Risk of corporate bribery must be reduced

Companies around the world need to set up more effective anti-corruption procedures

With almost daily reports of political and corporate corruption in the world media, you have to ask whether companies are taking sufficient steps to minimize the global risk of bribery.

A recent survey by the risk consultancy, Control Risks, suggests not. The survey, which involved senior legal and compliance officers from more than 300 global companies, reported that:

Only 35 percent of respondents said their companies have formal policy statements forbidding bribes.

Only 36 percent said their companies had a procedure for conducting risk assessments before entering a new country.

About 74 percent have no general anti-bribery training program and 91 percent have no specialized training for employees in high-risk areas.

Only 36 percent said they expected to have additional budget available next year for anti-corruption initiatives.

Should these results be seen as surprising? Few countries have laws that oblige companies to have anti-bribery procedures in place. In times when profit margins are tight, company boards may consider that spending significant sums on internal compliance measures is an unaffordable luxury.

For many multinationals, China is and will continue to be a key growth area. Yet from a corruption perspective, China is also one of the higher-risk jurisdictions for doing business, with its culture of gift giving and inducements, the necessarily high levels of interaction with public officials and state-owned entities, and the commonplace use of intermediaries to introduce and win business.

China may offer one of the biggest prizes in terms of scope for growth, but it also presents one of the biggest risks in terms of corruption and the potential ramifications for individuals and corporations caught up in Chinese corruption investigations.

Those ramifications, as we have seen from recent examples in the pharmaceutical sector, include enormous damage to global reputations, sales inside and outside China and share price, as well as the more direct impact on individuals and corporations in terms of fines, disgorgement of profits and potential imprisonment. The means of investigation are also quite different from what Westerners may be used to; the Chinese authorities have wide powers to restrict the movements of those under investigation and they use them regularly. In the most serious cases, individuals can find themselves the subject of lengthy interrogation.

And just because an issue may have occurred in China, and may be investigated and perhaps prosecuted in China, that won't necessarily be the end of the story. There is no international double-jeopardy principle: if a business (or individual) commits wrongful acts in one country and those acts fall under the jurisdiction of multiple prosecuting authorities in multiple jurisdictions (perhaps because of where the acts occurred, or where the company is registered or has listed securities), few countries offer protection against the risk of their authorities investigating and punishing those same acts (the United Kingdom is a notable exception). Even if the same offence is not prosecuted in multiple jurisdictions, a bribery offence in China may entail money laundering, false accounting or even tax-related offences elsewhere, which might be separately prosecuted and may entail wrongdoing by other entities in the corporate chain, depending on what happened to the money and who benefited from the bribery. At a time of increasing cooperation and information sharing between enforcement authorities around the world, this risk is heightened.

Conversely, there have been a number of recent high-profile US Foreign Corrupt Practices Act enforcement actions involving global pharmaceutical companies' activities in China, as well as the much-publicized UK investigation into Rolls-Royce's Chinese operations. There is nothing to stop the Chinese authorities from opening their own investigations into those same matters and taking appropriate action to enforce the law.

While some companies may take the view that the risk of the US or UK authorities investigating allegations relating to activities in China is remote, that view may be increasingly misguided. The risk that the US and UK authorities may learn of - and investigate - wrongdoing committed abroad by those under the jurisdiction of the US Foreign Corrupt Practices Act or UK Bribery Act, should not be ignored. In 2012, the US Securities and Exchange Commission received more than 300 whistleblower complaints concerning bribery. Many of those came from outside the US - 27 from China.

Moreover, authorities around the world are forging closer ties and cooperating to assist each other in their investigations of financial and other crimes. The UK Serious Fraud Office (which is the UK's lead enforcement agency for prosecuting overseas corruption) regularly reports on the close cooperation it has with overseas authorities to share information and obtain and give assistance in investigating fraud and corruption. It recently signed a memorandum of understanding with its Chinese counterparts to facilitate that cooperation.

Bearing in mind that China, like many non-common law jurisdictions, has no similar concept to the legal privilege protections available in the UK or US and that the wide powers of the Chinese authorities to search and seize evidence, the risk is not just that the US or UK authorities will discover wrongdoing overseas, but that the information that may be shared by the Chinese authorities with their foreign counterparts will include material that they would not normally be able to access.

Against this backdrop of increasingly onerous laws, harsh penalties, significant risk of discovery and damage to reputation, it would be an unwise corporation which chose not to seek to minimize its bribery risks, both to avoid the risks materializing and to maximize the protection available by implementing robust and proportionate anti-bribery policies and procedures.

While there is no magic formula for creating such protection, corporations may wish to take on board the "six principles" recommended by the UK Ministry of Justice and the "10 hallmarks" of effective compliance recommended by the US Department of Justice and the Securities and Exchange Commission. Together, they recommend implementing proportionate procedures following analysis of the bribery risks faced by the business, both internally and externally, supported by a senior management who lead by example and deliver the right "tone from the top".

The policies and procedures need to be the responsibility of someone senior within the business, with appropriate resources to deliver, implement, enforce and monitor the effectiveness of those procedures. Employees must be informed about these procedures and appropriate training provided.

There is no "one size fits all" approach to implementing such procedures and each business will have different concerns and activities that may expose it to an increased level of risk. However, understanding local issues, risks and cultural variations, as well as local best practices will be a key component in developing an effective program; this implies the need for local acceptance and involvement in the compliance process. Local support and trust are a must if the procedures are to be effective.

Finally, there should be monitoring and review of the processes to ensure they are fit for purpose and any gaps, failings or loopholes are identified and eradicated. It is all very well having an extensive and comprehensive set of policies and procedures in place but unless they are followed by those in the business, they will afford the corporation little protection. In fact, they can be detrimental and can open the business up to criticism when procedures are routinely not followed and this is either accepted or not appropriately addressed.

None of these recommendations are overly complex, but they require an investment of time, resources and cost. That effort could be rewarded many times over in the longer term by enabling the company to avoid wrongdoing by those acting on its behalf or, where that wrongdoing occurs, by mitigating the impact on the company itself.

The Morgan Stanley example from 2012 is a case in point. The former managing director of one of its businesses in China was convicted of the Foreign Corrupt Practices Act offences in the US. However, the US Department of Justice and the Securities and Exchange Commission took no action against the company itself; that was entirely down to the quality of the company's compliance program and the way the company cooperated with the authorities regarding the issue.

Multinationals operating in difficult sectors and regions would be well advised to learn from this case. It is not only the corporation itself that will be under the spotlight. Senior management are ultimately responsible to shareholders and there are those who may view a failure to adopt appropriate protections as a failure of management.

Omar Qureshi is a partner and head of anti-corruption at CMS, a law firm based in London. Amy Smart is an associate in the commercial dispute resolution team at CMS. The views do not necessarily reflect those of China Daily.

(China Daily Africa Weekly 02/28/2014 page12)