Chipping Away at Effective Anti-Corruption Programs

Attendees at the Compliance Week 2010 conference last week got a refresher course in the compliance challenges and litigation risks stemming from bribery and corruption—and given the fast-changing regulatory landscape around corruption, Corporate America needs the extra help.

“We’re in a world where you’re not just dealing with the Securities and Exchange Commission and the Justice Department,” Andrew Baker, a senior partner in the law firm Baker Botts, said during one panel discussion on corruption issues. “Other countries are looking into the same activities. If you thought about dealing with one agency as Tic Tac Toe, suddenly, this is chess.”

The SEC and Justice Department have stepped up enforcement of the Foreign Corrupt Practices Act dramatically in the last five years, to the point where worry about FCPA compliance is now standard fare for U.S. businesses. But now many other nations (most notably Britain) are also cracking down on bribery, so a corporation that uncovers a bribery issue will most likely come under scrutiny from multiple regulators simultaneously.

Barta

“In the last two years, there have been a series of developments that are game-changers,” said Michael Barta, another partner at Baker Botts. In that time, companies including Siemens, Halliburton, and BAE have all resolved bribery allegations with multiple regulators in multiple jurisdictions. Those regulators are all sharing information much more often, raising the risk that companies will end up paying more fines and penalties for essentially the same act of misconduct.

Pascale Dubois, the World Bank’s sanctions evaluation and suspension officer, echoed that sentiment during another panel discussion on collaborative approaches to anticorruption. She said World Bank investigators regularly speak with officials at the Justice Department, the U.K. Serious Fraud Office, and elsewhere. “On an international level, law enforcement agencies are working together more than ever,” she said. “It’s a small world and the enforcement people know each other.”

Compliance executives might find it difficult to cope with that multi-layered enforcement world. Different countries will have different investigative processes; strict privacy laws in one region (primarily Europe) may complicate the delivery of data to investigators in another. Different standards on attorney-client privilege and voluntary self-disclosure might also trip up a company’s efforts to cooperate with regulators.

“The investigative process in the United States is known, and there’s some regularity about how the settlement process works,” said Curtis Lu, deputy general counsel and chief ethics and compliance officer at Time Warner. “In other jurisdictions, the processes, standards, and policies can be dramatically different.”

Baker

Barta, Baker, and Lu all stressed that one important step is thorough due diligence in mergers and acquisitions to detect any FCPA worries, so your company can avoid buying its way into a corruption problem. The challenge, Baker said, is that “corrupt payments are hard to find … Rarely are they sitting in the general ledger.”

Of course, companies rarely have as much time as they’d like to complete due diligence during a merger. One useful tactic to determine FCPA risk, Baker said, is to study the target company’s compliance program right away. “See what processes the company has employed and try to determine whether it’s a real or paper program,” he said.

They also recommended that companies review guidance the Justice Department published in June 2008 at the request of Halliburton, which wanted to acquire a British company but faced legal restrictions in the bidding process that prevented Halliburton from fully vetting the company until after the deal had closed. The Justice Department agreed to suspend any enforcement action against Halliburton for six months, in return for a promise to follow stringent post-closing remediation efforts.

That landmark opinion “can be used in certain cases when you’re confronted with a situation that calls for something other than an off-the-rack solution,” Barta said. “It’s a third option between walk away or take the risk.”

Other Solutions

Speakers on the collaboration panel noted that even with strong anti-corruption compliance programs and the best of intentions, businesses still face real-world pressure to pay bribes when doing business or bidding for projects, and risk losing business to competitors that are willing to do so. Some companies are testing a new solution to the problem: working together to fight fraud.

“We see a lot of corruption, but at the same time we’re seeing a lot more anti-corruption activity, because companies are trying to do something about it, and also because of increased enforcement,” Dubois said.

Pascal Dubois of the World Bank talks about anti-corruption at Compliance Week 2010.

One example is Fluor Corp., a $21 billion construction services business. Fluor has teamed with Transparency International and the World Economic Forum to form the Partnering Against Corruption Initiative; it began in 2004 as an engineering and construction industry initiative, but now includes companies from all industries.

“The idea was, let’s get a bunch of companies to focus on these issues to see what we can do to try to help each other out, and to engage non-governmental organizations and other organizations not just to improve compliance, but to try to reduce demand for bribes,” Wendy Hallgren, Fluor’s vice president of corporate compliance, explained.

Another benefit of collaboration, Hallgren said, is that a company can learn how often its peers face bribery demands and how they’ve responded. Fluor also contributed to the “Resisting Extortion and Solicitation in International Transactions” handbook, published by the World Economic Forum and several other good-governance agencies to help businesses understand how they should respond to bribe demands.

“It’s difficult to be a first-mover,” Dubois said. “To prevent corruption and get business while being clean, the bottom line is, you never want to do it by yourself.” She encouraged companies to work with industry peers, governments, non-governmental agencies, and international organizations like the World Bank. “Talk to everybody,” she said. “The more you talk about it, the more you have a voice.”

NON-AUDIT FEE TRENDS

The following chart illustrates the two-tier debarment system at the World Bank:

Source: World Bank.

Dubois stressed that companies must still make sure their own house is in order by having a strong compliance program to avoid problems (including potential prosecution and debarment) in the first place. “Should you get into trouble, your compliance program and your cooperation will be your best defense,” she said.

Still, panelists said efforts by potential bribe payers alone aren’t enough; local governments and prospective bribe-takers must also be involved. “You’re never going to get to the root of the problem unless you stop people from expecting to be paid off,” Hallgren said. “You have to have local jurisdictional enforcement to get to that point.”

Dubois noted that publicity, or a “naming and shaming approach” is “a very powerful tool.”

“Even though bribery is supposedly common in some places, nobody likes to hear about it,” she said. To that end, she suggested that alliances with local grassroots organizations and any local beneficiaries may help keep a project honest.

James Carroll, director of corporate compliance at Ford Motor Co., said his company is teaming with its suppliers to fight corruption. “We’re hosting small forums, bringing people together—especially new suppliers in emerging markets,” he said. “The reality is we need our suppliers as much as they need us. It really has to be a collaborative effort.”

“Most people want to do the right thing, and they also realize that it’s good for business, because it can lead to investment in the area,” Carroll said.