Bribery and corruption risks plague companies across the globe, but the likelihood of facing a Foreign Corrupt Practices Act enforcement action is highest in Asia, where compliance officers often struggle to maintain compliance with global anti-corruption laws while maneuvering difficult local business environments.
Compliance Week conducted a review of FCPA enforcement actions brought by the Justice Department and Securities and Exchange Commission from 2012 through 2014, and found—probably to nobody’s surprise—that emerging markets featured heavily in the 45 settlements over that three-year period, which imposed a total of $2.53 billion in penalties. Enforcement actions brought against individuals were not counted in the analysis.
Foreign companies paid higher fines than U.S.-headquartered companies. Of the 30 total companies that faced FCPA enforcement actions, 21 are American, the other nine foreign. Fines imposed against those nine foreign companies totaled $1.56 billion, while total fines against U.S. companies were $969.2 million.
Sixteen of the 45 enforcement actions involved misconduct that occurred in Asian markets, followed by Europe with 14. The Middle East and Africa also proved to be sore spots for bribery and corruption, followed by Latin America. Many companies committed bribery in more than one region of the world.
“The number of international companies that are exposed to the extraterritorial jurisdiction of U.S. regulators is set to skyrocket as those companies access U.S. capital markets or structure investments in ways that attract U.S. jurisdiction,” says William Robinson, a partner in the Hong Kong office of law firm Freshfields Bruckhaus Deringer. “This means that U.S. enforcement activity abroad will also rise accordingly.”
The Far East is likely to remain the epicenter of FCPA enforcement activity at least for the foreseeable future. According to recent analysis conducted by Freshfields, at least 115 FCPA investigations are underway in Asia—significantly more than any other region of the world, with Africa (the second highest number of pending FCPA investigations) having at least 44 known FCPA investigations underway, while the European Union has 19 investigations pending.
Vigorous enforcement activity in Asia also comes at a time when U.S. companies are making greater investments in the region. In a poll conducted last year by the U.S. Chamber of Commerce, 74 percent of 588 senior executives representing U.S. companies working in the Pacific Rim region said their company’s level of trade and investment has increased over the past two years, and 89 percent of respondents said they expect it to increase over the next five years.
Greater enforcement of the FCPA, in combination with more U.S. companies expanding their global footprint into Asia, underlines the importance of aligning your anti-corruption compliance with the global enforcement environment. Particularly in China, anti-bribery enforcement continues to intensify—not just from the standpoint of FCPA enforcement officials, but local Chinese law enforcement, as well.
“Companies have been getting caught in that vice between local enforcement and FCPA enforcement and having to deal with both stakeholders at the same time.”
John Auerbach, Partner – Fraud Investigation, EY
“Companies have been getting caught in that vice between local enforcement and FCPA enforcement and having to deal with both stakeholders at the same time,” says John Auerbach, a partner with EY’s fraud investigation group. Those factors have made the anti-corruption enforcement environment “much more intense and much more complex,” particularly for the life sciences and pharmaceutical sectors, he says.
Consider the record $489 million fine that a Chinese court imposed last year on pharmaceutical giant GlaxoSmithKline. In that case, the Changsha Intermediate People’s Court in China’s Hunan Province found GSK China Investment (GSK China) guilty of bribing non-government personnel to obtain improper commercial gains. GSK China “resorted to bribery to boost sales of its medical products and sought benefits in an unfair manner,” the court statement read.
Indonesia was another common source of FCPA enforcement actions for U.S.-based and foreign companies alike. Companies that faced FCPA enforcement actions for corrupt activity in this country include U.S. companies Smith & Wesson and Diebold, as well France-based Alstom and Japan-based Marubeni.
Taken together, the FCPA enforcement actions resulting from corrupt activity in Asia offer valuable lessons for compliance officers of companies operating there. In China, for example, 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 all forms: theater tickets, trips, loans, expensive meals, education, political or charitable donations, club memberships, and more.
FCPA ENFORCEMENT ACTIONS
Following is a partial list of FCPA enforcement actions brought by the Justice Department and the SEC in 2014, resulting from bribery and corruption that occurred in Asia.
AlstomPenalty Amount: $772 million criminal penalty
Summary: Various Alstom executives paid bribes to government officials around the world to win power, grid, and transportation projects, and then falsified books and records to cover it up. Countries on the hit list include in Indonesia, Egypt, Saudi Arabia, the Bahamas, and Taiwan. In total, Alstom paid more than $75 million from at least 2000 to 2011 to secure $4 billion in projects, with a profit to the company of approximately $300 million.
Avon ProductsPenalty Amount: $135 million
Summary: Global beauty-products company, Avon Products, violated the FCPA by failing to put controls in place to detect and prevent payments and gifts to Chinese government officials from employees and consultants at a subsidiary. The SEC alleged that Avon’s subsidiary in China made $8 million worth of payments in cash, gifts, travel, and entertainment to gain access to Chinese officials overseeing direct selling regulations in China.
Bio-Rad LaboratoriesPenalty Amount: $55 million
Summary: Bio-Rad Laboratories, a clinical diagnostic and life science research company, violated the FCPA when its subsidiaries made improper payments to foreign officials in Russia, Vietnam, and Thailand in order to win business. According to the SEC, Bio-Rad lacked sufficient internal controls to prevent or detect approximately $7.5 million in bribes that were paid during a five-year period and improperly recorded in books and records as legitimate expenses like commissions, advertising, and training fees.
MarubeniPenalty Amount: $88 million
Summary: According to court filings, Marubeni, a Japanese trading company, and its employees participated in a seven-year scheme to pay—and conceal—bribes to high-ranking members of Parliament and Perusahaan Listrik Negara (PLN), the state-owned and state-controlled electricity company in Indonesia, in exchange for securing a $118 million contract, known as the Tarahan project, to provide power-related services in the country. Marubeni then retained two consultants for the purpose of paying bribes to Indonesian officials.
Global beauty company Avon Products learned this lesson the hard way, when it reached a $135 million settlement with the SEC and Justice Department in 2014 for failing to put controls in place to detect and prevent payments and gifts to Chinese government officials from employees and consultants at a subsidiary. The case speaks volumes about the value of keeping accurate books and records, as well as details about the purpose of payments made, which Avon failed to do.
The case also speaks to the importance of monitoring. Auerbach advises using technology tools, such as transaction monitoring or forensic data analytics, to detect fraud and corruption, “rather than waiting for problems to bubble up,” he says.
Another common compliance hurdle compliance officers of U.S. companies must overcome is getting employees in other parts of the world to understand the importance of complying with anti-corruption laws. Some local employees might see the FCPA strictly as a Western problem that doesn’t apply to them.
What’s most effective in those situations is to focus not so much on compliance with anti-corruption and anti-bribery laws, but rather the personal consequences of misconduct for individual employees under local laws and company policies. “However grave the consequences for a multinational company under the FCPA or U.K. Bribery Act, the immediate threat of disciplinary action, termination, or incarceration at home is a greater deterrent for individual employees,” says Nathan Bush, a partner with law firm O’Melveny & Myers in Singapore.
In another prominent enforcement action, last year French power and transportation giant Alstom entered into a $772 million criminal penalty—the largest ever obtained by the Justice Department in an FCPA case—for paying bribes to government officials around the world to win power, grid, and transportation projects, and then falsified books and records to cover it up. Countries on the hit list included Indonesia and Taiwan in Asia, among others regions.
That case echoes a warning compliance officers hear all the time, no matter where in the world they operate: Paper policies are not enough. “Although Alstom had policies in place prohibiting unlawful payments to foreign officials, including through consultants, Alstom knowingly failed to implement and maintain adequate controls to ensure compliance with those policies,” the plea agreement stated.
“A mere paper policy provides scant protection against violations and gains little traction with enforcement authorities,” Bush says. “Polices must be implemented through an ongoing program of training, monitoring, and reassessment to keep pace with evolving risks and compliance norms. Key policies should be translated and disseminated in the local language.”
Companies with robust anti-corruption and anti-bribery compliance programs in place today also tend to localize their resources as much as possible, including the oversight functions of audit, compliance, and legal departments. “Up until a few years ago, that was something that was done from afar,” Auerbach says.
Today, companies increasingly realize that to oversee bribery and corruption risks effectively, you must have people who know the region. A conflict can be resolved more effectively and efficiently by having a local team who understands local cultural norms and laws, whether in Asia or any other part of the world.