I recently led a workshop on commercial transparency at the IACCM Americas Conference in Phoenix, Arizona, designed to underscore the challenges of international commercial transactions and to raise awareness of anti-bribery laws, company-specific policies and bribery risks.
This article overviews topics covered in the workshop and practical guidance for identifying and mitigating commercial bribery risk. In an ideal world, all business transactions are fair, transparent and above-board. Buyers and sellers find one another in the marketplace, negotiate their terms and document their agreement. Everything is in writing, and everything is clear.
Likewise, with government functions like procurement and licensing, things work best when rules are explicit and respected—but it doesn’t always happen that way. Sometimes businesses go outside of proper channels and pay bribes to get an unfair advantage in the bidding process. Other times, corrupt government officials use their gatekeeper authority to shake businesses down.
Globally, an estimated US$1 trillion is lost to bribery each year. Corruption and bribery are serious problems that affect everyone, not just individuals or companies directly involved. They raise the cost of doing business, lead to the waste of public resources and exclude the poor from public services. They also contribute to political and social instability, fostering an increase in organized criminal behavior while eroding public trust in democracy and the rule of law.
For companies doing business internationally, it isn’t enough to lament these problems. To effectively push back against bribe demands and corrupt schemes, one needs to understand how these issues arise in real-life situations, and how specific risks and vulnerabilities can be identified and countered.
Anti-bribery deterrence and enforcement
Laws provide a useful context for this analysis. Bribery prohibition is universal, at least on paper. Bribing public officials is not legal in any country, and the past 20 years have seen many national governments strengthening their regulations against public bribery. This trend has been driven in part by international agreements like the United Nations Convention Against Corruption1, to which 186 countries are parties. Many countries also consider purely private sector bribery a criminal offense.
Beyond prohibiting domestic bribery, many countries consider it a crime to bribe an official of a foreign government. One such law is the U.S. Foreign Corrupt Practices Act (FCPA)2 enacted in 1977. The FCPA applies to U.S. citizens and companies but also extends its reach to non-U.S. citizens and companies under some circumstances. Dozens of other countries have followed suit with their own laws against foreign bribery. Penalties can be severe, including fines and forfeited profits, blacklisting, corporate dissolution and even imprisonment.
International businesses are likely to find themselves subject to multiple anti-bribery laws simultaneously. For example, a U.S. company may have a manufacturing subsidiary in China, which hires a sales agent from Singapore to help it win contracts from a Chinese government agency. If that sales agent pays a bribe to a Chinese government official to influence the contract award, it could be considered a violation of anti-bribery laws in all three jurisdictions and could subject the sales agent, the Chinese subsidiary and the U.S. parent company to criminal liability.
Bribery laws generally have a wide scope. They prohibit not only the giving of bribes, but also offering or promising of bribes. The bribe doesn’t have to be large or even monetary; it can consist of anything that has value to the recipient, including giving a corporate internship to a family member. The bribe can be conveyed directly or indirectly, so complicated payment schemes won’t offer any legal protection. Anytime the conveyance is made for an improper or corrupt purpose with the intention of obtaining a business advantage, the law is broken.
What makes a bribe illegal?
A bribe is illegal even if the payer of the bribe doesn’t receive any actual benefit. For example, in 2002, a U.S. company paid US$50,000 to a senior official at the Indonesian Ministry of Environment. The company was trying to influence the official to sidestep a documentation requirement. The official took the money but still required the document. Even though the company didn’t get anything as a result of the bribe, it was found guilty of violating the law with its failed bribery scheme.
As noted above, many anti-bribery laws focus on payments to government officials. But this may be broader than it first sounds. Government officials are typically understood to include not only individuals directly employed by a government agency, regardless of rank or position, but also employees of political parties, candidates for political office, members of a royal family and employees of state-owned enterprises.
This last category can be particularly broad in countries where major segments of the economy, like healthcare, are run by the state. Employees of public international organizations, employees of private companies owned by government officials, or those who act in an official capacity without compensation can also be considered government officials under these laws.
A careless company can find itself in trouble not only for its own direct actions, but also for actions taken for its benefit by third-party agents. Many companies use local partners when operating abroad to help them understand local business conditions and regulations. But some partners can be risky if they work in highly regulated sectors. Specifically, if a local partner pays a bribe while working on behalf of an international company, the company is legally responsible.
This is one reason due diligence and training are such important parts of any anti-bribery compliance program, particularly in high-risk regions and industries. Whether you’re dealing with suppliers, distributors, sales agents, resellers, vendors, customs brokers or any other sort of business agent, you want to be sure they understand and subscribe to your standards of conduct, and you want to be aware of any unusually close ties they might have to government officials—or to family members or close associates of such officials.
Even companies that aren’t looking for bribery opportunities can find themselves facing difficult situations. In many countries, government officials might demand “facilitation payments”—payments made to speed up or secure a routine governmental service (e.g., telephone service, power and water supply, loading and unloading cargo). It is estimated that such payments amount to 25 percent of all bribes paid to foreign government officials. These kinds of payments are illegal in most countries, and giving in to such demands may also raise issues under laws prohibiting bribery of foreign officials.
Sometimes, it is customary to offer small gifts or hospitality in the course of developing business relationships. These are not necessarily illegal. A modest, customary gift given to a government official on a national holiday, for example, is normally not deemed to be a bribe. Nor are items of nominal value, such as branded promotional items, cab fare, or reasonable meals and entertainment expenses tied to a legitimate business purpose.
But lavish gifts and expensive travel and accommodations are another matter: Anti-bribery laws prohibit the giving of expensive or extravagant gifts that can corruptly influence government officials. That said, even the smallest gift can qualify as a bribe if it is given with corrupt intent.
Books and records provisions
Of course, those who choose to act corruptly typically want to cover their tracks. Most anti-bribery laws include bookkeeping requirements to prevent this. Companies are required to make and keep a single set of books and records that accurately describes the company’s transactions. For example, describing a bribe as a “consultant’s fee” in the company books does not make it any less of a bribe. But it will make it easier for prosecutors to establish liability: If they can show that no actual consulting services were performed, the company can be found guilty of inaccurate recordkeeping, and there will be no need to demonstrate that the payer intended to improperly influence an official decision.
Those caught in wrongdoing face significant penalties. Every year brings new convictions and settlements under the FCPA and similar laws, with fines and other sanctions commonly reaching nine figures. In 2018, Brazilian majority state-owned petroleum company Petrobras was sanctioned more than $US1 billion in connection with the Operation Car Wash corruption scandal. Increasingly, individual employees are sentenced to jail for paying bribes as well. For example, in 2011, Joel Esquenazi, the former president of Terra Telecommunications Corp., was sentenced to 15 years in prison for bribing government officials in Haiti.
Companies accordingly have every incentive to keep their officers, employees and agents from paying bribes. They also have a legal obligation to do so: Anti-bribery laws typically require companies to implement adequate controls to detect and prevent corrupt behavior. If a company takes reasonable steps in good faith to prevent bribery, and it happens anyway, that company will be in a much stronger position to defend itself.
Identify red flags
So how can companies protect themselves and limit the spread of corruption? One of the most basic steps is learning how to identify “red flags” that may signal something amiss. A red flag is any action or circumstance that suggests a possibility or likelihood of bribery. A red flag doesn’t necessarily mean bribery has taken place, but it does signal a risk of bribery and should be fully investigated.
Bribery schemes can be complex, often including strenuous efforts to hide the identity of a payment’s recipient. Companies are expected to be sensitive to unusual payments and to train their employees and third-party business partners to do likewise.
Common red flags include:
- payments to a party not named in the contract;
- payments to corporate bank accounts held in the names of individuals;
- payments in cash or by check made out to “bearer” or “cash”;
- payments to a shell or holding company or blind trust, especially those registered in known tax havens;
- payments to a charity or nonprofit tied to a government official; and
- payments to entities with unknown owners.
Red flags can also appear in connection with third-party business partners who may be in a position to pay bribes. These include:
- a government official’s insistence on including specific partners in the deal;
- a third party’s request for reimbursement for questionable expenses (e.g. vaguely described or arising at the last minute);
- payments not tied to the delivery of any service within the scope of the contract (e.g. signing bonuses, unusual discounts or commission rates); and
- credible rumors or media reports of corrupt behavior or inappropriate ties to government officials.
Resellers and distributors have their own distinctive set of red flags, including:
- high discounts or an unusually large profit margin in comparison to the end-user price;
- wide discretion to decide on sales prices; and
- open-ended success fees based not on services performed but on the success of a deal.
Red flags should be taken seriously. Companies need to investigate suspicious actions or relationships with government officials, and employees should tell an appropriate person in the company if someone asks them to pay or accept a bribe, or if they hear about a bribe being paid within the company.
Managing bribery risk
Managing bribery risk requires a sustained effort and a commitment to maintaining a well-designed compliance program. What steps are needed to make a program effective will vary depending on the company, including its size, industry and business model. But there are three questions any company should ask:
- Is the program well-designed for the company in question?
- Is the program being effectively communicated and implemented?
- Does the program work in practice?
Any company can take these steps to make sure its compliance program is moving in the right direction:
- Anti-bribery policies, standards and procedures should be clear and accessible to all employees.
- Risk assessment should be tailored to the company’s business and risk profile.
- Systematic deployment of risk-based third-party due diligence and monitoring should be provided.
- Training should be provided, whether online, in person or both.
- Internal controls should be implemented and subjected to ongoing auditing to ensure their efficacy.
- Clear procedures should be in place for confidential reporting and investigation of alleged misbehavior.
Finally, the compliance program should undergo continuous testing and ongoing improvement. An effective compliance program can help keep a company’s business above board, protecting it against those who would step outside proper channels to conclude a deal.