FCPA Compliance and Ethics Blog

November 11, 2011

Transparency International 2011 Bribe Payors Index Report

Last week Transparency International (TI) released its Bribe Payors Index 2011 (Index). It represents the fifth such report issued by TI, the most recent previously released in 2008. In the introduction, TI says that the Index “ranks 28 of the world’s largest economies according to the perceived likelihood of companies from these countries to pay bribes abroad. It is based on the views of business executives as captured by Transparency International’s 2011 Bribe Payers Survey. The countries and territories ranked in the Index cover all regions of the world and represent almost 80 per cent of the total world outflow of goods, services and investments.” It also relates the perception of bribery “across business sectors.”

TI released the report because it believes that “bribery has significant adverse effects on public well-being around the world. It distorts the fair awarding of contracts, reduces the quality of basic public services, limits opportunities to develop a competitive private sector and undermines trust in public institutions. Engaging in bribery also creates instability for companies themselves and presents ever-growing reputational and financial risks. This is particularly relevant in light of recent anti-bribery reforms in a number of key countries around the world, such as in China and the UK.” It ends with its recommendations which both the private sector and governments can do to help lessen or eradicate the “prevalence of foreign bribery around the world.”

The survey for the Index asked more than 3,000 business executives (Respondents) worldwide about their views on the extent to which companies from 28 of the world’s leading economies engage in bribery when doing business abroad. The score for each country is based on the views of the business executives who had come into contact with companies from that country. At the bottom of the list were companies from Russia and China which were perceived to be “the most likely” to engage in bribery abroad.

The Index had five key findings.

  • There was clear evidence of bribery between private companies. More than one-third of the respondents in the Index reported that to help their companies grow business they were prepared to offer cash payments, gifts or hospitality to help win business. More ominously, more than one quarter of the respondents reported that they did not “trust their management to behave ethically.”
  •   There was no improvement seen since the previous index released in 2008. When looking at changes on a country-by-country basis, no country has seen a change in its prior score from 2008. India’s score improved the most with an increase of 0.7, but it still remains near the bottom of the table.
  •   The business integrity of a company is generally related to the perceived business integrity of its home country. An important first step in the fight against foreign bribery is that the home country government “must have an effective anti-corruption system in place. Home governments must set an example to companies by prohibiting corruption within the public sector and upholding high standards of integrity with no impunity.” In order to change the behavior of companies, one of the things needed is a strong legal framework in their home country making such conduct illegal.
  •  Companies from China and Russia were perceived as the most likely to pay bribes. TI has particular concerns with the reported findings regarding Russia and China as both of their economies have grown rapidly over the past decade. This gives their actions wide implications beyond their domestic economies. Further bribery and corruption by companies from Russia and China “are likely to have a substantial impact on the societies in which they operate and on the ability” or other companies to compete fairly in those countries.
  •  While the payment of bribes is prevalent across all business sectors it is perceived to be the most prevalent in the public works and construction sectors. TI notes that the public works and construction sectors are usually involved in high-value investment and significant government interaction and regulation, “both of which provide opportunities and incentives for corruption.” Further, the public works and construction sectors are also “particularly important from a development perspective, as they require decisions to be made with respect to the use and ownership of a country’s core resources and infrastructure.” This means that the public works and construction sectors will have significant consequences for the well-being of future generations of the countries in which they are involved. With bribery seen as widespread in public works and construction sectors, “countries working with foreign companies should be conscious of bribe paying and not tolerate unethical practices.”

The Index ended with recommendations for both companies and governments. While I found some of the recommendations for both groups unrealistic, I do believe that several are realistic and can be reached so that a company can remain competitive.

For companies, such recommendations include:

  • Bribery and corruption risks must be assessed across companies’ entire supply chains;
  • Companies should undertake due diligence, as appropriate, in evaluating prospective contractors and suppliers to ensure that they have effective anti-bribery programs;
  • Companies should make known their anti-bribery policies to contractors and suppliers and contractually require equivalent standards”; and finally
  • Companies should empower whistleblowers who experience or witness bribery and corruption through an effective and, if appropriate, anonymous whistleblower mechanism.

For governments, such recommendations include:

  • Strengthening of national anti-bribery and anti-corruption legislation, including the banning of all facilitation payments; and
  • Making illegal private sector bribery.

I found the TI Index report to be quite enlightening and useful. It will help inform the compliance practitioner on both the underlying legal basis of many international anti-bribery and anti-corruption initiatives and provide concrete steps to build or enhance a compliance program around. Its larger role may be to inform government regulators on companies from countries listed in the Index or market sectors which may be more prone to bribery and corruption. For laws which are both supply and consumer side based, such as the UK Bribery Act, it may point regulators to companies and sectors which may well bear scrutiny for companies over which they hold jurisdiction.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2011

June 1, 2011

We’re No. 1: What Level of Due Diligence Should You Perform?

New Zealand is generally recognized as having some of the lowest instances of corruption across the globe, at least that is the perception. Over the past 3 years it has either been Number 1 or led outright the Transparency International Corruptions Perceptions Index with scores of

  • 2010-9.3
  • 2009-9.4
  • 2008-9.3

It was, therefore, with some surprise that I came across a story referred to in yesterday’s Corruptions Currents blog by the Wall Street Journal (WSJ), on a website in New Zealand, Stuff.co.nz, entitled “NZ firms linked to money laundering” authored by Michael Field.

The article reported that companies created in New Zealand had been linked to “Russian crime, a Mexican drug cartel and Romanian extortion.” Additionally it reported that certain companies created in New Zealand had been tied to a company alleged to have smuggled arms into North Korea. These were accomplished by the creation of New Zealand shell companies which were used to move monies through to avoid detection.

The article reported certain international criticisms of New Zealand corporate registration protocols. The Canadian Financial Transactions and Reports Analysis Centre, “identified the “exploitation of New Zealand’s weak company registration laws” as a problem. International expert Martin Woods was quoted in the article as saying that shell companies were “ideal vehicles for money launderers, tax evaders and arms traffickers”. But the topper is the following line, “The government admits there is a problem but says it has had other priorities” but we do note that this final quote is not attributed.

The problem all of this raises for a compliance practitioner here in the US is how to evaluate a company for due diligence purposes? The Transparency International Corruptions Perceptions Index is a generally recognized index that many companies rely on to set the appropriate level of due diligence. New Zealand, with a sterling score of 9.3 or 9.4 and a ranking of Number 1 over the past three years, is a country that may be perceived to have one of the lowest levels of corruption in the world. However, the article in Stuff.co.nz demonstrates the need for active and strong due diligence in all places across the globe.

The article reports that one individual was, at one point, listed as a Director of over 300 New Zealand formed companies. Another person, listed as the Director of the New Zealand company alleged to have been involved with the shipment of arms to North Korea was “convicted of 75 breaches of the Companies Act for giving false addresses on registration forms”. Both of these examples cited in the article should give pause to companies when they set their due diligence levels. A traditional Level One US/UK database search may not be enough to protect your company.

You may need to move to a more sophisticated search such as one which makes a database search for in-county records. It is certainly important to know if and when a person holds multiple Directorships in various and not obviously related companies. This should raise a very big Red Flag.

The moral of this story is that due diligence is not a rote exercise. Care must be given in all phases. Simply because you are doing compliance due diligence for Foreign Corrupt Practices Act (FCPA) issues does not mean you can ignore money laundering and export control issues. I have written on compliance convergence and heard my colleague Howard Sklar talk on this several times. Your compliance program needs to be cognizant and integrated to evaluate and manage these risks for your company.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2011

March 30, 2010

Suspension of FCPA is NOT the Solution

Filed under: FCPA — tfoxlaw @ 5:57 am
Tags: , , , ,

Should enforcement of the Foreign Corrupt Practices Act (FCPA) be suspended for those US companies now working in Haiti? This topic has been in discussion for a few weeks. It began with a statement by Wall Street Journal editorial board member Mary Anastasia O’Grady in a piece entitled “Democrats and Haiti Telecom“. Ms. O’Grady cited “an American entrepreneur” for the quote “We did not bother with Haiti as the Foreign Corrupt Practices Act precludes legitimate U.S. entities from entering the Haitian market. Haiti is pure pay to play”.

This “pay to play” statement led George Mason University Professor Tyler Cowen, writing in the Marginal Revolution Blog, to write “one of the best ways to help Haiti” is to “pass a law stating that the Foreign Corrupt Practices Act does not apply to dealings in Haiti. As it stands right now, U.S. businesses are unwilling to take on this legal risk and the result is similar to an embargo. You can’t do business in Haiti without paying bribes”. Professor Cowen’s statement led Eric Lipman, writing in the Legal Blog Watch, followed this up with “[i]t should not be necessary to suspend enforcement of an anti-corruption law to enable U.S. companies to participate, but, realistically speaking, is it justified in this case to look the other way for a time?”.

Responding to the suggestion that FCPA enforcement should be suspended in Haiti, the FCPA Professor articulated three reasons the law should not be suspended in Haiti. First the FCPA applies only to foreign governmental officials so not all business dealings in Haiti are covered by the FCPA. Second, empirical evidence suggests that foreign investment will be high in countries should as Haiti if their markets are lucrative but Haiti’s is not. Third, is Haiti’s 2009 ranking in Transparency International’s Corruption Perceptions Index demonstrates that it is a country where corruption is rampant.

As the lead editorial in its Sunday, March 28 edition, the New York Times urged that Haiti “will need to sweep out the old, bad ways of doing things, not only those of the infamously corrupt and hapless government, but also of aid and development agencies, whose nurturing of Haiti has been a manifest failure for more than half a century”. The piece suggested the following ideas to further this goal: Transparency, Accountability and Effectiveness; Haitian Involvement, Self-Sufficiency; Tapping the Diaspora and De-centralization as some of the keys for a successful rebuilding of Haiti. These ideas applied to groups both inside the country and out. But it is clear that the Times did not suggest that cow-towing to a “pay to play state” by suspending the enforcement of the FCPA was a way to move forward.
This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2010

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