Global companies are seeing the value of refraining from paying bribes – but only when governments help them to do so
Global companies are seeing the value of refraining from paying bribes – but only when governments help them to do so
The business case against overseas corruption has never been stronger, as regulators around the world work together to prosecute companies that bribe abroad.
Enforcement trends show that firms breaking foreign bribery laws are today more likely to be prosecuted than ever before. Anti-corruption watchdog Transparency International says there was “significant enforcement” of the 1997 OECD anti-bribery convention in 16 countries in 2007, up from 14 in 2006. Governments from 37 countries have signed the convention and passed laws that criminalise bribery of foreign public officials.
So far US regulators have led efforts to crack down on overseas corruption, imposing record fines on companies and giving jail terms to individuals that bribe abroad. Now European countries including Germany, France, Italy and Switzerland are starting to follow suit. “US regulators used to be the only policeman on the block,” says Lee Dunst, a partner at New York law firm Gibson, Dunn & Crutcher and a specialist on the Foreign Corrupt Practices Act. “This has changed in the last 10 years,” he says, referring to European law enforcers starting to put resources into fighting overseas corruption.
Even the UK – accused of being soft on bribery after it dropped an investigation into defence firm BAE Systems’ dealings in Saudi Arabia – is taking bold steps to reform the way it investigates foreign bribes. In September, the UK’s Serious Fraud Office said it would introduce US-style plea-bargaining for companies in overseas corruption cases. By agreeing to cooperate with investigators, companies could be given more lenient sentences, or even avoid prosecution (see interview).
SFO director Richard Alderman says UK companies should step forward to reveal breaches of bribery laws. “I want companies to come and talk to us as early as possible,” he says. He has vowed to work closely with the City of London to improve the reporting of corrupt activities, not just in cases of foreign bribes but also fraud and insider trading. The idea for the regulator is to “free up resources to go in really hard on those companies where fraud and corruption are in need of investigation”, Alderman says.
The promise of plea-bargaining in the US has led to a surge in enforcement in the past five years under the FCPA. In 2007, the Department of Justice and market regulator the Securities and Exchange Commission between them brought 38 FCPA cases, compared with just two in 2003. The trend has continued into 2008. At the end of June, US federal enforcement bodies had undertaken 16 FCPA actions – the highest number of cases recorded in the first six months of a year.
“The business case is strong for US-listed companies; partly because of the FCPA liability but also because of positive incentives in US legislation like reductions of sentences and procurement policies rewarding companies for having anti-corruption programmes in place,” says Richard Samans, board member of the World Economic Forum’s Partnering Against Corruption Initiative, a voluntary business group promoting anti-corruption best practice.
Global risks
Tough FCPA enforcement is turning overseas corruption into a compliance risk for companies all over the world. Companies often think the FCPA only applies to firms with a US listing, but any company that does business in the US is liable under the act. US regulators have frequently made it clear that before deciding whether to investigate they first want to know the details of the allegation – especially who within the company is implicated and the sums involved, says Jennifer Hammond, forensic accountant at KPMG. Jurisdiction is one of the last items they consider, she says.
And global regulators are working ever more closely. The SFO, for example, helped 31 different countries last year gather evidence for overseas corruption cases, says Alderman. As the UK’s most senior overseas corruption law enforcer, he meets at least one delegation of foreign regulators every week; sometimes three or four. “It builds up relationships,” he says. For the same reason, regulators from OECD convention signatory countries meet four or five times a year in what has been dubbed the “prosecutors’ forum”, where they discuss ways to cooperate on global cases. These gatherings are timed to coincide with meetings of the OECD working group on bribery, when governments signed up to the convention get together to monitor progress.
“There’s now more cooperation than ever among governments in cross-border investigations,” says Richard Cassin of US law firm Cassin Law. “The globalisation of business has forced the globalisation of anti-corruption enforcement.”
The criminal penalties that come with being prosecuted for corruption give boards an obvious reason to put in place anti-corruption measures. But the headline figures of amounts paid in fines and restitution payments – which are already high and rising, especially in the US – are nothing compared with the hidden costs of being investigated for corruption, say professionals involved in bribery cases. For one US company fined about $20m under the FCPA, the actual cost of the investigation, including lawyers’ and accountants’ fees, was closer to $70m. In the US, every board member of a company under investigation for corruption tends to have a personal lawyer, in addition to the team of lawyers representing the firm.
US companies are also finding that, having disclosed FCPA violations, they are sued by shareholders angry that the company’s stock price has dropped because of the scandal. Faro Technologies this year paid $6.9m to settle one such class action suit with shareholders, becoming the second company to do so after Immucor settled for $2.5m with shareholders in 2007. Then there is the disruption an investigation brings to a company.
Under the cosh
Beyond the headline and hidden costs, being investigated for corruption is also a severe drain on management time, energy and resources; it damages staff morale; and it distracts boards from running a successful business. Dawn raids on offices and having staff stopped and searched at airports – as happened to two BAE executives that tried to enter the US in May – do little for a company’s reputation.
It can also can make companies more risk-averse in future, which could be bad for business, says Alexandra Wrage of TRACE, a corporate anti-corruption membership group. “Companies become more conservative than the law requires. They have this ‘never again’ mentality. If you have faced four days in a row being interviewed by FBI agents, you become more conservative,” she explains.
There is no doubt that the history of anti-corruption in the US and Europe has been shaped by how willing the respective regulators have been to act, says Wrage. Because of the nature and pace of FCPA enforcement, anti-corruption has developed in the US as a matter of compliance, to be looked after by the legal team. In Europe, where enforcement has been weaker, the decision of whether companies should bribe or not has been an ethical issue, to be treated as a matter of corporate responsibility.
Today European companies are going through the process US companies went through 10 years ago of putting in place anti-corruption programmes in response to high-profile scandals, say Wrage and others. In 1994, defence contractor Lockheed Martin was fined $24.8m, an FCPA record at the time, for bribes paid to win contracts in Egypt. The same year, a GE sales manager was sentenced to seven years in prison and ordered to forfeit $1.8m after paying bribes to win business in Israel. Both Lockheed and GE are now widely thought to have world-class anti-corruption programmes.
The pattern is now being repeated in Europe at German conglomerate Siemens, which was fined €38m in May 2007 for setting up a €200m slush fund to bribe officials to win telecommunications contracts. The firm has been investigating €420m of suspicious payments made by staff since the end of 2006, and the company continues to be investigated in more than 10 countries around the world.
A year ago, Siemens hired a board-level executive for legal and compliance issues, Peter Solmssen, formerly of GE. The company has also set up a compliance committee on the supervisory board to oversee its ongoing investigations and reforms to ethics and compliance (see below). Klaus Moosmayer, Siemens’ compliance operating officer and chief counsel of compliance and investigations, says: “It is essential to maintain a company culture which does not tolerate any illegal behaviour and strictly sticks to clean business.”
Defensive action
Corruption experts say the top priority for companies serious about staying clean is to set up an effective anti-corruption programme. This should be based on a rigorous assessment of corruption risks, be clearly communicated to staff, and be constantly monitored to check it is working. Sectors often highlighted as having strong anti-corruption programmes are those that have been subject to enforcement action in the past: oil and gas, aerospace and defence, and pharmaceuticals.
But how good a programme looks on paper is irrelevant, says KPMG’s Hammond. “Really, if a company has a strong programme it will find small, isolated instances before they turn into systematic problems.”
Companies are poor at reporting on how effective their anti-corruption programmes are, says François Vincke, chairman of the anti-corruption commission at the International Chamber of Commerce, whose members include GE, BP, Shell, Alcatel-Lucent, Suez and Siemens. Too often, he says, companies talk about policies rather than report on how many breaches of codes of conduct they have discovered, how many times they have turned down customers because of demands for bribes, and so on. It takes “courage and determination” to do this, and then report on it, he says.
Leading companies are slowly extending ethical codes of conduct and compliance training from their own staff to agents and business partners. BP for example requires a high level of anti-corruption compliance among suppliers and contractors, Cassin says. Making joint venture partners or major vendors sign up to anti-corruption conditions in contracts can help companies entering emerging markets “establish a reputation for not being an easy target”, says Dunst.
Saying no to demands from government officials for bribes helps a company show that it is no “patsy”, says Wrage. But while companies can work on stopping the “supply side” of corruption by getting staff and contractors to refuse to pay bribes, they can do less to stem demand for bribery from officials. She explains: “If you have been working on a project or proposal for four years, and spent thousands of dollars on it, and avoided corruption, it is very difficult when an official steps in at the last moment with their hand out.”
Joining forces to say no to corruption, as oil and gas companies have done in Kazakhstan or with governments through the Extractive Industries Transparency Initiative, can help present a united front against government demands, she says.
Another option for companies bidding for public contracts is to sign “integrity pacts”, or no-bribe deals, with governments. Siemens’ Moosmayer says these deals, which were developed by Transparency International, could be more effective than the threat of criminal penalties in making firms honest. Integrity pacts have now been used on more than 80 projects funded by the World Bank, and other lenders. Penalties for breaking them include cancellation of the contract, liability for future damages and disqualification from future government contracts.
Despite this progress, project finance loans in general do not contain effective anti-corruption provisions, says Neill Stansbury, director of the Global Infrastructure Anti-Corruption Centre, which provides an online anti-corruption resource for construction and engineering firms. He says: “Multilateral and bilateral donors could do a lot more to ensure that the projects to which they lend money have proper anti-corruption controls.” Commercial banks too are reluctant to attach or enforce anti-corruption conditions to lending, he says.
Corruption law enforcement may be increasing around the world, but honest firms continue to lose business, Stansbury says. “It’s causing enormous damage to companies that are not willing to bribe to get work. There are some places or sectors where only unethical companies can bid for work,” he says. The worst offenders are countries in Asia, Africa and South America that are at the bottom of Transparency International’s corruption perceptions index, he says.
Aside from the risks of becoming a target of law enforcers in the US and Europe, companies that bribe are saddled with higher running costs. The $1 trillion that companies and individuals pay in bribes each year is an extra tax on companies, adding 10% to the cost of doing business globally, and 25% to procurement contracts in developing countries, according to the World Bank. Moving business from countries with low levels of corruption to those with higher levels is equivalent to imposing a 20% tax on foreign companies, the group says.
Although these figures seem large, the short-term costs of bribes remain small compared with the value of contracts that companies are bidding for. Experts in the field say that, in the end, defeating corruption requires two things: governments willing to enforce corruption laws, and companies willing to demand high standards of integrity from staff and contractors. Only then will greedy officials be forced to keep their hands in their pockets.
Are anti-corruption programmes working?
Anti-corruption programmes are an essential first step for companies wanting to avoid the business risks of corruption. But executives are concerned that anti-corruption measures are not working.
According to a survey of 390 executives by PricewaterhouseCoopers:
· Almost 80% executives believe their company has some form of programme in place to prevent or detect corruption, but just 22% are “very confident” their anti-corruption programme identifies and reduces the risk of corruption.
· 28% of executives believe their companies are weak at communicating programmes.
· 47% say their company’s assessment of corruption risks is rigorous.
· For 55% of respondents, damage to reputation was the biggest risk that corruption posed to their business.
Source: Confronting Corruption, PricewaterhouseCoopers (August 2008)
Siemens reforms
After being rocked by corruption allegations since 2006, Siemens has:
· Appointed a board-level executive position for legal and compliance issues.
· Trained 140,000 staff on anti-corruption compliance.
· Adopted new policies on corruption risks in mergers and acquisitions, joint ventures and minority investments; and gift-giving and hospitality.
· Set up an independent ombudsman to hear complaints from Siemens staff and third parties.
· Created a compliance helpdesk to advise staff on the company’s code of conduct.
· Established a board disciplinary committee to punish misconduct.
· Audited internal anti-corruption controls.
Stanley’s comeuppance
On September 3, former KBR chief executive and chairman Albert “Jack” Stanley pleaded guilty to conspiring to bribe Nigerian government officials to win contracts worth a total of $6bn.
Stanley now faces seven years in prison for violating the US Foreign Corrupt Practices Act. He will also have to repay the $10.8m he made from the bribery scheme.
According to the Securities and Exchange Commission, KBR, a former subsidiary of energy services giant Halliburton, was one of four engineering and construction firms that decided it would have to bribe officials to win contracts in Nigeria’s liquefied natural gas sector.
Between 1994 and 2004, Stanley and his consortium channelled $180m in bribes to officials through two agents offering sham consulting services; $132m went to senior government officials through a UK agent, a London solicitor, who is now being investigated by the Serious Fraud Office; and $50m was paid through a Japanese company to bribe lower-ranking officials, the SEC says.
Global laws
As corruption laws converge around the world, companies can today fairly assume that what counts as a bribe in one country will count as a bribe in another. The difference lies in how states enforce these laws.
The UN Convention Against Corruption, which came into force in 2005, has been signed by more than 100 countries. The convention may lack teeth, but it has raised awareness about of the need to fight corruption among governments and companies around the world, observers say.
States do not need complex laws to beat bribery. Singapore’s anti-corruption laws are simple but effective; Indonesia has several bribery laws on the books, but enforcement is weak, says Richard Cassin of Cassin Law. Political will is more important than resources in fighting bribery, he says.
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