Whether obtaining prime locations, building, securing inspection and food permits, or creating partnerships to advance the development, operation and security of restaurants and hotels, the very nature of the hospitality industry lends itself to risk arising from bribery and corruption.
Like many industries, however, restaurateurs and hoteliers face greater challenges abroad, as the common language of compliance may not be translated or understood equally.
Global anti-corruption initiatives advanced by the United Nations, World Bank, World Trade Organization, European Union, Organization of American States, Association of Southeast Asian Nations, Caribbean Community, African Union, and others are helping to level the world’s competitive playing field. While progress against bribery and corruption is being made, the risk is still very real, especially to U.S. companies operating abroad that must comply with the Foreign Corrupt Practices Act, as well as other anti-bribery and anti-corruption laws and regulations in the jurisdictions where they conduct business.
Where the trouble starts
As demand grows for economic expansion in new and emerging markets in Africa, Brazil and Southeast Asia and as the international political landscape changes in broader terms in places such as China, India and the Middle East, hospitality companies face monumental challenges in protecting their organizations from bribery and corruption. Common issues the industry faces include:
- Securing prime locations — as all hospitality executives know, it’s all about location, location, location, but with so much red tape involved with identification and acquisitions for real estate and property development, this becomes a hotbed for trouble
- Safety and security — ensuring guest safety and security is paramount for hotels and hospitality businesses, but this means they must rely on local authorities, which in many foreign countries are a breeding ground for bribery and corruption
- Supply chain and vendors/suppliers — when it comes to dealing with the supply of goods and services in foreign countries, hospitality businesses are at risk of being involved (often unintentionally or through a third party’s actions) in kickbacks, and this especially true in regions where infrastructure is underdeveloped or customs is less stringent due to poor government oversight
- Franchisees — many in the hospitality industry take the position that the nature of their franchise relationship protects them from violations of anti-bribery and anti-corruption laws and regulations by their franchisees, but since they obtain a financial benefit in exchange for the franchisee’s use of their brand this position could be subject to challenge by regulators
- Partnerships with government or government-controlled organizations — in many countries, doing business with a government-run entity is unavoidable and in politically unstable nations, government-owned entities can become corrupt
What to do to avoid the obstacles
To consider these issues effectively and create safeguards that will protect the business from a seemingly endless string of potential pitfalls, it’s critically important to be thoughtful about a clear plan to reduce exposure to bribery and corruption risk. There are several key steps that companies need to take when doing business in foreign nations.
First and foremost, businesses should always start by completing a country risk profile. This helps to identify the cultural, political and regulatory environment, as well as assess the history of bribery and corruption that has occurred within a given country. Frequently, companies make the mistake of believing that because a foreign country doesn’t enforce its anti-bribery or anti-corruption laws, there is greater insulation against the penalties for compliance violations. In reality, that often ends up being a costly misconception when regulators from a company’s home country undertake an investigation of its overseas activities, often prompting further interest of, and action by, local authorities.
Next, it is critical to assess potential joint venture partners or franchisees that plan to operate on a company’s behalf in a foreign country. The organization should undertake an extensive due diligence investigation to determine, among other things, whether key members of management or the board of directors also hold political offices or act as government officials and may have a conflict of interest, and if any referrals have or will be made that could involve civil servants or public officials.
Also, the organization should set clear guidelines about the processes and monitoring for business courtesies, as well as payments and expenditures. This is especially important because business courtesies; charitable donations and political contributions; discretionary spending on gifts, meals, and entertainment; facilitation payments; employee bonuses; and commissions to agents, all of which present such a difficult challenge for any company, are potentially even more problematic among hospitality businesses and can certainly be more difficult to control in some foreign countries. The organization’s cash accounts, and its books or recordkeeping, are a prime area to address.
Finally, companies need to institute policies and procedures to ensure compliance when operating in foreign countries. This includes contractual compliance requirements in written agreements with third parties; training and awareness programs; mechanisms to obtain guidance on compliance issues and report concerns or complaints arising from potential violations of corporate policies, laws and regulations; and protocols to investigate “red flags” and reported matters when they do arise. If an organization discovers that violations have occurred, it is critical for it to take disciplinary and remedial action to correct behavior and close control gaps or weaknesses.
Regardless of the size of a company, the nature of its business or the location of its operations, transforming an aspirational commitment to compliance into a concrete strategy starts with assessing risk. In the hospitality industry, many of the issues that companies face when operating in foreign countries become drastically magnified due to the unique nature of the business. Identification and monitoring of risk involving bribery and corruption should be embedded in organizations’ ongoing risk assessment and continuous monitoring activities.
Pamela Verick is a director and Tom McClune is a managing director at global consulting firm Protiviti.