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Navigating the minefield: Bribery and corruption in business

Feature Articles

Cite as: December 2013 87 (12) LIJ, p.54

With harsh penalties and greater enforcement, businesses around the world are grappling with the challenges of effectively dealing with bribery and corruption. By Mini Vandepol 

By Mini Vandepol

Bribery and corruption are global concerns that undermine efforts to end poverty and have significant negative implications on trade and economic growth. As a result, most jurisdictions around the world have enacted legislation to criminalise such conduct by becoming signatories to the 1997 OECD Anti-Bribery Convention (the Convention).1

There are jurisdictional variations in the scope and specificity of the legislation introduced to give effect to the Convention, including:

  • whether the prohibition of bribes is limited to bribes paid to public officials (public sector bribery), or whether bribery in transactions with other corporates (private sector bribery) is also prohibited2;
  • whether the bribe payer and the recipient are both deemed to have committed an offence;
  • whether “facilitation” payments are permitted3; and
  • in what circumstances a company can be held liable for the corrupt acts of its employees or agents.

Putting aside these nuances, the common theme of the various global laws is to impose a criminal prohibition on the bribery of foreign public officials, together with significant criminal and civil penalties (both pecuniary and imprisonment) for contraventions of that prohibition.

The Australian Criminal Code Act 1995 (Cth) (Criminal Code)4 the US Foreign Corrupt Practices Act 1977 (FCPA)5 and the UK Bribery Act 2010 (Bribery Act)6 each contain such a prohibition. These laws apply to the conduct of their own citizens and companies that occurs within the relevant country’s borders and elsewhere in the world with a sufficient jurisdictional nexus.

The majority of countries in the Asia Pacific region have laws prohibiting, at a minimum, the bribery and corruption of public officials within their borders. These laws generally also apply to foreign companies conducting business in that particular jurisdiction.7 China, which has been particularly active in enforcing its anti-corruption laws, introduced an extraterritorial amendment to its laws in 2011 to prohibit bribery of foreign government officials.8

Hand in hand with the growing web of regulation, enforcement of anti-bribery and corruption laws has continued to climb throughout the Asia Pacific as well as the US.9 Statistically, every two weeks a company somewhere in the world has a case opened against it by a regulator for bribery and corruption connected to the Asia Pacific region.10

Individuals and companies that contravene bribery and corruption laws face potential prosecution by every regulator that asserts jurisdiction in respect of the conduct. They also face a variety of other consequences that can be equally damaging, including:

  • reputation or brand damage;
  • increased scrutiny from regulators, the media and stakeholders;
  • damage to share price or corporate value;
  • exclusion from government contracts;
  • increased compliance and regulatory costs; and
  • increases in insurance premiums.

Challenges

The emerging markets in the Asia Pacific region are understandably of great interest to much of the world, including Australia. In order to advance the potential opportunities in these regions, there is a myriad of additional considerations that needs to be understood such as culture, religion, language, tradition, custom and behaviour, some of which may not seem immediately compatible with the maintenance of a robust compliance regime.

In the past, cultural barriers were the number one concern of companies entering new markets, but a 2013 survey conducted by Baker & McKenzie in conjunction with The Economist11 indicated that corporate compliance is now the primary concern for cross-border merger and acquisition (M&A) dealmakers in the Asia Pacific region.

Recent published cases of US regulatory action involving the Asia Pacific region confirm that the risks are real and cannot be ignored:

Siemens: Shi Wan Zhong, the former human resources director of China Mobile (a Chinese state-owned telecommunication company), is reported to have received bribes exceeding US$5 million from Tian Qu, who acted as the middleman between Mr Zhong and Siemens. In May 2011, Mr Zhong was sentenced to death by a Chinese court and Mr Qu was sentenced to 15 years imprisonment.12

Morgan Stanley: On 25 April 2012, the US Securities and Exchange Commission (SEC) charged a former executive at Morgan Stanley with (among other things) violating the FCPA by secretly acquiring millions of dollars of real estate investments for himself and an influential Chinese official, who in turn directed business to Morgan Stanley’s funds. Morgan Stanley, which has not been charged in the matter, co-operated with the SEC’s inquiry and conducted a thorough internal investigation to determine the scope of the improper payments and other misconduct involved.13

Eli Lilly: On 20 December 2012, the SEC charged Eli Lilly with violations of the FCPA by making improper payments through its subsidiaries to foreign government officials to win millions of dollars of business. Employees of Eli Lilly’s Chinese subsidiary are alleged to have falsified expense reports in order to provide spa treatments, jewellery, improper gifts and cash payments to government-employed physicians. Eli Lilly has agreed to pay disgorgement of US$13,955,196, prejudgment interest of US$6,743,53, and a penalty of US$8,700,000.14

Mitigating bribery and corruption risks

In 2012 only 40 per cent of Asian companies had anti-bribery policies in place, compared with a global average of 81 per cent. A 2013 Ernst & Young survey15 polled 681 executives in China, Singapore, Australia, New Zealand, Indonesia, Vietnam, Malaysia and South Korea and found that despite a significant increase in investigations and enforcement in Asia, and China in particular, companies are not yet stepping up with more compliance protections.

For an Australian corporate seeking to assess, prevent, detect and mitigate bribery and corruption risks, particularly in the context of cross-border trade and commerce, there are five essential elements of corporate compliance16 that may assist in navigating the bribery and corruption minefield. These considerations are equally important for investors and those contemplating M&A activity in the region.

Leadership: The starting point must be a corporate culture with zero tolerance for bribery and corruption. This culture of compliance must emanate from the highest levels of the organisation (including the board, CEO, CFO and general counsel) and be effectively communicated to employees, suppliers and associated persons, especially individuals who have outward-facing roles and may interact with foreign public officials. The company’s board and senior executives must empower their employees and associated third parties to say no to corrupt conduct even if it comes at the expense of revenue growth targets or expansion strategies.

While remaining sensitive to differences, a zero-tolerance corporate culture must not be impugned by relativities that may be imposed by geographical, linguistic, cultural and/or religious boundaries. As local views on Western moral imperialism are unlikely to be tolerated as an excuse for contravening foreign bribery and corruption laws which apply in Asia, companies will need to demonstrate that their regional entities, employees and agents operate within the same culture of corporate compliance.

The old adage that actions speak louder than words could not be more true in the compliance space. Beautifully crafted codes of business conduct, web-based policies, procedures and expressions of corporate values are of no use unless they live and breathe within the business and genuinely guide its operations. Companies must also maintain evidence of the monitoring and enforcement of these processes and procedures to be credible in the eyes of a regulator.

Risk assessment: To really understand the potential exposure of a company operating in the region, a risk assessment is required to assess the specific country(s) where business is transacted, and with whom and how that business is conducted. Ensure that any risk-based assessment deals with all applicable laws, such as the FCPA, the Bribery Act, the Australian Criminal Code and local anti-corruption laws in each of the jurisdictions where business is conducted. These laws are not the same and a generalised approach to compliance with them is unlikely to be effective.

For example, compliance with the FCPA is unlikely to provide sufficient protection against a breach of the UK Bribery Act or the Indian Prevention of Corruption Act 1988, which outlaws facilitation payments or “grease money” paid to expedite routine government actions.

Standards and controls: Off-the-rack codes of conduct and bribery policies and procedures will seldom, if ever, be effective in reducing bribery and corruption risk, particularly when a company operates across different jurisdictions.

Customised codes, policies and procedures should be founded on a privileged written risk assessment which has examined jurisdictional and other relevant factors to ensure that preventative measures effectively and proportionately target identified risks. Be specific, be mandatory and focus your code or policy on eliminating (or at least minimising) known bribery and corruption risks.

Companies should also have a considered and jurisdictionally specific protocol in place to effectively address any allegations of misconduct that arise. If an allegation of bribery is made against an employee or intermediary, or the organisation itself, it is essential to have a protocol through which the allegation is thoroughly investigated and actioned.

A myriad of laws and legal principles may apply in any given circumstance, including criminal laws, whistleblower laws, privacy laws, data protection laws, rights to privilege against self-incrimination, employment laws and legal professional privilege. Having a protocol in place to guide the company’s response means that matters will be elevated to the right level and handled in a swift and considered manner, maximising the prospects that privilege will be preserved.

Training and communication: Management, employees, agents and suppliers should be regularly trained on bribery and corruption in person, and in an interactive manner. Training must be formulated to deal with specific jurisdictional and business risks and delivered in a manner that ensures cultural and linguistic comprehension.

The need for training is essential to establish that the message of zero tolerance to bribery has been imparted to the business, and to ensure that those at risk have the necessary tools to identify bribery risks and are empowered to respond to those situations in compliance with all applicable laws.

Monitoring, auditing and response: Beyond words on a page, companies must monitor their compliance regime to ensure that it remains effective and targeted at the specific risks they are facing. Thorough due diligence in relation to proposed engagement of third party contractors, agents, joint venture partners and other third parties is also a must for corruption risk management. Regular audits of these third parties should be conducted to ensure the highest level of probity in their business dealings. Proactive and proportionate safeguards, beyond reliance on contractual terms (warranties and indemnities), must be established.

Taking swift and decisive disciplinary or remedial action against those perpetrating corruption, whether they are employees, suppliers or intermediaries, is a good measure of the effectiveness of a company’s compliance culture. Building in an ability to draw to a prompt close any relationships that are identified as poisonous to the company’s values is an important pre-emptive step, particularly for companies operating in high-risk jurisdictions. While not always appropriate, in some circumstances voluntary reporting of events to regulators may secure more lenient treatment from prosecutors or regulators. This should be considered on a case-by-case basis with the benefit of experienced legal professionals.

Navigating the minefield

Emerging markets in the Asia-Pacific region may offer investors higher returns on their mergers and acquisitions, lower manufacturing costs, access to growing consumer markets and an ability to acquire new products and technology. The five essential elements of corporate compliance serve as helpful landmarks to navigate the bribery and corruption minefield in the Asian region and are designed to ensure that potential opportunities are not eroded by a business model riddled with corruption risks.



MINI VANDEPOL is a partner and regional chair, Asia Pacific dispute resolution group, Baker & McKenzie. She gratefully acknowledges the contribution of Ryan Hennessey, senior associate, Baker & McKenzie.

1. The 1997 OECD Anti-Bribery Convention established legally binding standards to criminalise bribery of foreign public officials in international business transactions and provides for a host of related measures to make this effective.

2. The Bribery Act (as defined below) prohibits private sector bribery. See further the publication issued by the UK Ministry of Justice, The Bribery Act 2010 Guidance about procedures which relevant commercial organisation can put into place to prevent persons associated with them from bribing.

3. On 15 November 2011, the Minister for Home Affairs launched a public consultation paper to seek interested stakeholder views on possible changes to Australia’s anti-foreign bribery laws and in particular the “facilitation payments” defence. www.crimeprevention.gov.au/Financialcrime/Pages/Briberyofforeignpublic officials.aspx.

4. Division 70 – Bribery of foreign public officials, Criminal Code Act 1995 (Cth).

5. Foreign Corrupt Practices Act 1977 (FCPA) (15 U.S.C. § 78dd-1, et seq.).

6. Section 6 of the UK Bribery Act 2010, Chapter 23.

7. “Criminalisation of bribery offences under the UNCAC in Asia and the Pacific” prepared by the Asian Development Bank, Organisation for Economic Co-operation and Development Anti-Corruption Initiative for Asia and the Pacific www.oecd.org/site/adboecdanti-corruptioninitiative/policyanalysis/criminalisationofbriberyoffencesundertheuncacinasiaandthepacific.htm.

8. The Standing Committee of the National People’s Congress passed the Eighth Amendment to the Criminal Law of the People’s Republic of China in early 2011. The Eighth Amendment came into force on 1 May 2011. In particular, the newly added paragraph of Article 164 of the Criminal Law prohibits the giving of any “property to any foreign public official or official of an international public organization” to seek any “illegitimate commercial benefit”.

9. R. W. Tarun, Anti-Bribery Conventions and Global Law Enforcement Efforts, July 2013, Chapter 3, The Foreign Corrupt Practices Act Handbook, 2013 Edition, American Bar Association Publishing.

10. Baker & McKenzie analysis of EthiXbase data. This figure excludes domestic matters in countries in that region.

11. Opportunities Across High-Growth Markets: Trends in Cross-Border M&A, Baker & McKenzie, The Economist (Intelligence Unit), April 2013.

12. “China Mobile executive gets death in bribery case” Shanghai Daily, 21 June 2011, www.china.org.cn/china/2011-06/21/content_22831176.htm

13. The US Department of Justice release “Former Morgan Stanley Managing Director Pleads Guilty for Role in Evading Internal Controls Required by FCPA” 25 April 2013 www.justice.gov/opa/pr/2012/April/12-crm-534.html.

14. The US Securities and Exchange Commission release “SEC Charges Eli Lilly and Company with FCPA Violations” 2012-273, 20 December 2012 www.sec.gov/News/PressRelease/Detail/PressRelease/1365171487116#.Ul4yTlCnoyg.

15. Ernst & Young “2013 Asia-Pacific Fraud Survey”www.ey.com/CN/en/Services/Assurance/Fraud- Investigation---Dispute-Services/2013-Asia-Pacific-Fraud-Survey.

16. Baker & McKenzie, The 5 Essential Elements of Corporate Compliance has been formulated by Baker & McKenzie as a guide to assist with anti-bribery and corruption compliance. The 5 Essential Elements represent the synthesis of the key aspects of the US, UK and Australian anti-bribery and corruption laws together with leading guidelines and best practice statements relating to the area. www.bakermckenzie.com/files/Uploads/Documents/Locations/Australia/br_australia_5elements.PDF and www.bakermckenzie.com/globalcorporatecompliance.

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