Should You be Worried about Overseas Corruption?

The past few years have seen a wave of investigations and prosecutions under the Foreign Corrupt Practices Act (FCPA) of US-owned or listed companies, such as IBM, ABB and Titan Corporation, by the Department of Justice (DOJ) and the Securities Exchange Commission (SEC) in relation to instances of corruption in the companies’ overseas operations. These investigations and prosecutions are hugely disruptive, damaging and costly for the businesses and individuals involved.

The US’s vigour in investigating and prosecuting overseas corruption has partly been a response to the Organisation for Economic Co-operation and Development’s (OECD) anti-bribery convention which was introduced in 1999. All 30 members of the OECD¹ and six non-members² have ratified the convention and enacted their own anti-bribery laws to make it a criminal offence to bribe a foreign public official. If your own country is a member of the OECD or a non-member signatory to the convention, your business will be subject to anti-bribery laws similar to those present in the US.

The OECD monitors the signatories’ compliance with the convention, both in terms of an assessment of the enacted legislation and a review of the 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. National governments have therefore been publicly pressured to eliminate inadequacies in their laws and to commit more and better co-ordinated resources to investigating and successfully prosecuting overseas corruption.

Will this pressure result in more countries tackling overseas corruption with the vigour demonstrated by the US? Should you therefore be concerned whether overseas corruption is present in your company or its overseas subsidiaries? Are your existing internal controls, policies and procedures strong enough to prevent or detect overseas corruption in your business? This article will help you answer these questions.

What is Overseas Corruption?

Overseas corruption is the abuse of a public office for private gain. The most obvious example of this would be the payment by a multinational company of a bribe to a foreign public official to secure a public works contract. However, the bribe could also take the form of a gift or entertainment and in return the company might instead receive confidential information about a tender, licences they are otherwise not entitled to, or just more timely public services.

Some countries’ legislation, such as the FCPA in the US, provide exemptions to prosecution for certain types of corrupt payments commonly termed ‘facilitation payments’. Facilitation payments normally take the form of payments to secure quicker receipt of goods or services that 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.

Legislation outlawing overseas corruption typically governs the actions of companies incorporated or listed in that country and their overseas operations, as well as any nationals of that country wherever they may be working. The legislation also normally extends to agents acting on behalf of the aforementioned companies and individuals.

Possible Consequences of Overseas Corruption

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 review or due diligence by an interested buyer; or (2) third party suppliers or vendors; or (3) anonymous sources (often employees).

Once such matters have been reported, the following consequences of the identification of overseas corruption typically follow at the behest of the SEC and the DOJ:

• 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;
• Global disclosure exercise to provide relevant electronic and hard-copy documentation and data relating to identified instances of corruption; and
• Criminal and civil sanctions in the form of fines and possible imprisonment of implicated individuals.

As if the action taken by law enforcement agencies and regulators wasn’t bad enough, the businesses investigated for overseas corruption inevitably also 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.

As if these punishments are not enough, the financial costs of the legal and accountancy fees incurred from investigations and reviews 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.

Preventing and Detecting Overseas Corruption

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; and
• Ensure that due diligence is performed and adequately documented on third party agents, and that written agreements are in place that explicitly bind such agents to compliance with overseas corruption legislation and industry guidelines.

To identify whether any corruption issues exist within overseas operations, a company could commission an independent compliance review of such operations (by external consultants or the internal audit function if they have the relevant expertise). A review like this should be focussed on those operations most at risk from corruption, determinable by the following factors:

• The position of the country of the overseas operation on Transparency International’s Corruption Perception Index³ ;
• The volume of sales to government-owned entities;
• Recent acquisitions; and
• The use of third party agents to secure contracts.

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.

Conclusion

Companies are facing a real and current risk of being investigated and prosecuted for overseas corruption – wherever their operations reside. Governments, law enforcement agencies and regulators around the world are responding to increasing global pressure to investigate and prosecute overseas corruption with vigour approaching that demonstrated by the US in recent years. Many 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 are critical. Violators face an array of harsh consequences: reputational 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 organisation 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 relying on the momentary inability or apathy of governments, law enforcement agencies or regulators. When inability and apathy turn into focused, co-ordinated, well-resourced action, every business must be certain that no skeletons are waiting in the closet to be revealed.

¹ Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Spain, Sweden, Switzerland, Turkey, United Kingdom and United States.

² Argentina, Brazil, Bulgaria, Chile, Estonia and Slovenia.

³ Transparency International is a non-profit, non-governmental organisation working to counter corrupt international business and government practices. The Corruption Perceptions Index ranks more than 150 countries in terms of perceived levels of corruption, as determined by expert assessments and opinion surveys.