Is it impossible to operate cleanly in some countries?

At the beginning of August, U.K. tobacco firm British American Tobacco (BAT) announced that it is under official investigation by the Serious Fraud Office (SFO) over allegations that it paid bribes in East Africa. The payments were allegedly aimed at influencing laws surrounding the use of tobacco in the region.

BAT says that it is cooperating with the SFO’s investigation, and is conducting its own investigation using external counsel.

For many, the SFO investigation into BAT wasn’t news: The allegations were first made in a BBC Panorama programme back in 2015. Paul Hopkins, who worked for BAT in Kenya for 13 years, told the news programme that he had begun paying bribes after being told it was the cost of doing business in Africa.

Whether the SFO decides to prosecute or not, BAT is not the only company to think that paying bribes is the only way to operate in high-risk regions such as Africa and Latin America or emerging markets like Russia.

Several compliance officers, internal auditors, and other risk professionals have conceded that their organisations have knowingly paid bribes and/or facilitation payments or that they have made payments that could be regarded as bribes. Many of them suggested that such payments were “one-offs” rather than routine and that they were often made under duress. One compliance officer once told me that his company authorised an illegal payment to prevent an “unwarranted” tax investigation. Another said that the company was forced to “supplement” local police salaries to ensure that the operation’s facilities were kept secure.

“If you can’t find a way of doing business overseas without paying bribes, then find a different line of business. There is no excuse for committing crime to conduct business.”

Alun Milford, General Counsel, Serious Fraud Office

But making corrupt payments equals corruption, and corruption can be prosecuted. Exactly why a company acted corruptly is besides the point to enforcement agencies. Just ask the SFO.

At the end of March, the U.K. arm of the Institute of Internal Auditors held a conference for heads of internal audit. One of the sessions was led by Alun Milford, the SFO’s general counsel. During his presentation, one attendee made the observation that “bribery is a way of life in some countries, so it is difficult to operate legally.” Milford was unimpressed: “If you can’t find a way of doing business overseas without paying bribes, then find a different line of business. There is no excuse for committing crime to conduct business.”

According to the 2017 anticorruption survey—a research paper released earlier this year by business turnaround consultants AlixPartners—around two-thirds of compliance officers and in-house counsel surveyed said that there are some locations where it is “impossible” to avoid corrupt business practices, such as Russia (as stated by 35 percent of these respondents), Africa (33 percent), and China (27 percent). The vast majority of respondents also found that anti-corruption laws in these countries are ineffective, which may lure some companies into the trap of thinking that they are safe from prosecution if local agencies are prepared to tolerate such activity.

CORRUPTION STATS

Below are some key statistics from AlixPartners’ 2017 anti-corruption survey.
No countries or regions are free from corruption, but in-house counsel and compliance officers say certain regions are especially vulnerable. About 76% of survey respondents say doing business in high-risk regions is one of their biggest challenges.

67% say there are locations where it is impossible to avoid corrupt business practices—namely, Russia (35%), Africa (33%), and China (27%).

81% say corruption laws in Africa are ineffective.

73% say corruption laws in Russia are ineffective.

32% have avoided doing business in Russia because of corruption risks.
Source: AlixPartners

Encouragingly, the 2017 anti-corruption survey found that most companies have implemented anti-corruption programmes to combat such risks, and that these policies are reviewed. It also found that companies are increasingly prepared to walk away from a deal if backhanders are involved: For example, some 42 percent of survey respondents said that their companies had stopped doing business with some partners because of corruption risk—up from 32 percent in 2016. One-third of respondents said that their companies had avoided doing business in Russia altogether because of corruption risks.

Not so long ago paying bribes (or allowing third parties to do so on one’s behalf) may have been seen as a calculated risk for some companies: Hand over the brown envelopes stuffed full of cash and watch the government contracts roll in at 100 times the price of the graft. But not anymore. Now, companies are likely to be fined more than they ever received in revenue from the dodgy deal.

Back in January, Rolls-Royce agreed to a £497m (U.S.$640m) deferred prosecution agreement with the SFO after admitting 12 counts of conspiracy to corrupt, false accounting, and failure to prevent bribery, all over three decades and across seven countries. Its profits from the corrupt activity amounted to about half the penalty the SFO agreed to—around £258m (U.S.$332.3m).

Even the company known as “XYZ,” a small-to-medium enterprise (SME) that agreed to a Deferred Prosecution Agreement with the SFO last year, saw all its estimated profits from contracts won with bribes swallowed up in massive fines and legal costs.

No one is naïve enough to think that corruption is on the wane in countries like Nigeria, Russia, or Venezuela. Nor does anyone seriously think that every company that pays bribes is going to get caught—a look at the SFO’s prosecution record is testament to that.

But the message is becoming louder and clearer: Illicit payments constitute illegal activity, and enforcement agencies will not tolerate them. Furthermore, these agencies have the power—and patience—to wade through documents and determine how much the company earned from paying bribes and then take it all back off them (and then some). From a financial standpoint alone, companies need to have a rethink.