Category: Bribery and Corruption

Adequate Procedures to Prevent Bribery in the UK

On 14 September 2010, the United Kingdom’s Ministry of Justice  issued its Consultation Paper on what might be “adequate procedures” prevent bribery. Under section 9 of the Bribery Act, the only defense against criminal liability for a commercial organization which has “failed to prevent bribery” is that the organization had adequate procedures” to prevent bribery.

The consultation is a designed to seek public comment. Responses are due by November 8.

It lays out six principles for bribery prevention:

Risk Assessment – this is about knowing and keeping up to date with the bribery risks you face in your sector and market;
Top level commitment – this concerns establishing a culture across the organisation in which bribery is unacceptable. If your business is small or medium sized this may not require much sophistication but the theme is making the message clear, unambiguous and regularly made to all staff and business partners;

Due diligence – this is about knowing who you do business with; knowing why, when and to whom you are releasing funds and seeking reciprocal anti-bribery agreements ; and being in a position to feel confident that business relationships are transparent and ethical;

Clear, Practical and Accessible Policies and Procedures – this concerns applying them to everyone you employ and business partners under your effective control and covering all relevant risks such as political and charitable contributions, gifts and hospitality, promotional expenses, and responding to demands for facilitation demands or when an allegation of bribery comes to light.

Effective implementation – this is about going beyond ‘paper compliance’ to embedding anti-bribery in your organisation’s internal controls, recruitment and remuneration policies, operations, communications and training on practical business issues.

Monitoring and review – this relates to auditing and financial controls that are sensitive to bribery and are transparent, considering how regularly you need to review your policies and procedures, and whether external verification would help.

It also sets out a few scenarios and how the principles would be applied.

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Michael Lewis, Greece, and Corruption

Michael Lewis has moved from Wall Street, to baseball, the left tackle, Iceland, the credit collapse and on to Greece. He takes a look at Greece’s financial crisis in the October issue of Vanity Fair: Beware of Greeks Bearing Bonds.

One issue is the debt hangover. Greece has about $400 billion in outstanding government debt and $800 billion in pension obligations. That $1.2 trillion is about a quarter-million for each working adult.

Another is the generous wages paid to government works. The average government worker makes three times the wage of the average private-sector job. The national railroad has annual revenues of €100 million, but has an annual wage bill of €400 million and another €300 million in other expenses.

Then there is the corruption. “It’s simply assumed, for instance, that anyone who is working for the government is meant to be bribed.”

The government is notorious for pulling tax collectors off the streets during election years. An estimated 2/3 of Greek doctors report incomes of less than €12,000. Self-employment means self reporting of income. Only those salaried employees who have taxes taken from their paycheck get stuck paying taxes. Greece is a poor country full of rich people.

Just to prove the point, he didn’t get a receipt for his coffee with a whistle-blowing tax collector. Even the fancy hotel was not paying the sales tax it owed.

“Everyone is pretty sure everyone is cheating on his taxes, or bribing politicians, or taking bribes, or lying about the value of his real estate. And this total absence of faith in one another is self-reinforcing. The epidemic of lying and cheating and stealing makes any sort of civic life impossible; the collapse of civic life only encourages more lying, cheating, and stealing. “

Greece was desperate to become part of the European Union. That meant they needed to get their deficit under control and prove a stable economy. It seems like they did it by “cooking their books” instead of economic policy. They simply moved expenses and obligations off their balance sheet to earn their 2001 entrance to the EU, swapping the drachma for the euro.

What went wrong?

Prime Minister Costas Karamanlis was involved in a scandal, leading to his ouster and the ouster of his government. The new finance minister took the more honest approach and began finding all of the financial skeletons.

[He] found so much less money in the government’s coffers than it had expected that it decided there was no choice but to come clean. The prime minister announced that Greece’s budget deficits had been badly understated—and that it was going to take some time to nail down the numbers. Pension funds and global bond funds and other sorts who buy Greek bonds, having seen several big American and British banks go belly-up, and knowing the fragile state of a lot of European banks, panicked. The new, higher interest rates Greece was forced to pay left the country—which needed to borrow vast sums to fund its operations—more or less bankrupt. In came the I.M.F. to examine the Greek books more closely; out went whatever tiny shred of credibility the Greeks had left. “How in the hell is it possible for a member of the euro area to say the deficit was 3 percent of G.D.P. when it was really 15 percent?” a senior I.M.F. official asks. “How could you possibly do something like that?”

The other focus of the Lewis’ story is the Vatopedi Monastery that was part of the Karamanlis scandal. The monastery had title to a lake in northern Greece. They convinced the Greek government to trade for the ownership of the lake with government owned property. This included the gymnastics center from the 2004 Olympics. The lake was worth roughly €55 million and the government property they received is probably worth many time that amount. It’s even more valuable now that the monastery has convinced the government to re-zone big chunks of the property for commercial purposes.

It seems the monks just want to use the money to rebuild their monastery. Nobody is claiming the leadership of the monastery is pocketing the money.  The same is not true on the other side of the transaction.

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Image of the Parthenon is by Simon Tong.

FCPA Release 10-03: Foreign Agents as Foreign Officials

The Department of Justice released its latest FCPA Opinion Release. The requesting company for this opinion release is stepping into a situation full of FCPA red flags. In the end, the DOJ opined that it would not bring an enforcement action based on the safeguards put in place by the company.

The company is involved in “natural resource infrastructure development” and trying to get a government contract. They want to hire a consultant who has previously and currently holds contracts to represent the foreign government
and act on its behalf and a registered agent of a foreign government pursuant to the Foreign Agents Registration Act, 22 U.S.C. § 611 et seq. Of course, the consultant is being paid on a contingency basis.

The DOJ points out that the FCPA does not “per se prohibit business relationships with, or payments to, foreign officials.” They look for these factors in the business relationship:

  • indicia of corrupt intent
  • transparency to the foreign government and the general public
  • whether the arrangement is in conformity with local law
  • whether there are safeguards to prevent the foreign official from improperly using his or her position

In this case, the company is putting extensive safeguards in place. The DOJ found the safeguards were good enough.

The consultant is an agent of the foreign government and there are situations in which the consultant will act on behalf of the foreign government, so the company should treat the consultant and its employees “foreign officials” for purposes of the FCPA.

The company is walling off the employees working on the various representations from each other and is disclosing  the relationships to the relevant parties. The business relationships are permitted under local law. The obligations limit representation of the foreign government by the consultant are sufficient to ensure that the consultant will not be acting on behalf of the foreign government in acting for the company.

The walling off and limitations are actually enough to pull the consultant out from under the label of being a “foreign official.”

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FCPA Opinion Procedure Release 10-02

A continuing quirk of the Foreign Corrupt Practices Act is the ability to ask the Department of Justice whether a particular set of facts would be a violation of the Act. Given all of the recent FCPA activity I expected there to be an uptick in Opinion Procedure Releases under the FCPA. So far that does not seem to be the case. There was one release in 2009 and only the second for 2010 has recently been issued.

Maybe the bribery situations being faced by corporate America are straightforward and don’t need interpretation (or unwanted attention) from the Department of Justice.

The Opinion Requestor runs a micro-finance operation in a country in Eurasia. (I’m not sure why they used this identification.) They are trying to convert from a non-profit model to a commercial operation. The government of the unnamed Eurasian country is insisting that the requestor make a significant grant to local micro-finance institution. The regulating agency has provided a short list of six local MFIs in the Eurasian country. Either cough of the cash to get it localized or it can’t get its operating permits.

Of the six local micro-finance institutions, they found three “as generally unqualified to receive the grant funds and put them to effective use.” They then conducted further diligence on the remaining three and ruled out two more: one for conflict of interest concerns, the other after the discovery of a previously undisclosed ownership change in the entity.

That left them with one choice, so they dove deeper in their diligence. They discovered that one of the board members of the local micro-finance institution was also a government official.

The requestor laid out a series of controls is would put in place to protect the investment in the local micro-finance institution from corrupt influence and prevent money from flowing to board members.

There is some interesting discussion about what charitable institutions need to look at and controls needed to avoid FCPA violations. The DOJ also refers to three prior releases that have dealt with charitable-type grants or donations:

  1. FCPA Opinion Release 95-01 (Jan. 11, 1995)
  2. FCPA Opinion Release 97-02 (Nov. 5, 1997)
  3. FCPA Opinion Release 06-01 (Oct. 16, 2006)

The situation in the release is unique but you can use the controls and discussion in the release to help with your own FCPA compliance program.

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UK Bribery Act Delayed

When I saw there was a press release from the UK’s Ministry of Justice, I was expecting an announcement of what it meant for a commercial organization to have “adequate procedures” to prevent bribery. That being the only affirmative defense under the Bribery Bill.

It turns out that implementation of the Bribery Act will be delayed until April 2011. They will start the regulatory process for guidance on procedures which commercial organizations can put in place to prevent bribery. That guidance is scheduled to be released in early 2011 in time for organizations to ramp up for the compliance deadline.

I view the UK Bribery Act as being more strict than the Foreign Corrupt Practices Act since it has no exclusion for “facilitation payments” and is not limited to government officials. The US DOJ and SEC have stepped up their enforcement of the FCPA which makes it a big concern for any company with international operations. We have yet to see how the UK government will enforce its Bribery Act.

In light of the delay, Transparency International is planning to publish its own guidance to “allow companies to get a ‘head start’ in tightening up their anti-corruption procedures.”

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It Does Not Take Much to Get You Into FCPA Trouble

The recent FCPA enforcement actions brought against Veraz Networks, Inc. shows that it does not take huge piles of money to get in trouble. Veraz admitted to making improper payments of only $40,000.

Not that $40,000 is an insignificant amount. It just pales in comparison to the huge dollars we have seen on other FCPA enforcement actions.

That $40,000 in improper payments led to a $300,000 fine and $3,000,000 of investigation expenses.

Back in 2008 Veraz was involved in an SEC investigation that resulted in the company not being able to timely file its 10Q for March 31, 2008. The FCPA violation was uncovered by the company during this investigation. It’s not clear what the original SEC investigation was focused on, but I would guess it was not FCPA violations. They were merely a byproduct of another investigation.

What lessons can we learn from the Veraz?

It does not take a lot of zeros to have an FCPA violation. It’s clear from the statute that even a nominal amount can be a violation.

FCPA violations are on the SEC’s checklist when they start poking around. The SEC is getting easy wins from the FCPA.

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FCPA Opinion Procedure Release 10-01

The Department of Justice released its latest Opinion Procedure Release under the Foreign Corrupt Practices Act. It’s one of the quirks of the FCPA that you can ask the Department of Justice whether a particular situation would be a violation of the FCPA.

This opinion is also quirky. The company requesting the opinion was in the odd situation of having to hire a foreign official as the director of a facility it is building in a foreign country.

Hiring a foreign official is an obvious red flag for a potential violation of the FCPA.

The quirk of the situation is that the United States government directed the company to hire the foreign official. The company is building the facility under a government contract as part of US assistance to the foreign country. The foreign country identified the individual they wanted as facility director. They told the US government, who directed the company to hire the individual.

Here are the reasons stated why this situation is not a violation of the FCPA:

  • [T]he Individual is being hired pursuant to an agreement between the U.S. Government Agency and the Foreign Country, and will not be in a position to influence any act or decision affecting the Requestor.
  • [T]he Requestor is contractually bound to hire and compensate the Individual as directed by the U.S. Government Agency.
  • The Requestor did not play any role in selecting the Individual, who was appointed by the Foreign Country based upon the Individual’s qualifications.
  • In neither position will the Individual perform any services on behalf of, or receive any direction from, the Requestor.
  • [T]he Individual will have no decision-making authority over matters affecting the Requestor, including procurement and contracting decisions.

I don’t think this release offers much insight to the FCPA. It does point out that you may be able to hire a foreign official if directed by the US government.

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Bribery in Britain

The British government is working on a new Bribery Bill “to reform the criminal law of bribery to provide for a new consolidated scheme of bribery offenses to cover bribery both in the United Kingdom (UK) and abroad.”

The Bribery Bill would replaces the offenses under the Public Bodies Corrupt Practices Act 1889, the Prevention of Corruption Act 1906 and the Prevention of Corruption Act 1916 with two crimes. The first makes it a crime to bribe another person. The second makes it a crime to accept a bribe.

The Bribery Bill also creates a discrete offense of bribery of a foreign public official and a new offense where a commercial organization fails to prevent bribery. This would create a British version of the US Foreign Corrupt Practices Act and and bring the United Kingdom compliant with its obligations under the OECD.

There is an affirmative defense for the failure of a commercial organization to prevent bribery: “adequate procedures.” The Bribery Bill requires the Secretary of State to publish guidance about procedures that a company can put in place to prevent bribery.

The Bribery Bill is widely expected to come into force later this year.

According to research from the Eversheds, many businesses are unaware of this new Bribery Bill, with 60% of businesses unaware that failing to prevent bribery will be a criminal offense.

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Daimler Charged with FCPA Violations

Daimler AG, the parent company of Mercedes-Benz, has been charged with violations of the Foreign Corrupt Practices Act.

The Department of Justice accuses the company of engaging in a long-standing practice of paying bribes worth tens of millions of dollars to foreign officials in over 22 countries.

There is an April 1 hearing in U.S. District Court in Washington D.C.

Daimler is accused of making “hundreds of payments” between 1998 and January 2008 to officials in 22 countries, including China, Croatia, Egypt, Greece, Hungary, Indonesia, Iraq, Ivory Coast, Latvia, Nigeria, Russia, Serbia and Montenegro, Thailand, Turkey, Turkmenistan, Uzbekistan and Vietnam.

Daimler is accused of having “interne Fremdkonten” or third party accounts with over 2000 in place at the time of the Chrysler merger in 1998. There is also mention of cash desk in Stuttgart that sounds a lot like the suitcase room at Siemens, where executives could fill up suitcases of cash to pay bribes.

In China the “819 account” was used to pay special commissions. The account number’s last three digits were “819.”

In addition to the payment of bribes, Daimler is also accused of improperly accounting for the funds in violation of the books and records provisions of the FCPA.

It looks ugly for the company.

Here is a copy of the Information Filing in US v. Daimler AG – hosted on JD Supra:

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Paying a Bribe with Zero

In India, petty corruption is pervasive. Its citizens often face situations where they are asked to pay bribes for public services that should be provided free. The 5th Pillar is advocating for paying the bribe with a zero-rupee note.

According Vijay Anand, president of the 5th Pillar, the idea is credited to an expatriate Indian physics professor from the University of Maryland who was traveling back home. He found himself harassed by endless extortion demands and thought of the notes as a polite way of saying “no.” The 5th Pillar took the idea to the next level and has distributed one million of the zero-rupee notes since 2007.

They have been collecting success stories of how the notes have battled bribery: 5th Pillar Success Stories.

5th Pillar is a non profit, non governmental organization aimed at fighting corruption. The name of the group is based on the premise that India already has four pillars of democracy – the legislature, executive, judiciary and the media. “So, any socially conscious, patriotic and well-meaning citizen who abides by laws and puts the nation in front of his personal gains, is a 5th Pillar.”

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