Confronting the FCPA wrinkle in CSR practices

Companies whose operations have an impact on local communities are increasingly extending their stakeholder engagement efforts by creating community councils or, in the case of operations in foreign countries, talking with human rights NGOs that advocate on behalf of indigenous communities’ interests.

In an article entitled Sustainability: driving stakeholder engagement, in Corporate Secretary’s February special report, two sources make the point that in dealing with local communities, companies need to know who has the right to speak for those communities. This can have more critical implications when it comes to temptations to engage in conduct that could be perceived as being in violation of the FCPA and result in charges being brought against a company.

In a February 5 post to the FCPA Blog, Troy Charlton, a senior adviser at Monkey Forest Consulting, which advises clients on their social performance, said: ‘It’s crucial that the [CSR strategy] plan be focused on the community as a whole, not on individuals. Beware of requests from a public official. All CSR project agreements should be completely transparent and include objectives, participants, KPIs and financial management to help avoid any perception of corrupt intent.’

Charlton goes on to explain that in emerging markets a company’s community relations team may well be negotiating with indigenous tribal leaders, and that the team needs to make sure these leaders aren’t given anything of value, such as a business contract, to meet local content requirements. He elaborated on these risks in an interview with Corporate Secretary.

It’s common for companies to partner with NGOs on local community development projects -- regarding education, for example -- as part of their CSR efforts in foreign markets where they operate. ‘One concern is that the NGO may hire a local construction company to build a school and the construction company is owned by a politician,’ says Charlton. ‘You’re in effect influencing the politician through your community development project. You have to do due diligence on those NGOs to make sure there’s no exposure to that risk.’

In his blog post, Charlton also cites a recent report, Costs of company-community conflict in the extractive sector, written by Rachel Davis and Daniel Franks and sponsored by Harvard’s Kennedy School, that details the costs related to community conflict stemming from temporary production delays. Unless I’m reading too much into it, there’s a suggestion that local production managers may be tempted to grease the palm of whoever is most influential with local communities to avoid such delays and shutdowns, which hurt productivity and profits.

But what if corruption is much less straightforward and is the inadvertent result of misguided company incentives to the country manager?

Davis and Franks’ report includes a troubling description of just such a case where ransoms paid to rescue international staff who had been kidnapped came out of a separate budget line at their European firm’s headquarters instead of the country manager’s production budget. Turns out the country manager was being rewarded for delivering high production levels while keeping costs down, mainly by underpaying local workers even as he pressed them to be more productive. This led the local workers to tip off community criminal gangs about the comings and goings of international staff, enabling them to be kidnapped. Once the ransoms were paid, the local workers received a cut.

Ransoms and even lesser facilitation payments to local officials to protect international staff whose lives are believed to have been threatened can generally be justified to FCPA enforcement agencies, I’ve been told by FCPA experts. And whether an international company could avoid charges for the ransom scenario above is unclear. But the very possibility argues for companies taking a much deeper dive into the local business conditions in remote geographical locations to ensure everything is above board.