Gönenç Gürkaynak*, Ç. Olgu Kama** and Burcu Ergün***
A company engaging in corrupt behavior risks significant legal repercussions due in part to the regulatory and enforcement changes that occurred in the last few years. Rigorous enforcement of the extraterritorial US Law Foreign Corrupt Practices Act, along with the entry into the force of OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions ("OECD Convention") and the enactment of the UK Bribery Act, have recently formed an international framework compelling companies to at least reflect on the high cost of corruption. Now companies might face corruption sanctions if a bribe is paid to foreign public officials. With a global anti-corruption infrastructure gradually forming around the globe, the last decade has witnessed a steep rise in fines imposed on corrupt behavior, the spill-over effect experienced by multi-national enterprises ("MNEs") in parallel have led to the increased media attention on corruption. MNEs may not only face sky-rocket high civil and criminal fines but also imprisonment of their (top) executives, injunctions and confiscations in several jurisdictions, debarment from tenders, a dramatic loss of reputation deteriorating the image of the company before its employees, consumers, suppliers, clients, shareholders and the public in general.
In the face of such high risks, MNEs should be vigilant to deter, detect and prevent corruption. The OECD Foreign Bribery Report ("Report"), published in 2014, provides useful guidance and important data to MNEs demonstrating where and how they can be vulnerable to corruption. This document can further serve as a guide for those companies wishing to eliminate corruption from their activities.
Larger Companies are under the Radar for Foreign Bribery
According to the Report, 60% of the companies involved in foreign bribery were larger companies. Even though such a finding does not necessarily state that MNEs are the only ones who engage in bribery abroad (taking into account that small and medium sized enterprises could also be engaging in corruption but in smaller amounts thus not garnering the attention of enforcing authorities), it still means that MNEs are under the radar of the enforcing authorities in terms of foreign bribery.
The Report also finds that the country which instituted the highest number of enforcement actions against foreign bribery since the OECD Convention came into force is the USA with 128 enforcement actions; Germany and Korea have 16 and 11 enforcement actions respectively; Italy, Switzerland and the UK have 6 enforcement actions each. This suggests that companies established in – or with commercial connections to – these jurisdictions have the highest likelihood of being investigated.
The Context Matters
The Report also finds that the vast majority of foreign bribery took place in four sectors. 19% of the cases were in extractive industry, 15% were in construction, 15% were in transportation and storage, and 10% were in information and communication . One common characteristic of these four sectors could be that all are heavily dependent on permits received from public officials and thus potentially prone to red tape. By the same logic, the Report demonstrates that 57% of foreign bribery took place during public procurement and 12% with customs procedures. Foreign bribes were mostly paid to public officials. 27% were paid to employees at public enterprises, 11% were paid to customs officials, 7% were paid to health officials and finally, defense officials received 6%.
In light of the above data, companies active in sectors or transactions mentioned above should be vigilant, e.g. increasing the level of scrutiny, to prevent corruption.
Tone from the Top?
According to the Report, 41% of the foreign bribery cases contained the direct involvement/authorization of management level employees for the bribery. 12% of foreign bribery cases also contained the direct involvement of the CEO of companies. Given the fact that in all of the foreign bribery cases almost 1 in 2 top level executives were involved at some level in the corrupt dealings, this data could justify the emphasis put on the behavior of the top level management as a key component of an effective compliance program. Accordingly, when it comes to compliance, the tone should be set from the top since the top managers are the leaders of the company and employees follow the leaders. An effective compliance program should apply from cloak room to board room. Such high levels of participation among upper management also demonstrate that the compliance policies are not internalized by the top level executives themselves, and the company should show best efforts to train its top level managers. In addition, the company could enforce incentives to encourage compliant behavior.
Importance of Third Party Due Diligence
One of the most significant findings of the Report is that 75% of the cases involved payments through intermediaries. The bribery took place through local sales agents, distributors, subsidiary companies, local consulting firms, shell companies established to benefit public officials etc. This data, coupled with the existence of the willful blindness doctrine, demonstrates the significance of third party due diligence.
Although a company may prefer to use third parties in order to enter a foreign market more quickly, such third parties should not be chosen too swiftly and without proper scrutiny. Thorough due diligence should be exercised continuously when retaining them because if they are not chosen carefully, then the company puts itself at great risks of facing corruption charges. A thorough due diligence can be realized during the pre-agreement phase, agreement negotiations phase and during the discharge of the contractual obligations. During the pre-agreement phase, the past actions and the reputation of the third party should be vetted as well as determining whether the company or individual has the expertise to discharge the required obligations. During agreement negotiations, the services of the third party and their payment terms should be clearly stipulated in the agreement. The principal company should continuously monitor the third party when the contract is being exercised. Certain red flags include reputation of previous unethical behavior; representatives or consultants recommended by governmental official or close relatives of an official; request of payment in cash and request for reimbursement for poorly documented or questionable expenses. If any of these factors apply, even greater scrutiny is necessary.
Self-Reporting and Settlements
The Report demonstrates that the authorities became aware of the alleged conduct through self-reporting in a third of all cases. 13% of the cases were uncovered through investigations and only 2% of the cases were initiated through whistleblowing. Given most of the foreign bribery cases were prosecuted in the US, the tendency to self-report could be result of the US's willingness to provide fine reductions for those companies who self-report. Such fine reductions in turn, emphasize the importance of the existence of a compliance program, as the Report suggests that 31% of the irregularities were realized during internal audits, and 28% of them were uncovered during merger and acquisition due diligences.
According to the Report, 69% of the foreign bribery cases ended with settlements. This again, is reflective of the US pattern where the enforcing authorities enter into deferred prosecution or non-prosecution agreements if there are mitigating factors such as self-reporting and cooperation during an investigation.
The Report, taking into account 427 enforcement actions that took place since the entry into force of the OECD Convention until February 2014, excels in demonstrating where MNEs fail to prevent corruption. Accordingly, incentivizing top managers not to engage in bribery, setting the tone at the top, training the managers, exercising thorough third party due diligence and being extra diligent in sectors such as transportation and communication especially when bidding for tenders and realizing customs transactions, are some of the actions MNEs can take to ensure their compliance with applicable anti-corruption laws.
 The US legal concept of willful blindness refers to a situation where a person willfully separates itself from the actual knowledge of bribery and circumstances that the person should have been aware of the corrupt act were present.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.