Set clear company limits on all payments involving foreign representatives.
As securities regulators continue to step up their war against bribery, Western companies operating overseas are grappling with a difficult challenge: how to avoid offending foreign business partners while still staying within the limits of the law when faced with local customs that call for gift-giving, entertainment and even outright bribes.
‘It’s very much a struggle for companies to find that balance,’ says Edward Rial, pictured right, who heads Deloitte Financial 
Advisory Services’ Foreign Corrupt Practices Act (FCPA) consulting group. ‘There aren’t any easy answers.’
Still, companies must come up with some solutions, as revenue from foreign markets is accounting for higher percentages of overall corporate earnings in recent years. Most companies can’t afford to give up international business to practice good governance, but having your corporate reputation damaged and being fined millions of dollars for violating the FCPA or UK Bribery Act isn’t an attractive option either.
There are cultural challenges across the globe, ranging from gift-giving traditions in Beijing during Chinese New Year to an expectation that a lucrative job may be offered to a relative in some Middle Eastern countries. In India, bribes are often needed simply to get basic services such as electricity – while in Nigeria, kickbacks are so engrained in the local customs that the country has developed its own nomenclature, notes Frank Cavico, a professor of business law at Nova Southeastern University and co-author of the book Baksheesh or bribe?.
If Nigerian officials ask for a ‘kola nut’, they want a small payment, but if they want a bag filled with $100 bills, they’ll ask for a ‘Ghana-must-go bag’ (named after expelled Ghanaian immigrants who crammed their luggage with cash during the reign of Idi Amin). ‘If someone asks you for a Ghana-must-go bag, you are definitely on the wrong side of the law,’ says Cavico.
Pleading cultural pressures is unlikely to gain much sympathy from government regulators, who have been dramatically stepping up their enforcement of the FCPA in the last couple of years. The whole point of the FCPA when it was initially passed in the 1970s, notes Rod Heard, a professor at Loyola University’s School of Law and a partner at law firm Barnes & Thornburg, was ‘to prevent American companies from being seduced by cultures where bribery was indeed accepted practice. Congress felt that even though it may be locally acceptable, companies can’t do it.’
Taking the top-down approach
So how is a company to strike the balance between maintaining business momentum and staying on the right side of the law? Errol Mendes, a University of Ottawa law professor and ethics consultant, says appealing directly to the top of the command chain can sometimes prove an effective strategy.
‘Often, even in the countries that are regarded as the most corrupt, if you lay down what you will do and what you will not do, and you go to the very top of the hierarchy and say, Tell us now whether or not you can do business, you’ll be given protection from corruption,’ he explains.
In one Middle Eastern country, Mendes says in reference to an unnamed company, one of his clients went directly to the president’s office and presented a ‘code of conduct’. Before the company committed to doing business there, it asked for assurances that it would be protected from bribery demands, and it received them.
‘It’s a multinational company, and it abides by the letter and spirit of the FCPA and its Canadian equivalent,’ he says. ‘The company achieved this in a country regarded as one of the most corrupt in the world by going directly to the president’s office.’
Setting limits on payments
Not everybody has access to those in high office, however. For the majority of companies, another option is to explore a ‘gray area’ that a number of experts point to as a possible exception. The FCPA allows for ‘facilitating payments’: small bonuses that can be paid out for expedited service.
Just what actions warrant such bonuses is a matter of interpretation. Bill Reinsch, president of the National Foreign Trade Council (NFTC), says the facilitating payments exception is often used to make small payments to ‘get a customs official to do what he is supposed to do’. For example, making a facilitating payment to have perishable food items moved through customs before they spoil would likely be appropriate.
‘Under US law, that is considered a facilitated payment,’ Reinsch adds. ‘Whether it’s a bribe is a moral question.’ No such exception exists under the UK’s newly passed anti-corruption laws – but the UK laws, Reinsch notes, have ‘much greater enforcement latitude’ and most likely won’t focus their enforcement efforts on such small violations.
Mendes says this exception can also be used preemptively to gain protection from lower-level bribers. In one case, which occurred in a large African nation, a foreign company needed to ship vital parts to an installation but was receiving demands for bribes ‘all the way up and down the line’. When the company refused, it was told by representatives of the government-run shipping agency: ‘You will be out of business very soon.’
To deal with the problem, the company informed a high-ranking official that the state-run agency would be entitled to a bonus paid to other shippers around the world if the parts arrived faster than the agreed-upon deadline.
‘And that’s what happened,’ Mendes says. ‘The parts came twice as fast, and the payments were not violating anybody’s law, because it is perfectly legitimate to pay for sped-up service. The bonuses were also paid to the actual company, so it went above people’s heads.’
But the problem with facilitating payments, notes Heard, is that ‘it is very difficult to discern when you cross the line, other than the smell test’. That can pose compliance problems for companies back home.
‘If you pay $50 to facilitate customs coming into the country, I think there might be some justification so long as you are getting some facilitation,’ Heard continues. ‘If it’s $1,000, that’s more problematic. Everybody is going to recognize that clearly crosses into the area where there is a bribe.’
Strong, clearly spelled-out company limits on any payments are one way to help avert pitfalls, experts note.
Entertainment receives higher scrutiny
The same concerns apply to expenses paid while entertaining local officials, which can also veer out of the gray area and into territory where a company is exposed, notes Rial. To ‘find the balance between participating meaningfully in those markets and at the same time being cognizant of what might constitute a statutory violation’, many companies have opted to put strong controls in place that provide very specific guidelines on what amount can be spent on entertaining. In some cases, buying a gift or taking someone out to dinner will require preapproval from compliance or legal professionals.
‘Sensitizing local company personnel to the fact that it’s a potential issue goes a long way toward controlling what sorts of expenditures are made,’ Rial explains. ‘If people know that if you go out to dinner and spend $5,000 in a very lavish setting with expensive liquor and expensive foods, there is going to be scrutiny – and if it is not preapproved, there is going to be greater scrutiny – it can help.’
Some companies have even gone so far as to preapprove and recommend certain restaurants where they know spending exorbitant amounts would be difficult, while others have banned entertainment altogether, deciding that it’s just not worth the risk.
Even so, such vetting still comes with potential pitfalls. ‘If you are at a dinner and the official orders a $500 bottle of wine, what can you do at that point?’ Rial asks. ‘It’s not a great situation to be in. You report it afterwards, and if there are circumstances like that which are unavoidable, the company has a decision to make. If it’s an isolated incident, that’s one thing, but in the aggregate, it can be significant. Depending on the size of the company, it can be hundreds of thousands of dollars.’
Gift-giving gets the ‘smell test’
In China and Korea, long traditions of gift-giving on certain holidays can present similarly thorny problems. During one Chinese holiday it is traditional to give ‘mooncakes’, Chinese pastries that used to be filled with red bean paste or duck eggs but now often contain mobile phones or other gifts. In one case cited in a report by Gibson Dunn, the head of a construction company in Hong Kong was sentenced to prison for presenting 15 boxes of mooncakes to local police.
Rial says companies need to make sure they consider the value of gifts to determine if they pass the smell test. Gifts that are branded with company logos, such as pens, T-shirts or bags, are often safe options – though they might disappoint some officials.
‘It comes back to the company’s analysis – and there should be a full documentation of the issue,’ Rial explains. ‘If a company is hearing from its sales representative that the gift-giving is required, the company should fully understand the circumstances. Is there any pending business? Can a gift be perceived in any way as quid pro quo? You have to consider how it looks to others.’
Though the goal is to structure a compliance program that ‘complies but also makes sure you don’t lose business momentum in local jurisdictions’, sometimes losing that momentum is unavoidable, notes James Parkinson, a partner at law firm BuckleySandler.
‘A very common message to communicate is, We don’t wish to offend you, but you have to understand that we are regulated by our own US law, which prohibits us from doing this. We wish to continue working here, and we wish to compete for your business, but this aspect we just won’t do,’ says Parkinson. ‘This is often an effective message, but there are circumstances where it is not enough.’
In those circumstances, a company may well lose business – but it’s a loss, experts say, that a growing number of companies are willing to take, as the cost of violating the FCPA is far greater.
Reinsch notes that the US government is aware of the problem, and has tried to level the playing field by working for multilateralized restrictions on bribery that force foreign countries to follow similar rules. Though some multilateral agreements go back as far as 20 years, they don’t affect China, Brazil, India or other emerging countries, which can create a disadvantage. That’s one of the reasons why the NFTC lobbed Congress to support the UN Convention against Corruption.
‘The other important thing that’s happening on this is that countries where bribery is welcome or encouraged are discovering that corruption is a real obstacle to investment and doing business there,’ Reinsch says. Many governments are beginning to get the message, and are cracking down internally.
‘Increasingly, big companies, which are the ones with deep pockets, don’t want to do business in these countries,’ Reinsch concludes. ‘It’s not just about a culture of corruption – it’s about the uncertainty that exists. The problem with bribery is that nobody ever stays bribed.’
Corruption Perceptions Index 2011
The Corruption Perceptions Index ranks countries according to their perceived levels of public-sector corruption. The 2011 index used various surveys and assessments by independent and reputable institutions on issues relating to the bribery of public officials, kickbacks in public procurement, embezzlement of public funds, and the strength and effectiveness of public-sector anti-corruption efforts.
The 10 least corrupt countries:
1 New Zealand
2 Denmark
3 Finland
4 Sweden
5 Singapore
6 Norway
7 Netherlands
8 Australia
9 Switzerland
10 Canada
*UK at 16; US at 24
The 10 most corrupt countries:
1 Somalia
2 North Korea
3 Myanmar
4 Afghanistan
5 Uzbekistan
6 Turkmenistan
7 Sudan
8 Iraq
9 Haiti
10 Venezuela
Source: Transparency International
