By Russ Banham
Corporate Board Member
Fred Davidson was stifling in the unbearable heat of a midsummer’s day in 2002. Temperatures in the corrugated steel warehouse hovered around 100 degrees. Weeks earlier, Energold Drilling, a global drilling solutions company that operates 270 rigs in 24 countries across the Americas, Africa and Asia, had imported several drill rigs into the country. The rigs were now blanketed in a fine layer of dust. For nine hours straight, the customs agent ticked off one supposed problem after another with the rigs’ components—none of them actual regulatory infringements.
It was a test of wills between the two men. “It was not a lot of money he wanted, but in no way were we going to set a precedent,” says Davidson, who is Energold’s CEO and a director on its board. “If I was going to shed a few pounds of weight in that warehouse, he was going to shed a few pounds with me.”
Finally, the customs agent backed away from his unspoken expectation of a payment and released the rigs. “I had sent a clear message that we would never solicit preferential treatment for a bribe,” Davidson says. “Some companies just pay it, figuring it’s the cost of doing business and they won’t get caught. But it’s a slippery slope.”
This slope remains just as slippery in 2019 and is a growing risk for corporate boards of directors at fast-growing global companies. Not only is corruption a financial disaster for the companies they serve, it can dig into their own personal pockets. “Board members, as individuals, may be held civilly and criminally liable if they lack knowledge ‘about the content and operation of the (company’s) compliance and ethics program,’” says Pamela Passman, citing boilerplate from the U.S. Department of Justice. Passman is the CEO of the Center for Responsible Enterprise and Trade (CREATe), a non-governmental organization promoting anti-corruption best practices.
Aside from financial liability, board members have a responsibility to ensure that business strategy and the objectives of the company’s anti-bribery program are aligned, says Passman. “The challenge is that global oversight of bribery and corruption is complex, and there’s a limit to what boards can review,” she adds. The price for companies that downplay these risks has never been higher, says David Montero, author of Kickback, a history of corporate corruption. “Federal law enforcement agencies both in the U.S. and abroad are showing greater determination to crack down on corruption,” he explains. “Fines also are mounting, with the Justice Department pocketing more than $11 billion since 2006. Now, more than ever, board members should be apprised of the corruption risks involved in global expansion.”
A GROWING CONCERN
It is now 42 years since the Foreign Corrupt Practices Act (FCPA) came into law in the U.S., yet bribery continues to be the “cost of doing business” in many countries worldwide. The United Nations estimates that corruption eats up some 5 percent of the world’s GDP, a shocking figure. The most crooked places on Earth to do business are Somalia, Syria, North Korea, Venezuela, Iraq and Haiti, and the least corrupt are Denmark, New Zealand, Finland and Singapore, according to Transparency International’s 2018 Corruption Perceptions Index, the leading indicator of public sector bribery on a country-by-country basis.
It’s the countries in between that give pause for consideration. India ranked 78th of the 180 countries on the list, tied with Ghana and Burkina Faso. Argentina ranked 85th, and China and Serbia shared an 87 grade. Although Vietnam’s economy is soaring, the country ranked a dismal 117 in a tie with Pakistan. What about the U.S.? It was ranked 22nd, sandwiched between France and United Arab Emirates. The U.S. received a score of 71 on a 0 to 100 scale in which 0 is most corrupt and 100 is least. Somalia, at the bottom of the list, received a score of 10.
To be sure, FCPA, and FCPA-like laws in places like the UK, Brazil and Canada, and the equally punitive provisions of the OECD Anti-Bribery Convention, ratified by 43 countries, have had an effect. These varied regulations prohibit companies and their representatives from influencing foreign officials with payments or rewards to receive preferential treatment in obtaining or retaining business.
Civil and criminal sanctions for anti-bribery violations are significant and sobering. As directors know, FCPA authorizes the U.S. Securities and Exchange Commission to bring civil enforcement actions against company officers, directors, employees and stockholders. If determined to have committed the violation, they must disgorge the ill-gotten gains, pay substantial civil penalties and may even be imprisoned. Sixteen companies paid a record $2.89 billion in 2018 to resolve FCPA cases.
“We’ve seen significant reduction in bribery-related crimes by U.S. companies in the past dozen years,” Montero says. “For roughly 30 years, FCPA criminalized commercial bribery overseas, but enforcement was laughable. The Justice Department had one full-time prosecutor, literally the same guy from 1977 to 2005. No one gave the law much thought.”
No longer is this the case. While stricter anti-bribery oversight and enforcement has resulted in fewer companies offering payments in a country for preferential treatment, it has not curtailed the practice of corrupt government individuals asking for one. The payments typically are billed as “surcharges” and “commissions” to help companies mask skirting the law.
“Paying a bribe comes at a cost, but not paying a bribe also comes at a cost— in `lost’ contracts, slow licensing timeframes and other unnecessary delays and bureaucratic roadblocks,” says Montero. “Further incentivizing a bribe is the knowledge that a competitor will pay one and get away with it.”
He’s referring to companies in countries not signatory to the OECD’s Anti-Bribery Convention or bound by the FCPA and similar laws. Such companies, says Daniel Wagner, CEO of consultancy Country Risk Solutions, “not only are legally permitted to pay bribes, they’ll often receive a tax deduction for the amount paid, which puts their competitors at a distinct advantage.” Among countries permitting tax deductions for bribes showed to be a necessary part of a transaction are Austria, Belgium, France and Germany.
This preferential treatment is a “competitive injustice” to companies that will not stoop to paying a bribe, says Jim Nelson, president and COO of Parr Instrument Company, a manufacturer and global seller of chemical reactors and pressure vessels in 75 countries. “It hurts us financially and ticks me off personally when I find a competitor that’s not bound to the FCPA paying a bribe without a care in the world,” says Nelson.
“Bribery is a continual problem,” says Jon R. Tabor, chairman and CEO of Allied Mineral Products, a global manufacturer of monolithic refractory products for a myriad of industrial applications. The company has 12 manufacturing plants in eight countries, including China, India, Russia, Chile and Brazil, and a sales presence in more than 100 countries. “We’ve been asked and refused to pay bribes in Russia, China, India, and elsewhere,” Tabor says. “Once you start paying, you get a reputation for it and it never stops.”
Davidson agrees. “You pay just one person and the word gets out, and now you’re expected to pay everyone,” he says. “It’s like quicksand—you put your foot into it, and it gradually sucks you in.”
Why do companies risk their reputations in committing these crimes? They figure they’ll get away with it, says Montero. “In my research, I discovered that only about 20 percent of companies [that engage in bribery] ever get caught,” he says. “While the fines may look astronomical, they’re miniscule relative to the value of selling in an overseas market.”
The good news is that fewer companies are taking the risk. “The fines are an impediment, but it’s really the risk of imprisonment and disbarment from a country [to procure business in the future] that are starting to make a positive difference,” says Patrick Moulette, head of the anti-corruption division of the OECD’s Directorate for Financial and Enterprise Affairs.
Since the OECD Anti-Bribery Convention entered in force in 1999, 560 individuals and 184 business entities have received criminal sanctions for foreign bribery. At least 125 of these individuals were sentenced to prison, with 11 of them receiving five-year terms. At present, more than 155 criminal proceedings are underway against 146 individuals and nine businesses.
Refusing to pay a bribe does not always mean a company will face hurdles getting its products into a foreign region. In countries like India, where the asking of small bribes by low-level customs agents is common to get goods off a dock and into commerce, not paying the bribe stalls the proceedings temporarily. “It doesn’t mean you can’t transact business in the country; it just means it will take a bit longer,” says Bill Pollard, a partner at Deloitte Risk and Financial Advisory, who specializes in anti-bribery due diligence and post-bribery detection.
Blowing the whistle on a government employee who asks for a payment doesn’t necessarily speed up the delay. Davidson recalls once being asked for a kickback by a customs agent. “I went over the person to his superior and told him what happened,” he says. “Two days later, I got a call from the same customs agent. He doubled the payment. That told me people up the chain were getting a percentage.”
Despite the prevalence of such practices, beyond a peek at an organization’s anti-bribery policies, board members rarely are apprised of what is going on in the trenches. “Board members need to be confident that not only is a robust program in place, but that it is effective and embedded throughout the organization and particularly in high-risk regions,” warns Passman.
Montero agrees, pointing out that directors must balance their interests in growing business abroad and maintaining the commitment to ethical practices. “Board members should realize that some markets are simply so corrupt that bribery cannot be avoided; in such cases, they should walk away and concentrate on those segments where the company can both thrive and adhere to sound compliance,” he says.
That’s the practice at BlackLine, a public company experiencing rapid global expansion. “There are countries where corruption is standard business practice that we will not do any business in—period,” says Therese Tucker, founder, CEO and board member of the provider of finance and accounting automation software solutions that has sprouted offices in the UK, Australia, France, Germany, Singapore and Japan in the past six years. “Even if the country represents a significant market, it’s just not worth it to us.”
This approach should be de rigueur in all companies, Montero says. “Corrupt behaviors are a short-term solution with a long-term downside—bribes may drive up sales today, but, over the long run, they increase costs, adding to inefficiency and undermining morale,” he explains. Board members should take care not to inadvertently encourage such risky behaviors. “At times, board members will push management too hard to execute deals quickly in specific jurisdictions for competitive reasons—without a discussion of the bribery and corruption risks,” Pollard says. Directors also need to become more knowledgeable about the risk environment in the geographies eyed for market expansion. In assessing the country risk, the compliance experts agree that Transparency International’s index is a great start. “It’s the best way to determine which markets you can effectively compete in and be the ethical player you want to be,” says Montero.
Due diligence into the third parties the business relies on to service, sell and distribute its products abroad also is recommended. According to the 2018 Anti-Bribery and Corruption Report by corporate investigations firm Kroll, nearly half (45 percent) of companies surveyed rely on third-party partners to enter foreign markets and conduct business abroad. If the third party engages in bribes to obtain or retain business, the company itself could be in violation of FCPA and other anti-bribery regulations.
Given that 58 percent of the survey respondents uncovered legal, ethical or compliance issues in their due diligence to select a third party, the compliance risks are not for the fainthearted. “Third-party risks are the most significant corruption challenge for a company expanding overseas,” says Passman. “The further you move away from relying on your own employees abroad, the higher the bribery risk.”
To strengthen third party compliance practices, Passman advises boards to follow the framework within the ISO 37001 Anti-Bribery Management Systems Standard, published in 2016 by the International Organization for Standardization. The standard provides for independent verifications and audits of third-party partners. If these evaluations indicate prior problems with a third party, the standard requires that these issues are made public to alert other companies.
Board members also can help beef up the provisions of the company’s anti-bribery code of conduct to make sure they are transparent, strict and punitive. Contracts with third parties in violation of the code should be terminated, and employees should be made liable for disciplinary actions, including loss of employment. The violators also should be reported to relevant regulatory and criminal authorities. “The code of conduct should be absolutely clear that local business practices are never a justification for paying a bribe,” says Wagner from Country Risk Solutions.
To ensure BlackLine’s employees understand and appreciate the company’s strict compliance with FCPA and other anti-bribery regimes, Tucker has an external legal consultant draw up a 60-pages long detailed employment contract that includes a boldfaced Code of Conduct. “We have a zero-tolerance policy when it comes to bribery and any form of dishonesty,” she says. “When trust is lost, it cannot be regained.”
Russ Banham is a Pulitzer-nominated financial journalist and best-selling author.