Supply-chain bottlenecks a risk factor for corruption

U.S. sanctions imposed in response to Russia’s recent invasion of Ukraine have created clear short-term compliance issues for companies but also have seeded potential long-term challenges.

Oil, wheat, fertilizer, neon, iron and other important commodities are in limited supply, either directly because of sanctions or because the conflict has disrupted supplies from Russia and Ukraine. These shortages can lead less scrupulous third-parties and agents to pay bribes as a way to move things along.

“Scarcity causes corrupt actors to act upon their instincts," Pam Davis, a partner at law firm Winston & Strawn LLP, said.

As in most corruption cases, the biggest risk is from third parties whose work can’t be as easily overseen as a company’s own operations, said Ms. Davis, who chairs the firm’s U.S. Foreign Corrupt Practices Act and anticorruption team. She already has begun to counsel clients to be watchful of the looming risks, she said.

Ukraine conflict-linked shortages are relatively new. Kara Brockmeyer, a partner at Debevoise & Plimpton LLP who previously led the Securities and Exchange Commission’s anticorruption enforcement unit, said that although she hasn’t yet counseled any clients involved in corruption stemming directly from the Ukraine-Russia conflict, she has had to do work for clients that may have run afoul of U.S. anticorruption laws because of pandemic shortages.

“It increases the pressure to make sure that you’re finding goods, that you are finding alternative suppliers," she said. “Those are really some of the pain points where we encourage our clients and their compliance officers to be paying attention."

Customs can be a particularly sensitive area. Companies or their agents might seek to expedite the movement of goods through customs by paying bribes to customs agents.

In 2010, for example, five oil-services companies and a freight forwarder entered into settlements with the SEC and the U.S. Justice Department for paying bribes to receive preferential treatment from customs agents in a host of countries. The bribery occurred as oil prices increased to their highest-ever level in 2008.

Weatherford International Ltd., another oil-services company, in 2013 admitted to violating the FCPA in connection with a host of bribes paid in the same period. Notably, Weatherford also admitted to sanctions violations at the same time, misconduct that a top prosecutor attributed to an “anemic compliance environment."

Companies also might pay bribes to help disguise the origin of goods, making material subject to a sanctions block appear as though it came from a legitimate source, Brandon Daniels, president of risk and compliance company Exiger LLC, said.

“Anytime you’ve got a major economic blockade, you’re going to have people that are trying to obfuscate the source of goods," Mr. Daniels said.

Any kind of scarcity also can induce companies to attempt to bribe state officials with access to a sought-after commodity—for example, officials at a state-owned mining company in a time of metals shortages, he said.

Several employees of mining company Rio Tinto PLC were in 2009 accused of involvement in bribery in China amid a period of steep iron ore price increases.

Mr. Daniels, whose company advises on risk and supply-chain issues, said businesses should increase their monitoring of invoicing and transaction activity, look for anomalies in new providers and enhance their due diligence on third-party consultants.

Leadership at companies also should be aware that placing too much emphasis on staff producing results can lead to corners being cut, Ms. Brockmeyer said.

“You can put pressure on your business to perform and put pressure on your business when things are not going well," she said. “The pressure has to be coupled with the message ‘We just want you to make sure that you’re acting appropriately.’"