Over the last decade, several Latin-American countries have implemented different practices to fight illicit practices and corruption. As an example, we can quote Law 12. 846 in Brazil, Law 30424 in Peru, or Law 27. 401 in Argentina. Also, in recent years, these nations have proposed additional measures to protect government administrations, and local and international businesses. It is evident that ensuring efficient compliance measures in your company has become the standard to reduce legal risks.However, in practice, we have not achieved these compliance goals yet. A large number of companies in Latin America are still exposed to malpractices. For example, 44% of Brazilian companies have already gone through fraud in the procurement sector.
Compliance actions protect a company from legal issues and are very useful to show how a company can get rid of irregular acts that can harm a business’ image and its finances.
What is compliance?
Compliance comes from the verb “to comply”. The goal is to adapt companies to ethical and legal rules that ensure certain values, like sustainability or transparency, in commercial relationships and procedures. It also seeks to make sure that every parties’ interests are well kept.
Therefore, a company that considers and applies compliance precepts offers the market more transparent businesses and processes. It can develop tools to identify omissions, irregularities or deviations within its structure and solve these problems promptly and efficiently.
Fraud Analysis and Detection in the Purchasing Sector
The implementation of compliance methods requires mechanisms that contribute to the verification and correction of irregularities that lead to illegal acts. But, in general, you need to foster a whole culture of compliance that includes:
- Developing a company’s anti-corruption policy
- Creating codes of ethics and conduct
- Getting the management team and the stakeholders to commit with compliance’s goals
- Establishing communication channels that protect employees’ best interests where they can anonymously make reports/complaints
- Encouraging and supporting the investigation of complaints
- Performing internal and third-party audits to verify if the company and its departments (such as procurement) are complying with regulations and working to maintain the company’s good reputation
- Promoting training for employees so they can learn all the elements about compliance in the procurement sector
- Implementing a program to continuously improve compliance processes
One cannot be completely sure of the veracity of the information provided by a customer, supplier, or other business partners. You need to confirm it with reliable sources. Nevertheless, the information may be scattered around, missing, duplicated, or even manipulated. The lack of transparency hides risks related to the corporate bond of a company and the identity of shareholders and beneficial owners.
Latin America is one of the regions with the highest rates of corruption and money laundering. Supplier management is one of the processes in which the risks of noncompliance are very high. Improving the relationship with your suppliers –and improving the whole supply chain management– will help you prevent the risks of having the company involved in adverse media or cases of corruption practiced by these partners.
When you have a complete and comprehensive compliance process, you can make sure that the clauses of the agreements between you and another partner are in fact being fulfilled. It also mitigates the risk of fraud by revealing points that should be added or removed in any contract renewals.
How to ensure compliance in the procurement sector?
There are some specific practices that can help you make sure that you follow efficient compliance procedures in the procurement sector. Some examples are:
Investigating suppliers or potential partners before closing any deals
Investigating partners is a challenge. You have to establish compliance clauses in every contract, and not only stick to payment or procedures. Any compliance clause must be met by every party involved in said contracts to avoid risks or non-compliance with laws and regulations.
Performing Regular Audits
Regular audits are necessary in the procurement sector to find weaknesses or potential risks in that sector. Audits are constantly required in the procurement departments to detect possible weaknesses in the area. Some elements that you can correct or implement to improve compliance are:
- Avoiding inappropriate favors or gifts to some of your suppliers, especially if your company is an intermediary in projects or provides service to public entities
- Ensuring quality control procedures to avoid tax offenses and fiscal irregularities
- Improving control over procured goods, and verifying if they are in accordance with what was established in its contract
- Performing regular audits to the vendors to protect your business. The goal is to make sure that your partner follows the same compliance principles as your company
Ensuring standardized procurement processes is a way of reducing gaps for illicit acts, curtailing the actions of malicious people who want to benefit from the detriment of your company. Besides that, once you analyze and evaluate your company to identify the weak spots in your processes, it is necessary to implement actions that aim for the continuous improvement of compliance processes and adjusting routines, so that they always follow the latest laws and legal norms.
Ensuring partnerships with reliable suppliers
Implementing a constant revision and verification process for every supplier is necessary to ensure transparent and healthy relationships. This process must be clear and efficient, so that it can also work as supporting information for future monitoring processes. If you implement these review processes, in time it will be easier for you to analyze the performance of your suppliers, and if they comply to your specific requirements and are qualified to maintain a commercial relation with you. Once you have the results, it is important to give priority to the suppliers that prove to be the most reliable.
Ensuring quality levels
You can also establish a minimum quality level for each product or process –whether internal or external– in the procurement sector. For example, a product will be labeled as “excellent quality” if you demand that the raw materials and procedures used to elaborate that product stick to that label and are, in fact, of a superior quality. Thus, nobody will be able to ask for lesser-quality materials and price it as if it were of “excellent quality” to earn more money.
Why has compliance been increasingly used in the procurement sector?
Many companies that deal with fraud issues turn to legal professionals to find errors and corruption cases. However, this solution is more focused on punishment and remediation than in prevention and correction. Also, the damage already generated affects the business’ image. However, with the new compliance practices in the procurement sector, the goal is:
- to prevent illicit behavior
- to make sure that a company complies with legislation and ethics
- to prioritize the improvement of control processes and corruption prevention
When combined with good legal work, the company can achieve its proposed goals. This can help to increase the credibility of a business and, specifically, of the procurement sector. In this way, the organization may even have greater acceptance in the market and more chance of closing deals only with suppliers who follow similar ethical principles. Compliance in the procurement sector contributes to overcoming some of the key management challenges in the area, such as building credibility and preventing fraud.