As companies look to expand their global footprint in emerging markets, they are met with an ever-present threat of corruption—a compliance risk that should be top of mind for compliance officers as more countries’ anti-corruption efforts and corruption scandals of historic proportions take the national stage.
In a recent webcast, a panel of anti-corruption experts with law firm Gibson Dunn shared some key insights into the latest anti-corruption developments in some of the world’s largest—but most corrupt—regions and offered some practical tips on how to do business in these countries without running afoul of anti-corruption laws. The regions, which are discussed in more detail below, include Asia, Russia, Latin America, and Africa.
In China, ongoing trade wars and political reform are causing a tremendous amount of market uncertainty, increasing commercial bribery risk on the ground there. Moreover, China’s economic growth rate is projected to slow to 6.3 percent in 2019. Such market pressures often drive misguided efforts on the part of local management and sales teams to meet sales targets through improper activities, said Kelly Austin, partner-in-charge of Gibson Dunn’s Hong Kong office.
Moreover, it’s projected that China’s anti-corruption efforts will continue, if not escalate, under the country’s powerful new National Supervisory Commission (NSC). Established in March 2018, the NSC effectively consolidates and expands the enforcement arm of China’s anti-corruption agencies. Whereas the Central Commission for Discipline Inspection (CCDI) covers party members only, the NSC covers “all public servants, regardless of branch of government or Party membership,” including executives of state-owned enterprises.
“Even though this National Supervisory Commission focuses on government officials, we are seeing clients who are allegedly involved in the supply side of bribery—the bribe payers—continuing to be caught up in these investigations,” Austin said. Thus, companies addressing anti-corruption enforcement matters in China need to have experienced counsel—both People’s Republic of China (PRC) local counsel and international counsel—who really understand how these various anti-corruption enforcement bodies interact with one another, she said.
Compliance and legal professionals should also look to recent enforcement actions in China, as they point to a broad range of business activities that could result in a U.S. Foreign Corrupt Practices Act enforcement action. Examples include:
“The use of intermediaries remains a corporate weakness and, therefore, a focus of enforcers.”
Sacha Harber-Kelly, Partner, Gibson Dunn
- Credit Suisse and the FCPA risks associated with hiring practices of Chinese authorities;
- Panasonic and Stryker and FCPA risks associated with third parties;
- United Technologies and the FCPA risks associated with gifts and sponsored travel in the China market; and
- Polycom and FCPA risks associated with off-book funds—like rebates and discounts—and how they are used to make bribe payments.
Also, relevant to China’s anti-corruption campaign, the State Administration for Market Regulation and the NSC have launched campaigns targeting specific sectors as part of their anti-bribery and anti-corruption efforts—particularly the pharmaceutical, medical devices, and educational sectors. Companies operating in these sectors may find themselves the subjects of inquiries and should prepare for heightened enforcement activity, Austin said.
In Russia, the most significant development on the anti-corruption front concerns the expanded scope of corporate liability for bribery offenses. Whereas Article 19.28 of the Code of Administrative Violations originally called for the prosecution of a company or a third party for the giving of a bribe “in the interests of” the company, the revised law, signed into law Dec. 27, 2018, now also covers bribes given in the interests of any “affiliated” entity. This means a company—including any foreign company subject to Article 19.28—could be held liable for any bribe made in the interest of any subsidiary, group company, distributor, or any other entity affiliated with the company.
The law applies to bribes given not just to the primary bribe taker, but also to anyone who is designated by the primary bribe taker to receive the bribe, regardless of whether it knew, or had reason to know, of such payment. Enforcement activity under Article 19.28 is already bearing fruit: Based on statistics published in a newly created public register of companies that have faced administrative sanctions under this statute, 429 companies faced prosecutions for Article 19.28 violations in 2017, and another 280 companies faced prosecutions in 2018, to date.
These recent anti-corruption developments make it even more important that companies operating in Russia implement robust anti-corruption compliance programs and conduct thorough third-party due diligence. “Conducting vigorous third-party due diligence is key to avoiding FCPA risk,” said Benno Schwarz, a partner in the Munich, Germany, office at Gibson Dunn.
One big development in India is the long-awaited amendments to the Prevention of Corruption Act (PCA), which came into effect in July 2018. The law makes it an offense to pay a bribe, “whereas previously that was unclear,” Austin said. The law prohibits any person from accepting any “undue advantage” from anyone that would cause a public servant to perform public duties in an improper, dishonest manner.
Third-party risk areas around the world
Corruption matters involving third parties have been at the core of recent enforcement actions conducted by enforcement authorities around the world. Below, Gibson Dunn has put together a list of high-risk third parties that companies might encounter in each region of the world and, thus, where they should focus their due diligence efforts.
- China: Consultants, design institutes, PR/marketing firms, event organizers, travel agents, or distributors.
- India: Sales agents, distributors, tendering/procurement agents, government liaison agents, logistics providers, joint venture partners, or fictitious vendors.
- Korea: Distributors, customs clearance agents, travel agents, or event planners.
- Russia: Distributors, state-owned customers, fictitious service providers, vendors, or private customers.
- Latin America: Sales and marketing agents, customs brokers, lobbyists, or tendering agents.
- Africa: Joint venture partners and consultants.
Source: Gibson Dunn
Additionally, legal entities can be held criminally liable for the actions of their employees, agents, and service providers. A foreign parent company also can be held liable for the actions of its Indian subsidiary. The amended PCA specifically clarifies that facilitation payments are also prohibited. Importantly, under the law, managerial personnel can be held liable if they are found to have consented to, or schemed with, the person who committed the offense under the PCA.
Companies can avoid liability if they have in place a compliance program that includes adequate procedures designed to prevent bribes. Guidelines are currently in development as to what constitutes adequate procedures, but, for now, the adequate procedures provisions under Section 7 of the U.K. Bribery Act, and the standards expected by the U.S. government for FCPA internal controls, “should be guiding the adequate procedures you are putting in place in India,” Austin said.
In Latin America, while it’s important to understand the nuances of each region’s anti-corruption laws, there is a broader developing trend in several major Latin American jurisdictions of late in moving toward a U.S.- or U.K.-style compliance regime, said Joel Cohen, co-chair of Gibson Dunn’s White-Collar Defense and Investigations Group.
In Argentina, for example, Law 27.401, which came into force in March 2018, imposes strict liability for companies that commit bribery and participate in the illicit enrichment of public officials, among other crimes. The law complements existing anti-bribery laws in the country that apply only to individuals. Companies in Argentina may avoid prosecution, however, if they self-report the misconduct and disgorge ill-gotten gains. Companies may also be exempt from penalties if they implement an “integrity program,” the minimum requirements of which are defined in the law.
Peru is also making strides in its battle against corruption. Effective since Jan. 1, 2018, Peru amended and significantly expanded Law 30424, which introduced a new corporate criminal liability regime for foreign bribery in 2016. Under the amended law, companies may be held liable for domestic and overseas bribery of public officials, as well as for money laundering and terrorism financing. In addition to direct liability, a company may be held accountable for actions conducted in its name, for its benefit, or on its behalf.
To be exempt from liability, a company must demonstrate the existence of an adequate compliance program or show that the misconduct was not committed under the orders or authorization of company partners, directors, or administrators. Other options for potential leniency include cooperating with the prosecuting authorities and taking remedial measures.
In Africa, most enforcement actions continue to be brought by U.S. and U.K. enforcement authorities, with a focus on the extractive industry and the financial services sector. Among companies that have faced enforcement actions in the extractives industry for corrupt business dealings in Africa include Kinross Gold, Glencore, and Griffiths Energy. Ongoing investigations include ENRC and Rio Tinto.
And in the financial services sector, companies that have faced enforcement actions for corrupt business dealings in Africa include Société Générale, Legg Mason, and Credit Suisse. “What we see here is various types of enforcement occurring in Africa,” said Sacha Harber-Kelly, a partner at Gibson Dunn in the London office. While many actions are domestically led, often focusing on domestic corruption, there is an emerging trend of enforcement actions against employees of foreign concern, not just against civil servants and former ministers, he said.
Across all continents and countries, “the use of intermediaries remains a corporate weakness and, therefore, a focus of enforcers,” Harber-Kelly said. “While the risks vary, significant care needs to be taken in business dealings, particularly in high-risk business sectors.” Pre-engagement screening and ongoing monitoring throughout the lifetime of any engagement can help reduce the sort of third-party risk agents and intermediaries pose.