[This essay was originally posted on the Conflict of Interest Blog]
Whether one is drafting a code of conduct or other C&E policy documents, developing training, designing audit protocols, conducting a risk or program assessment or creating C&E metrics, it may be useful to bear in mind the relationships between COIs, corruption and fraud – particularly given the extent of overlap among these areas. The following is offered as an overview of these connections, but note that these are intended only as general principles under US law; aspects of the analysis may differ under various other countries’ legal regimes, and even some aspects of US law itself.
Corruption generally involves a breach of a duty of loyalty – either the duty an employee owes her employer or that owed by an agent to her principal. Corruption – at least viewed this way – always involves COIs.
Outbound corruption involves causing such a breach by others – e.g., paying a bribe to an employee of another organization to cause her to breach her duty of loyalty to such entity. Inbound corruption involves breaching one’s own duty to employer/principal – e.g., by receiving a bribe to betray the employer.
While all corruption involves COIs not all COIs involve corruption. Typically (but perhaps not always), the added dimension of concealment is required for an act to be considered truly corrupt. (So, for instance, supervising a family member at work would generally not be viewed as a criminally corrupt act if it were disclosed, although it typically would still be seen as a COI.)
Fraud involves a misrepresentation for the purposes of cheating another. In some circumstances, particularly where a duty of loyalty exists, a material omission/failure to disclose – even in the absence of an overt falsehood – is enough for fraud liability.
Outbound fraud can involve cheating shareholders/lenders (through, e.g., misstatements about financial condition/performance); customers (e.g., though deception about the product/service in question); or regulators (e.g., lying about one’s product/service or general business matters, such as tax). Insider trading is seen as a form of fraud, although in some circumstances the fraud analysis is a stretch.
Inbound fraud involves the organization itself being cheated either by employees (e.g., submission of phony expense reports) or third parties (e.g., suppliers lying about conditions in which a product is manufactured). In such cases the failure to disclose/material omission will often be sufficient for liability, given the nature of the relationships involved.
It is possible to see all forms of corruption as involving a fraud element, in that corrupt schemes presumably always implicate an overt deception or material omission. And, the nature of deception/omission tends to involve COIs.
However, clearly not all acts of fraud have an element of corruption. For instance, deceiving a customer about the quality of a product would not entail corruption, unless an employee of the customer was “in on it.”
Some closing points:
First, while I think it is important to keep these different categories in mind for different aspects of C&E work (such as those noted in the first paragraph of this post), they – and indeed many other forms of wrongdoing – should be seen as connected to each other, in the sense of how they can affect an organization’s culture. That is, an employee seeing even small-scale COIs or cheating on expense forms at her company is, I think, more likely to become more vulnerable (through desensitization) to other types of offenses. Included here would be those involving outbound corruption which, of all the participants in the above-described “parade of horribles,” is often treated most harshly by the legal system in the US and elsewhere. Put otherwise, COIs and small scale frauds can be seen as “gateway offenses.”
Second, even where conceptually distinct, fraud and corruption often have the same controls-related issues. For instance, weakness in the vendor selection/management process can be an occasion for an inbound fraud (supplier cheats company), an inbound corrupt act (supplier bribes company procurement personnel) or an outbound corrupt act (extra money given to supplier used as a slush fund to pay off company’s customers or regulators). Or, all three could be happening at once.
Finally, a brief repeat of the opening cautionary note that my framework is not intended to be universal. Indeed, as recently as yesterday we saw an executive jailed for “breach of trust” in Germany under circumstances that might not (at least as I read the story) be considered criminal under US law.
For additional reading:
A post on “slippery slopes.”
Major laws in the US designed to promote ethical conduct by businesses (from the Ethical Systems web site).