Educación, Salud, Deporte y Gobernabilidad

3.4.1 Insurance broking accounts

100. Systems and controls over payments to third parties form a key line of defence in

preventing bribery and corruption. But however effective they are in themselves, they will be ineffective if the underlying due diligence on third party relationships is of poor quality. 101. We found the systems and controls around payments to third parties appeared

generally adequate, with clear, risk-based payment authorisation procedures usually in place and payments to third parties prohibited unless there was an approved, live third party account on the system. We found that there were sound systems and controls in place at ten firms we visited, and there was only one firm with major shortcomings. 102. Against this, our confidence in the robustness of the payment controls was often

tempered by the weaknesses in third party due diligence described in Section 3.3. Because of these weaknesses in due diligence, payments were often made to third parties without the firm clearly understanding or verifying the business rationale. 103. Advance commission payments should be considered as higher risk as they could be bribes

to win business or used to facilitate them. We found that advance commission payments were generally not made by the firms we visited. However, one large firm had paid commission to new third parties in advance of premiums being received or due diligence completed, even though this was not its normal practice. In another case, a smaller firm appeared to have paid commission in advance in breach of its own procedures.

One firm’s policy was not to make payments to third parties who are individuals, yet our review of their third party payments schedule showed they had made such

payments in the last two years.

104. Hardly any firms monitored payments over time to identify unusual payments to third parties, despite the fact that most firms could produce schedules of third party

payments without difficulty. We consider it is good practice for firms to conduct this type of review. During our visits we discussed schedules of third party payments made over the last two years, and several firms commented that regularly reviewing

payments in this way would be a valuable exercise.

At one firm, the Compliance Officer said regular payments of small amounts would raise concerns about bribery and corruption. We highlighted a number of third party payments made by the firm to an individual which fell into this category. The

Compliance Officer appeared concerned by these payments and confirmed he had never reviewed payments in this way before.

3.4.2 Accounts payable

105. Firms should be aware of the risk that Accounts Payable can be used to make payments or inducements to third parties who may not have been subject to due diligence and appropriately approved. Examples of payments or inducements that can be made to third parties via Accounts Payable include excessive entertainment, gifts and hospitality, cash payments and payments of lifestyle-related bills such as travel or school fees. Firms should therefore ensure that they have adequate systems and

controls in place to mitigate this risk.

106. It is good practice for firms to limit third party payments from Accounts Payable to reimbursements of genuine business-related costs or reasonable entertainment which is unlikely to be construed as an inducement and ensure that the reasons for payment are clearly documented and approved.

As part of routine supervision, we found that a broker firm’s Chairman, based overseas, operated through a corporate entity in an offshore financial centre and introduced high-risk business to the broker firm. The broker firm paid advance travel expenses of around £200,000 annually to the offshore corporate entity and did not require any proof of expenditure in return. In addition, the annual travel budget for the corporate entity was determined based on the previous year with few questions asked by the broker firm. There is a risk in these circumstances that some or all advance travel expenses can be used to make illicit payments to win business.

107. Although we did not carry out any practical testing of how Accounts Payable is used, we discussed relevant procedures with accounting staff to understand the quality and effectiveness of controls to ensure the accuracy and transparency of payments.

108. Generally, systems and controls over staff expenses and accounts payable appeared to be adequate, but some firms had no formal limits on staff entertaining, expenditure or travel. In general, we found that although the controls appeared to be strong, this was mainly to ensure value for money or to cut costs, rather than to mitigate bribery and corruption risk.

Each month, one smaller firm’s Finance Director conducted an in-depth review of the travel expenses of one individual over the past twelve months.

109. All firms visited required staff to produce receipts for expenditure and expenses to be signed off by an authorised person. In many cases other evidence was sought if a receipt was genuinely lost or mislaid. However, some firms told us that large cash advances were sometimes given to staff for travelling in higher risk countries where they said credit cards were not readily accepted. Firms should consider carefully the risk of allowing staff to travel to high risk countries with large amounts of cash. One firm advanced significant sums of cash to staff visiting a very high risk country where, it said, credit cards were not accepted. They said hotels in this country cost

$600-$1000 per night, meaning that large sums of cash were needed on these trips. Our subsequent research found that good quality business hotels could be booked in that country in advance through well-known, on-line travel agents. Therefore, there was no need for this firm’s staff to take large amounts of cash on their visits.

110. Most firms visited had a Gifts Register with clear associated procedures although, in some cases, they had only recently been introduced. We noted that one firm’s

thresholds for recording of gifts and entertainment on the Register included £500 for entertainment and £300 for cash. We regard it as poor practice in all circumstances for firms either to give or receive gifts of cash.

3.4.3 Payment controls – examples of good and poor practice

Good practice

• Ensuring adequate due diligence on and approval of third party relationships before payments are made to the third party.

• Risk-based approval procedures for payments and a clear understanding of the reason for all payments.

• Checking third party payments individually prior to approval, to ensure consistency with the business case for that account.

• Regular and thorough monitoring of third party payments to check, for example, whether a payment is unusual in the context of previous similar payments.

• A healthily sceptical approach to approving third party payments.

• Adequate due diligence on new suppliers being added to the Accounts Payable system. • Clear limits on staff expenditure, which are fully documented, communicated to

staff and enforced.

• Limiting third party payments from Accounts Payable to reimbursements of genuine business-related costs or reasonable entertainment.

• Ensuring the reasons for third party payments via Accounts Payable are clearly documented and appropriately approved.

• The facility to produce accurate MI to assist effective payment monitoring. Poor practice

• Failing to check whether third parties to whom payments are due have been subject to appropriate due diligence and approval.

• Failing to produce regular third party payment schedules for review.

• Failing to check thoroughly the nature, reasonableness and appropriateness of gifts and hospitality.

• No absolute limits on different types of expenditure, combined with inadequate scrutiny during the approvals process.

• The giving or receipt of cash gifts.