Despite an intense focus on mitigating them, corruption risks are only increasing for companies that do business in places like China, Russia, and Mexico.
Vigorous enforcement of the Foreign Corrupt Practices Act by the Justice Department and worsening corruption in several countries are making it increasingly difficult to get corruption risks under control for companies that are expanding globally.
Despite cultural differences or the lack of transparency in some countries, the Department of Justice has made it blatantly clear that no country in the world is immune from FCPA enforcement. As Assistant Attorney General Lanny Breuer recently stated during a conference on the FCPA, “Combating corruption around the world is, and will remain, a priority of the United States.”
At the same time, as more U.S. companies are increasing their global operations into BRIC nations—Brazil, Russia, India, China—and Mexico where the FCPA often creates the greatest compliance headaches, "they will necessarily have to align their anti-corruption compliance efforts with the global enforcement environment, or risk paying a very high price for failing to do so,” says Kelly Currie, a partner with law firm Crowell & Moring.
Just look at Wal-Mart. What started off as a massive bribery scheme to win market share in Mexico in the early 2000s has now exploded into a global investigation over FCPA violations expanding recently into Brazil, India, and China.
That means multinational companies doing business in BRIC countries and Mexico must tailor their policies and practices to each jurisdiction in order to avoid the unique bribery risks that innately arise while conducting business in these countries.
If you look at FCPA enforcement over the last decade, the industries that are most vulnerable to corruption tend to be those with state-owned or state-operated entities, including energy, oil and gas, mining, telecommunications, and healthcare companies. “Foreign bribery is certainly not limited to those industries, but those are the areas in the past that have shown a high level of bribery,” says Paul Pelletier, a member of the law firm Mintz Levin and a former federal prosecutor of the Justice Department.
Consider the $236 million settlement that the Justice Department and Securities and Exchange Commission reached with global freight forwarding company Panalpina World Transport and six of its customers—GlobalSantaFe, Noble Corp., Pride International, Shell, Tidewater, and Transocean—for paying thousands of bribes from 2002 through 2007 to foreign officials for customs clearance in several countries, including Brazil and Russia.
There are some signs that corruption is declining in some BRIC countries. Brazil and India, for example, have moved up—albeit only slightly—on Transparency International's Corruption Perception Index, since last year's rankings. With a rank of 73 in 2012, Brazil moved up four spots to 69 this year. In comparison, India moved up one spot from 95 to 94. Given that Transparency International ranked eight more countries than last year, actual progress in Brazil and India remains difficult to determine.
“The good news is that the more that western companies enter into these markets, the more that these markets become more open, more transparent and, therefore, more compliant with anti-corruption laws,” says Paul Berger, a partner in the law firm Debevoise & Plimpton. In some BRIC countries, for example, U.S. companies are finding that state-owned entities and government officials are operating in a much more transparent way than just a decade ago, he adds.
But with progress comes some setbacks. China is the only country of the BRICs that fell in the Transparency International rankings from the 75 spot in 2011, down to the 80 spot in 2012. Mexico's rankings on the Corruption Index also declined from the 100 spot in 2011 to the 105 spot in 2012. And while Russia's rank improved to 133 out of 174 countries in the 2012 Corruption Index, up from the 143 out of 182 countries ranked last year, it remains the most corrupt of the BRIC countries to do business with.
In Transparency International's Global Corruption Barometer, the only worldwide public opinion survey on corruption, which interviewed more than 100,000 respondents in 100 countries, 53 percent said they believe corruption has increased in Russia, whereas 39 percent said it has stayed the same. Only eight percent said that corruption has decreased. When asked how they would assess the government's fight against corruption, the majority (52 percent) described it as “ineffective.”
Each of these countries also presents its own unique country-specific bribery risks, due to their diverse cultures, government structures, and business operations. As companies move into different markets and their business models change, says Currie, “your assessment of corruption risk has to continually evolve with your changing business model.
Political scandals in Brazil and India, for example, represent an emerging issue that has brought potential FCPA violations to light over the last couple of years, says Currie, when they have involved allegations of corruption—such as kickback schemes tied to the awarding of contracts—linked to U.S. companies. “The U.S. authorities open an investigation focused on the company making the alleged corrupt payments, while the local attention is on the politicians and government officials,” says Currie.
As more and more U.S. companies increase their global footprint “that is going to necessarily increase the attention that some of these corruption cases might bring.”
Crowell & Moring
Such high levels of corruption among political parties also are reflected in Transparency International's Global Corruption Barometer, in which respondents in Brazil and India ranked political parties as the most corrupt out of eleven organizations; parliament members and police also received high corrupt rankings in both countries.
Matthias Kleinhempel, director of the Center for Governance and Transparency at IAE Business School of Austral University in Buenos Aires, points out that Brazil has recently made great strides in its anti-corruption efforts. “If you look at the progress of improvement,” he says, “you can see that the government has made very clear and consistent efforts to prosecute corrupt officials.”
In November, for example, the Supreme Court of Brazil convicted Jose Dirceu, the chief of staff of former President Luiz Inácio Lula da Silva, over charges that he laundered and doled out millions of dollars in public and private money to secure votes for legislation in the National Congress from 2003 to 2005. He was sentenced to nearly 11 years in prison. Twenty-two other individuals, including politicians, aides, and bankers also were convicted on various charges.
In China, on the other hand, the cultural expectation of treating government officials with gifts, travel, and entertainment as a way of showing respect highlights the need for strong controls and policies around such practices. Bribery can come in the form of theater tickets, trips, loans, expensive meals, education, political or charitable donations, club memberships, and more.
Global beauty company Avon Products learned this lesson the hard way, when the company commenced an internal investigation in June 2008 after a whistleblower alerted executives that certain travel, entertainment, and other expenses may have been improperly incurred in connection with the company's China operations.
The Avon case is also a lesson in how expensive conducting a global FCPA investigation can be. Since 2009, Avon has spent a whopping $247 million on professional and related fees associated with the global FCPA investigation and compliance reviews. A breakdown of those costs shows the company spent $93.3 million in 2011, $95 million in 2010, and $59 million in 2009.
Another risk that is unique to doing business in countries like China and Mexico is the prevalent use of cash. “China, for example, is still a very cash-oriented society,” says Berger. “It's not unusual for businesses to want to be paid in cash.”
Doing business in this manner, however, greatly enhances the risk of bribery payments and, thus, the chance of an FCPA investigation. Just consider the case of Control Components, which pleaded guilty in July 2009 after paying millions in cash, vacations, and other gifts from 2003 to 2007 to officials and employees of foreign state-owned companies in China and various other places in order to win business.
U.S. companies will often enlist the help of third-party agents, consultants, or intermediaries who are familiar with the inner workings of these countries and can help cut through the red tape. The compliance challenge there is making sure that the third parties or consultants who live locally in that country and work on the company's behalf are “not accepting of local customs or practices that run afoul of the FCPA,” says Pelletier.
This means vetting appropriate third-party intermediaries, practicing continuous due diligence while engaging in business with them, maintaining accurate books and records, and conducting internal investigations into potential FCPA violations.
With global anti-corruption enforcement expected to rise and U.S. prosecutors cooperating with foreign law enforcement on FCPA cases more closely than ever before, the free-flow of investigative information between and among regulators and law enforcement agencies in these countries, Currie says, is also going “to feed the quantity and quality of the investigations that we see.”