Guarding Against CorruptionWolf von Kumberg The World Bank estimates that more than US$1 trillion in bribes is paid each year. This is a staggering sum that the Bank sees as a major drag on developing economies. As a result, it and a significant number of NGOs have made the elimination of bribery and related practices a major policy objective. The most powerful weapon that the World Bank has in its arsenal is disbarment. This means it can prevent suppliers who are convicted of corruption from bidding on massive projects in the developing world. Nothing gets the attention of companies faster than hitting their bottom line. US aerospace and defence contractors have been living with this threat for a long time now. In fact, the Foreign Corrupt Practices Act (FCPA) was passed in 1977 primarily to deal with foreign bribes being paid by such companies. For the first time, domestic companies in one jurisdiction were being held accountable for bribing not domestic officials, but foreign officials in another jurisdiction. It was a sea change and the beginning of a global movement to fight corruption. The FCPA approached corruption and its prevention in a number of evolving ways. It imposed stiff fines and custodial sentences on individuals. It also imposed fines on companies involved in corruption but, perhaps more importantly, ensured those companies were debarred from US Government contracts. In addition, the Department of Justice increasingly required of US companies the need to put an effective compliance and ethics program in place, providing reasonable assurance that FCPA violations would be deterred. It is this latter evolution, which was mainly voluntary on the part of industry, rather than the legislative sanctions that has led to the most significant internal changes within the major US defence companies. Legislating against corruption and, in particular, foreign corruption is only a first step. Companies have to adopt as part of their culture the principle that corruption is not a method of doing business. This is a much more difficult and lengthy process. Many would argue that it is a generational change within a company and can not happen overnight. It has taken the US defence industry over 30 years of dealing with the FCPA to have robust practices and training programs in place to reduce the opportunity for its employees to actively participate in foreign corruption. Yet, even so, US companies are still paying millions of dollars a year in fines for FCPA violations. Certainly the stamping out of foreign corruption is taking centre stage with a variety of international conventions now dealing with the subject:
These conventions are, of course, a critical first step in any effective attempt to battle corruption. In many cases, these conventions have led to domestic legislation being introduced to cover both domestic and foreign corruption. The OECD Convention has now been adopted by all Western European countries and it is interesting to see enforcement activity starting to take place. Given the US experience with the FCPA, it is clear that, before companies will begin to create effective internal procedures to prevent foreign corrupt payments, there must be a perceived threat to individuals and to the bottom line. The German and Italian courts appear to have started this process in a number of cases including those in relation to Enelpower and Siemens. Both companies, together with Alstrom, were convicted of paying bribes to officials in Abu Dhabi. In addition, Siemens, in a separate situation involving the bribery of officials at Enelpower, was actually debarred from selling gas turbines to Italy for a period of one year. Clearly the weapon of debarment was also recognised as an effective tool in Europe. Siemens has also had its share of problems in its home country, Germany. Five executives have been arrested and charged with bribery offences, which include the creation of a secret bank account with €420 million waiting to be used for foreign bribes. In another case, a German court found that Siemens had approved the payment of a €6 million bribe to win a power generating order. As a result, the company was fined €200 million in that case. Certainly stamping out foreign corruption is being taken seriously by some European courts. Yet there are other situations where European Union Member States have shown greater reluctance to review foreign corruption charges. The best known case is that of BAE and the Saudi Arabian contracts it has had stretching back over 20 years. The Serious Fraud Office (SFO) was investigating a purported bribery slush fund but ended the investigation in 2006 due to security considerations. The OECD reviewed the matter and there is also an English judicial review into the decision to end the investigation. Given the negative publicity that this case has received both in the UK and abroad, it is unlikely that future situations of this type will be handled in the same manner by the UK authorities. An interesting development is the approach taken by the US authorities in deciding to review situations where European authorities have been seen to take lax enforcement positions. Increasingly, the US authorities are finding ways to bring their own prosecutions against these companies. Today, any foreign company that involves the United States in any aspect of an overseas bribe can be prosecuted for FCPA violations in the US. This involvement can include being listed for ADRs, using US bank accounts for the transfer of money used for the bribe, or employing US nationals involved in the bribe. A UK subsidiary of ABB used a US bank account to transfer money to a Nigerian official and was thereby convicted of FCPA violations. Statoil, a Norwegian company, was charged with FCPA violations in the US based on the use of a US account to make bribery payments. Statoil paid a settlement of US$18 Million. It also entered into a deferred prosecution agreement that put the company on probation. The original charges would be dropped only if the company committed no further violations for a period of three years. An Alcatel executive was arrested in the United States on FCPA charges for payment of bribes in Costa Rica. The company is French, the employee was a French national and worked and was paid in France. The only US-related element was the fact that funds were transferred through US banks. These cases illustrate the need for European companies to take note. Foreign corruption is now on the global agenda and if local authorities do not prosecute it, US authorities are increasingly finding ways to do so. The Best Defence Is a Good Offence In addition, the compliance program has to receive top management support and be communicated down through the ranks to the lowest employee. Not having top management buy in or, worse, employees or management finding ways to evade the program will put a company at grave risk of prosecution. Employee training in relation to the requirements of the policy and the controls in place to enforce it is vital. The training should be renewed on a regular basis; once a year is not too often, particularly for employees in key marketing and sales functions. Adequate controls to both deter and to detect violations is also key. Failure to have these in place will lead not just to large criminal fines, but also to having compliance monitors put in place. A proper compliance program that includes adequate controls is something each company must put in place based on its risk profile. There must be a realistic assessment of the risks that a company faces and a determination of how to react to that risk most effectively. Some of the measures that make up a robust compliance program are:
There is no foolproof way to prevent a rogue employee from being corrupt. Having good systems in place to help to avoid these situations, remove the opportunity or detect any wrongdoing as early as possible will pay dividends. Such systems are one of the first things the authorities will look for and, if you have them in place, it will go a long way towards mitigating the adverse consequences.
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