Third Parties don’t have to be the “Third Rail” of International Development
Photo Credit: Richard Masoner via Flickr
Third parties lie at the heart of corporate compliance risks as 90% of FCPA cases involve external intermediaries. A third party is any person or entity that is not a direct hire or main party to a transaction – typically a contractor or an out-sourced service provider. Examples of third party misdeeds in international aid flows often become stories of national interest, propelling conversations about the efficacy of international development to the point that it is becoming a political third rail. That said, the same practices that mitigate third party risks for multi-national firms are applicable to the international development sector as well. As a result, third parties do not have to be the third rail for donor governments and international development charities and private enterprises.
As in any industry, firms and organizations working in international development cannot directly control the actions of third parties. When international development firms and organizations assume the risk of contractors and service providers, they may not only be held criminally liable, but risk irreparable harm to their reputation and undermining their mission. For example, corruption charges against the largest UK aid contractor, Adam Smith International (ASI), raised questions about the British government’s reliance on corporate third parties in aid work and has spurred a tightening of the regulations governing those relationships.
The case of ASI and third parties exacerbates the current level of public scrutiny in the UK media towards international development and its funding. Along the same lines, a recent article from the Economist expresses a general sense of unease with the increase of development funding that is dispersed in large contracts to consortia led by for-profit firms like ASI.
The authors urge donor governments to improve their bidding procedures and contract management, and to disperse more funds through grants to non-profit organizations and charities. They also encourage international development practitioners to work with developing country governments directly and pursue, when possible, contracts with the corporate social responsibility (CSR) units in large multi-national corporations.
Setting aside the politically charged argument questioning for-profit development work, the Economist’s suggestions reveals a misunderstanding of the common risks posed by third parties to international development for-profit firms and non-profit organizations alike, that can lead to high profile scandals. First, governments are not the only actors who have the incentive and capacity to address inherent third party risks – firms and organizations in the development sector do as well. Second, working through grants or corporate aid agreements does not eliminate the risks associated with external parties, which both corporate and charitable actors in international development, rely on heavily for implementation and technical assistance on projects.
Firms and organizations, even small ones, have incentives to mitigate third party risks, from regulatory sanctions to brand reputation. There are also numerous resources available to inform risk management processes across industry, scale, and jurisdiction. The Society of Corporate Compliance and Ethics, for example, has a publically-available brochure on mitigating risks. In it, Marjorie W. Doyle, JD, CCEP-F and Diana Lutz lay out an easy-to-use checklist that helps firms evaluate their procedures for identifying and managing potential third party risks.
Grants, the funding mechanisms highlighted by the Economist article, have their own set of risks as well. In general, grants put fewer restrictions on the relationship between a grantor and a grantee, this can confound the assessments of whether obligations and deliverables have been met. Grantors must, to a certain extent, rely on their relationship with and trust in the grantee to ensure that the funds are being used for their intended purpose. As with any contract, applying common-sense practices, as thoroughly outlined here by the Financial Fraud Enforcement Task Force in the US Office of Inspector General, can help improve relationships, trust, and accountability between parties.
Third parties pose risks to firms and organizations regardless of sector. However, the international development community is particularly reliant on external experts and resources, partially due to the uncertain nature of grant funding. Moreover, building and maintaining a positive reputation is essential for continuing operations and cementing ongoing funding and support. Scandals involving charitable funds misused by third parties threatens to undermine the entire international development community. The corporate compliance sector, increasingly motivated by brand reputation, has authored numerous tools for assessing and mitigating third party risks; international development practitioners can take advantage of these publically accessible resources to help mitigate risks in the industry.
Peter Glover is a Program Assistant for the Program Coordination Unit at CIPE