The past few years have seen a wave of US investigations and prosecutions in relation to instances of corruption in overseas operations of companies. Brought under the Foreign Corrupt Practices Act (by the Department of Justice and the Securities Exchange Commission), the cases involve US-owned or listed companies such as IBM, ABB and Titan Corporation. These investigations and prosecutions are hugely disruptive, damaging and costly for the businesses and individuals involved. By Keith Williamson of AlixPartners Ltd.
The US vigour in investigating and prosecuting overseas corruption has partly been a response to the OECD’s Anti-Bribery Convention, which was introduced in 1999. All 30 members of the OECD and six non-members have ratified the convention and enacted their own anti-bribery laws to make it a criminal offence to bribe a foreign public official.
The OECD monitors the signatories' compliance with the convention, both in terms of an assessment of the enacted legislation and a review of the investigation and prosecution of overseas corruption in practice. During the past year, the OECD has publicly rebuked many national governments for their poor enforcement of the convention's anti-bribery provisions.
The most recent example is the OECD’s widely publicised concern over the UK Serious Fraud Office’s decision to discontinue an investigation into allegations regarding BAE Systems. The British authorities supposedly acted on the grounds that the UK’s national security interests would be threatened by further action on the charges that the company had bribed Saudi Arabian officials to secure a huge fighter aircraft contract.
National governments have been publicly pressured to eliminate inadequacies in their laws and to commit more and better coordinated resources to investigating and prosecuting overseas corruption successfully. In addition to governments’ obligations under the OECD Anti-Bribery Convention, pressure to take action is also building from other sources, such as the United Nations’ Convention Against Corruption and the Council of Europe’s Criminal and Civil Conventions on Corruption, which have come into force in recent years.
With increased political awareness and a stronger will to investigate and prosecute overseas corruption across the world, should you be concerned whether overseas corruption is present in your company or its overseas operations? Are your existing internal controls, policies and procedures strong enough to prevent or detect overseas corruption in your business. Overseas corruption is the abuse of a foreign public office for private gain. The most obvious example of would be the payment by a multinational company of a bribe to a foreign public official to win or keep a public works contract. However, the bribe could also take the form of a gift, favour or entertainment, and in return the company might instead receive confidential information about a tender, licenses that they are otherwise not entitled to, or just more timely public services.
Under the FCPA in the US, certain types of ‘facilitation payment’ are not deemed to be corrupt. These normally take the form of payments to secure quicker receipt of goods or services than the recipient would ordinarily be entitled to receive, but perhaps not within the same timescale. For example, a payment to a customs official to ensure that goods or supplies are cleared for entry to or exit from a country much more quickly than normal would amount to a facilitation payment.
Although the FCPA provides an exemption for such facilitation payments, the books and records provisions of the legislation require that these payments are openly and accurately recorded as such in the company’s accounting records. Many other countries’ anti-bribery legislation prohibits facilitation payments altogether.
Legislation outlawing overseas corruption typically governs the actions of companies incorporated or listed in the country of the legislation and their overseas operations, as well as any nationals of that country, wherever they may be working. Importantly, the legislation also normally extends to agents acting on behalf of the aforementioned companies and individuals, so it is not acceptable to turn a blind eye to the activities of third parties acting on your behalf in overseas locations.
Law enforcement agencies and regulators are typically alerted to incidences of overseas corruption by (1) a company's management following the discovery of such an incident during an internal or external audit or due diligence review, or (2) customers or vendors or (3) anonymous whistle-blowing sources – often employees.
Once such matters have been reported in the US, the following consequences of the identification of overseas corruption typically follow at the behest or with the encouragement of the US authorities:
• Performance of a thorough independent investigation of the suspected corruption;
• Performance of a global review of other entities' operations within the corporate group to identify any other instances of corruption;
• A global disclosure exercise to provide relevant electronic and hard-copy documentation and data relating to identified instances of corruption;
• Introduction of a thorough and effective anti-corruption compliance framework; and
• Criminal and civil sanctions in the form of fines for the company and fines and possible imprisonment of implicated individuals.
Increasingly, the Department of Justice is entering into deferred prosecution agreements with offending corporations that oblige the corporation to introduce a strict regime of anti-corruption compliance and monitoring with the appointment of independent external legal compliance counsel and forensic auditors for the duration of the agreement. In return for the offending corporation admitting the facts of the alleged corrupt conduct and adhering to the requirements of the agreement throughout its term, the Department of Justice waives any criminal sanctions that it might otherwise have imposed.
As if the action taken by law enforcement agencies and regulators wasn't bad enough, the businesses investigated for overseas corruption inevitably suffer from:
• Reputation damage due to adverse publicity, negatively impacting relationships with vendors, suppliers, financial institutions and shareholders;
• Delays to proposed listings, acquisitions and disposals;
• Low employee morale as a result of the uncertainty of the outcome of the investigation, internal and regulatory disciplinary action and the interruption to the business caused by the investigation or review; and
• Lost senior management and finance team time through involvement in assisting investigations and reviews.
Moreover, the financial costs of the legal and accountancy fees incurred from investigations, reviews and compliance monitoring sometimes dwarf the multi-million dollar fines levied by law enforcement agencies and regulators. With so much at risk, prevention is a much better business strategy.
To prevent and detect the occurrence of overseas corruption, the finance and compliance departments of companies with operations overseas should undertake – at a minimum – the following steps:
• Provide regular staff training and written communications on anti-bribery legislation and relevant industry guidelines on acceptable local industry practices (e.g., expenditure on client entertainment and gifts);
• Enshrine compliance with overseas corruption legislation and guidelines in an employee code of ethics;
• Publicise channels of confidential communication for concerns regarding overseas corruption;
• Ensure that due diligence is performed and adequately documented on third party agents used to secure business or obtain government services on their behalf (e.g., customs clearance agents), and that written agreements are in place that explicitly bind such agents to compliance with overseas corruption legislation and industry guidelines; and
• Ensure that the internal audit function is appropriately qualified and empowered to implement adequate internal controls, policies and procedures to prevent and detect overseas corruption.
To identify whether any corruption issues exist within overseas operations, a company could commission an independent compliance review of such operations (by external consultants, an internal audit function with the relevant expertise, or a combination of the two), focusing on those that are most at risk from corruption.
Should any suspicions of overseas corruption be identified, legal advice should be sought immediately regarding the legal and regulatory ramifications of the findings. A thorough and independent investigation of any suspicions should take place, followed by appropriate disciplinary actions if allegations are supported by evidence.
Companies in the US are facing a real and current risk of being investigated and prosecuted for overseas corruption – wherever their operations reside. Other governments, law enforcement agencies and regulators around the world are also responding to increasing global pressure to investigate and prosecute overseas corruption. Many multi-national companies oblivious to this risk are doing little to mitigate it. They need to act now.
The potential consequences of a law enforcement or regulatory investigation into instances of overseas corruption are so great that, at a minimum, familiarity and active compliance with applicable legislation and industry guidelines is critical. Violators face an array of harsh consequences: reputation damage, negative publicity, loss of business with key suppliers and customers, and low employee morale – in addition to severe fines and possible imprisonment.
Ensuring that your organization has the policies, procedures and culture in place to prevent and detect overseas corruption is the best risk management strategy and far more effective than hoping that no skeletons fall out of the closet in your company.
Keith Williamson is a Director in AlixPartners Ltd, the leading financial consulting and restructuring firm. Keith is a member of AlixPartners’ forensic accounting and expert witness team in London, where he specialises in fraud, corruption and regulatory investigations on behalf of companies and regulators across the globe. He is a Chartered Accountant and an honours graduate in Law. Contact kwilliamson[at]alixpartners.com
There is a non-profit, non-governmental organisation, Transparency International, working to counter corrupt international business and government practices. The Corruption Perceptions Index ranks more than 150 countries in terms of their perceived levels of corruption as determined by expert assessments and opinion
The articles published here in the Thinking CEO are internet updates of the latest management knowledge and practice, which have been commissioned by Sovereign Publications for their bi-annual magazine, CEO Today, and will appear later in the first 2007 issue of this publication. To contact Sovereign and CEO Today, go to:
http://www.sovereign-publications.com/ceo-art.htm
