanoscale superpowers — not just in the laboratory, but efficiently enough, and at low enough cost, to enable commercial manufacturing.
That’s why new fabrics are more stain-resistant, why tennis rackets and bicycle frames are lighter and stronger than ever before, why food containers can help keep food fresher even longer. It’s why lifeguards no longer wear those unfashionable white sunblock smears.
Nanoscale technology is already more than a decade old, and — to put it mildly — its potential is tremendous. But nanotech products are lightly regulated, and their long-term effects are not well understood.
Products using nanotech may one day zap tumors or enable more effective treatments for cardiovascular illness or Parkinson’s disease. They could improve the performance, resiliency and longevity of our transportation infrastructure while reducing cost. They could transform our energy future by making batteries last longer, and enable solar panels to produce many times more energy. Nanotechnology could make it easier for us to bring clean drinking water to millions in need around the world.
No wonder nanotech is growing fast — so quickly, in fact, that reliable data is hard to find and may be out of date by the time it is published.
There are more than 5,400 nanotech firms globally. The consumer products inventory at www.nanotechproject.org lists more than 1,300 products using nanotechnology, produced in 30 different countries, that are commercially available.
Every state in the United States has at least one nanotech manufacturer, with California leading the pack. Nanotechnology is already in our food, medicines, clothes, cosmetics, sunscreens, pesticides, electronics, homes, sports equipment, cars, airplanes, water, air and land. Nanotechnology is everywhere.
But, little has been spent studying short- or long-term effects, and early tests indicate potential risks such as cellular or genetic damage. Some nanoproducts pass through the skin and are distributed throughout the body, with unknown effects. Nanomaterials may be able to breach landfill barriers as well.
The U.S. Food and Drug Administration has released draft food and cosmetic guidance, but there are few labeling requirements, and many manufacturers have failed to test the safety of their products.
In April 2013, the National Institute for Occupational Safety and Health (NIOSH) recommended that occupational exposures to carbon nanotubes and carbon nanofibers be controlled to reduce a potential risk of certain work-related lung effects. According to NIOSH, recent results from experimental animal studies with rodents indicate that exposure to carbon nanotubes and carbon nanofibers may pose a respiratory hazard if inhaled.
Several studies have linked carbon nanotubes to mesothelioma. That has echoes of an emerging risk from decades gone by: asbestos.
An Underwriting Challenge
Insurers are already at risk. Standard policies don’t specifically exclude nanotech, and it’s not clear whether courts in all jurisdictions would apply a policy’s pollution exclusion. Few insurance applications ask about nanomaterials. Nanotechnology could well be the underwriting challenge of the next hundred years.
Even though data is in short supply, actuaries have been tackling the challenge presented by nanotechnology.
Drawing on the lessons learned from the notorious exposures of asbestos and pollution, property/casualty actuaries are helping insurers prepare to handle new emerging risks like nanotechnology by assisting with the development of new policy language and encouraging underwriting discipline.
Actuaries can also help integrate pricing, planning and reserve setting to manage the underwriting cycle.
Actuarial work is, fundamentally, the analysis of relevant information to develop estimates of future financial implications. Just because nanotech-related insurance data has yet to emerge, that doesn’t mean there is a complete lack of relevant information.
As with the emerging risk of climate change, analysis begins with scientific findings — and by applying the expertise of the subject matter experts in the insurance world. Actuaries involved with coverage of nanotech processes and products use work such as that presented in Nanotechnology Safety, edited by Ramazan Asmathulu, a Wichita State University associate professor who focuses on nanomaterials.
Then, most importantly, actuaries apply a sound analytical structure to address the problem. Framing the issues in a logical manner involves the use of techniques such as lifecycle analysis and expert elicitation to supplement available data and develop preliminary estimates.
Also important is the regulatory environment. As asbestos litigation evolved, it was perhaps unexpected developments such as the 1965 Restatement of Torts that proved the most troublesome.
An analysis of current regulations, in the United States and abroad, can provide context for initial product design and rate estimates. But it will be important, in this quickly changing landscape, to remain alert for changes in the legislatures and the courts.
Insurers are wise to be alert to new sources of risk — but not all apparently emerging issues do, in fact, emerge. Our reaction time as an industry, however, has improved. New opportunities are quickly tackled while at the same time managing, and pricing for, the inherent risks.
The insurance industry can be an important enabler of new industries and technologies such as the ones nanoprocesses have already brought to market, and the many more applications yet to be discovered. Like the lifeguard watching over the pool, insurers seek to make money without getting burned. That’s why it’s important to think ahead, assess the risks and put the right protections in place.
Mind the Gap in Global Logistics
Manufacturers and shippers are going global.
As inventories grow, shippers need sophisticated systems to manage it all, and many companies choose to outsource significant chunks of their supply chain management to contracted providers. A recent survey by market research firm Transport Intelligence reveals that outsourcing outnumbers nearshoring in the logistics industry by 2:1. In addition, only 16.7 percent of respondents stated they are outsourcing fewer logistics processes today than they were three years ago.
Those providers in turn take more responsibilities through each step of the bailment process, from processing, packaging and labeling to transportation and storage. Spending in the U.S. logistics and transportation industry totaled $1.45 trillion in 2014 and represented 8.3 percent of annual gross domestic product, according to the International Trade Administration.
“Traditionally these outside parties provided one phase of the supply chain process, perhaps transportation, or just warehousing. Today many of these companies are extending their services and product offerings to many phases of supply chain management,” said Mike Perrotti, Senior Vice President, Inland Marine, XL Catlin.
Such companies are known as third-party logistics (3PL) providers, or even fourth-party logistics (4PL) providers. They could provide transportation, storage, pick-n-pack, processing or consolidation/deconsolidation.
As the provider’s logistics responsibilities widen, their insurance needs grow.
“In the past, the underwriters would piecemeal together different coverages for these logistics providers. For instance, they might take a motor truck cargo policy, and attach a warehouse form, a bailee’s form, other inland marine products, and an ocean cargo form. You would have most of the exposures covered, but when you start taking different products and bolting them together, you end up with gaps,” said Alexander McGinley, Vice President, US Marine, XL Catlin.
A comprehensive logistics form can close those gaps, and demand for such a product has been on the rise over the past decade as logistics providers search for a better way to manage their range of exposures.
“Traditionally these outside parties provided one phase of the supply chain process, perhaps transportation, or just warehousing. Today many of these companies are extending their services and product offerings to many phases of supply chain management.”
–Mike Perrotti, Senior Vice President, Inland Marine, XL Catlin
A Complementary Package
XL Catlin’s Logistics Services Coverage Solutions takes a holistic approach to the legal liability that 3PL providers face while a manufacturer’s stock is in their care, custody and control.
“A 3PL’s legal liability for loss or damage from a covered cause of loss to the covered property during storage, packaging, consolidation, shipping and related services would be insured under this comprehensive policy,” McGinley said. “It provides piece of mind to both the owner of the goods and the logistics provider that they are protected if something goes wrong.”
In addition to coverage for physical damage, the logistics solution also provides protection from cyber risks, employee theft and contract penalties, and from emerging exposures created by the FDA Food Modernization Act.
This coverage form, however, only protects 3PL companies’ operations within the U.S., its territories and possessions, and Canada. Many large shippers also have an international arm that needs the same protection.
XL Catlin’s Ocean Cargo Coverage Solutions product rounds out the logistics solution with international coverage.
While Ocean Cargo coverage typically serves the owner of a shipment or their customers, it can also be provided to the internationally exposed logistics provider to cover the cargo of others while in their care, custody, and control.
“This covers a client’s shipment that they’re buying from or selling to another party while it’s in transit, by any type of conveyance, anywhere in the world,” said Andrew D’Alessio, National Ocean Cargo Product Leader, XL Catlin. “When provided to the logistics company, they in turn insure the shipment on behalf of the owner of the cargo.”
The international component provided by ocean cargo coverage can also eliminate clients’ fears over non-compliance if admitted insurance coverage is purchased. Through its global network, XL Catlin is uniquely positioned as a multi-national insurer to offer locally admitted coverages in over 200 countries.
“In the past, the underwriters would piecemeal together different coverages for these logistics providers. For instance, they might take a motor truck cargo policy, and attach a warehouse form, a bailee’s form, other inland marine products, and an ocean cargo form. You would have most of the exposures covered, but when you start taking different products and bolting them together, you end up with gaps.”
–Alexander McGinley, Vice President, US Marine, XL Catlin
A Developing Need
The approaching holiday season demonstrates the need for an insurance product that manages both domestic and international logistics exposures.
In the final months of the year, lots of goods will be shipped to the U.S. from major manufacturing nations in Asia. Transportation providers responsible for importing these goods may require two policies: ocean cargo coverage to address risks to shipments outside North America, and a logistics solution to cover risks once goods arrive in the United States or Canada.
“These transportation providers are expanding globally while also shipping throughout the U.S. That’s how the need for both domestic and international logistics coverage evolved. Until now there have been few solutions to holistically manage their exposures,” D’Alessio said.
In another example, D’Alessio described one major paper provider that expanded its business from manufacturing to include logistics management. In this case, the paper company needed coverage as a primary owner of a product and as the bailee managing the goods their clients own in transit.
“That manufacturer has a significant market share of the world’s paper, producing everything from copy paper to Bible paper, wrapping paper, magazine paper, anything you can think of. Because they were so dominant, their customers started asking them to arrange freight for their products as well,” he said.
“These transportation providers are expanding globally while also shipping throughout the U.S. That’s how the need for both domestic and international logistics coverage evolved. Until now there have been few solutions to holistically manage their exposures.”
–Andrew D’Alessio, National Ocean Cargo Product Leader, XL Catlin
The global, multi-national paper company essentially launched a second business, serving as a transportation and logistics provider for their own customers. As the paper shipments changed ownership through the bailment process, the company required two totally different types of insurance coverage: an ocean cargo policy to cover their interests as the owner and producer of the product, and logistics coverage to address their exposures as a transportation provider while they move the products of others.
“As a bailee, they no longer own the products, but they have the care, custody, and control for another party. They need to make sure that they have the appropriate insurance coverage to address those specific risks,” McGinley said.
“From a coverage standpoint, this is slowly but surely becoming the new standard. A logistics form on the inland marine side, combined with an international component, is becoming something that a sophisticated client as well as a sophisticated broker should really be asking for,” McGinley said.
The old status quo method of bolting on coverage forms or additional coverages as needed won’t suffice as global shipping needs become more complex.
With one underwriting solution, the marine team at XL Catlin can insure 3PL clients’ risks from both a domestic and international standpoint.
“The two products, Ocean Cargo Coverage Solutions and Logistics Service Coverage Solutions, can be provided to the same customer to really round out all of their bailment, shipping, transportation, and storage needs domestically and around the globe,” D’Alessio said.
The information contained herein is intended for informational purposes only. Insurance coverage in any particular case will depend upon the type of policy in effect, the terms, conditions and exclusions in any such policy, and the facts of each unique situation. No representation is made that any specific insurance coverage would apply in the circumstances outlined herein. Please refer to the individual policy forms for specific coverage details. XL Catlin, the XL Catlin logo and Make Your World Go are trademarks of XL Group Ltd companies. XL Catlin is the global brand used by XL Group Ltd’s (re)insurance subsidiaries. In the US, the insurance companies of XL Group Ltd are: Catlin Indemnity Company, Catlin Insurance Company, Inc., Catlin Specialty Insurance Company, Greenwich Insurance Company, Indian Harbor Insurance Company, XL Insurance America, Inc., and XL Specialty Insurance Company. Not all of the insurers do business in all jurisdictions nor is coverage available in all jurisdictions. Information accurate as of December 2016.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with XL Catlin. The editorial staff of Risk & Insurance had no role in its preparation.