Bribery

 

With law enforcement agencies turning up the international pressure on bribery, what can procurement do to keep corrupt practices out?

 

 

Summer 2010

 

By Richard Brass

 

A few years ago, a procurement executive at a large UK plc appointed a purchasing director to the company’s south-east Asian office. A week later, the appointee called the executive and said he had just visited some suppliers and they had asked if he wanted the same terms as his predecessor. The executive said he was happy with those terms, but the purchasing director had to correct him. “No,” he said. “They mean am I still happy with a 5 per cent cut of any orders.”

That kind of scenario will be familiar to many procurement executives. Whether the offer takes the form of hard cash, portable gifts, international flights, accommodation, nights on the town or more disreputable services, there can be few buyers, particularly those working in the developing economies, who have not had inducements of various kinds dangled in front of them to encourage their spending in a particular direction.

It’s a practice that goes by a variety of names. To some  people, it’s normal business behaviour and to others it’s relationship-building, but to most, and to a growing army of law-enforcement bodies, it’s bribery.

The danger of executives getting caught up in this often-grey area of business has been rising in the past few years as prosecutors have put more resources into pursuing corporate bribery, and the risk is likely to rise even further following the passage in April of the UK Bribery Act. The new legislation ensures that culpability for any bribery connected with a company, whether giving or taking, will be laid at the door of the company’s leadership, rather than limited to the specific local officers directly implicated, and is regarded by observers as likely to usher in a new era in the policing of bribery.

Crucial provision

“The crucial provision of the act, from the perspective of companies, is that it makes it an offence if a company fails to prevent somebody acting on its behalf – anybody associated with the company – from giving or receiving a bribe,” says Chandrashekhar Krishnan, executive director of the UK arm of Transparency International, an international anti-corruption non-governmental organisation.
“That definition of being associated with a company is fairly broad and it covers intermediaries and agents and business partners. If you are, for instance, doing business in country X, where corruption levels are very high, and you’re employing an agent there, you may have adopted a strong anti-bribery policy, but you may have failed to let your agent know that he or she is also expected to adhere to the same policy.

“Let’s say that agent thinks that it’s okay to pay a bribe on your behalf in order to enable you to get a major contract. You would be liable for that under the new law. That applies to both the giving and the receiving of bribes.”

Furthermore, you don’t need to have acted on the inducement to be liable for prosecution. “Under this act, you still may not have done something improper, but the very fact that you accepted the bribe or hospitality could make you liable to prosecution,” Krishnan says.

“So great care will be needed in future when it comes to things such as gifts and hospitality to ensure that companies are staying on the right side of the law. I get the impression that there are quite a few companies that are not aware of this. Smaller companies especially may not have fully grasped the implications of this new act.”

Get it wrong and the penalties are serious: you face fines and up to 10 years in prison.
But it’s not only the UK that is applying increased pressure in this area. The new Bribery Act brings UK law belatedly into line with the Organisation for Economic Co-operation and Development’s (OECD) Anti-Bribery Convention, and which called on its signatories to make bribery a clear offence. While the UK had been accused of dragging its feet by not updating its bribery laws earlier, the US amended its own Foreign Corrupt Practices Act to take account of the OECD convention in 1998, and in the past couple of years the US Department of Justice has been devoting increased resources to prosecuting bribery around the world.

“The Department of Justice has expanded its staff of lawyers to do that kind of work,” says Brent McDaniel, director of KPMG Forensic and head of KPMG’s UK anti-bribery and corruption team. There is also now an FBI squad devoted to anti-bribery work.

“So enforcement is definitely on the rise, and you’ve certainly seen more international cases, not just US ones. Now you’re seeing other regulators – the UK, the Germans, the Swiss and others – taking a keen interest in it.”

The list of companies caught out by this growing international activity against bribery is getting longer. Last September, bridge-building firm Mabey & Johnson became the first large British company to be convicted of foreign bribery after admitting that it had paid bribes to ministers and officials in Africa, the Caribbean and the Middle East to secure orders.

Co-ordinated action led by US investigators uncovered an extensive network of bribery at Siemens. In February, BAE agreed to pay nearly £300 million in fines in the US and the UK over corruption offences committed over many years, and campaigners are taking action through the UK High Court seeking a more thorough investigation of the charges against the company.

In March, three directors of the French engineering conglomerate Alstom were arrested in an operation by the UK’s Serious Fraud Office, involving dramatic dawn raids on the company’s offices around the country, over alleged bribery payments uncovered in an investigation carried out jointly with Swiss authorities. Also that month, Innospec, an international chemicals company based in northern England, admitted paying bribes to Indonesian officials to prevent them outlawing a chemical that had been banned from general sale in Britain.
Then in April, Robert Dougall, a former marketing director at DePuy International, a UK subsidiary of Johnson & Johnson, pleaded guilty in a London court to paying £4.5 million in bribes to Greek doctors as a way of convincing them to order his company’s orthopedic products. Even though Dougall didn’t benefit personally from the bribery, he was sentenced to a year in jail.
One recent case that brought the risks of bribery starkly into the minds of executives has been that of Stern Hu. In March, the Australian Rio Tinto employee was sentenced to 10 years in jail by a Chinese court for receiving bribes and stealing commercial secrets. His conviction and sentence were heavily criticised internationally on the grounds that his trial took place in a closed court and Australian consular officials were barred from hearing some evidence, but the case nonetheless highlighted the risks that face executives, risks that are only likely to rise.

A procurement problem

Although these cases involved the sales side of their companies, procurement is just as likely to fall within the scope of investigations as senior buyers are being offered inducements to choose particular suppliers. It’s a risk already familiar to many buyers. “At one company I worked at, it was normal practice at Christmas for the procurement manager to write to all the suppliers and ask them for presents,” says one purchasing professional. “Those presents were then handed out to the staff. There were holidays, expensive watches, you name it.

“I knocked that on the head, but then the CEO wrote to me saying he didn’t see anything wrong with it. It was just standard practice.”

Another says: “I’ve been offered inducements many times. It usually starts with dinners and that sort of stuff, but then it becomes quite crude. They’ll just say ‘What do you want? What percentage do you want to give us this business?’”

An executive with long experience of working in south-east Asia adds: “It’s just a different way of doing things from the way we were trained. It’s part of the standard way of doing things in many parts of the world, and it works on all kinds of subtle levels. If they take you to karaoke and you sing a song better than they do, are you going to get a better price? Yes you are. If you drink them under the table, are you going to get a better deal? Yes you are. Is that bribery? But it can quickly cross the line into prostitution and gifts and all that stuff.”

“Sometimes it works by arranging things differently,” says a fourth procurement professional. “Once I was trying to buy a particular product in China and I was struggling. I’d done all the things you do in Asia – try to build the relationship, go out for meals with them, try to explain who we were, act very humble and try to get other people to influence them as well - but the pricing just wouldn’t make it attractive.

“Then I was asked to visit a particular factory, and when I did one of the people there was one of the sales directors I’d been trying to buy from, and another gentleman, who didn’t speak English. It turned out he owned a Hong Kong trading office, and I soon found out that if I was willing to place my orders via that office, I could get the price I wanted. The deal was clearly that this man, who I hadn’t spoken to and who didn’t even have a business card, would grease the wheels at the supplier and I would get my price. The whole thing was bizarre.”

With a growing number of prosecutions making the headlines and countless tales of bribery or attempted bribery reported from the front line of procurement, is it fair to conclude that bribery is on the rise?

It certainly appears to be in rude health in a number of areas. China and south-east Asia, Africa and the Middle East are the regions most commonly mentioned by buyers and experts as places where bribery is considered a natural part of business. The World Bank Institute has estimated that more than $1 trillion is paid in bribes every year, with at least $400 billion of that occurring in government procurement.

A report published last year by KPMG found that two-thirds of company executives believed there were countries where it is impossible to do business without being involved in bribery and corruption, but only a third said they had stopped doing business in any countries due to that risk.
An earlier survey of more than 1,000 business leaders in 33 countries, carried out by Ernst & Young, found that almost a quarter said their organisations had been approached to pay a bribe in order to retain or win business in the previous two years.

More exposed

“Pick any country in Africa, for the sake of argument,” says KPMG’s McDaniel. “Do I think it’s more corrupt than it was a few years ago? I don’t necessarily think so. I think the schemes are different, and UK companies are more exposed to them, because in the developed world the markets are saturated and the opportunities to expand revenue and business operations are limited. So people have looked to emerging markets, and those markets are less transparent and there are higher risks of bribery and corruption in them.

“I think the better question is: is it worse across the globe? I don’t know that it is, but people are at greater risk of exposure to it because they’ve expanded into higher-risk markets.”

But that fact, combined with the increased willingness of law-enforcement agencies to pursue bribery cases, is enough to indicate that companies should be doing what they can to limit their risk of ending up on the wrong side of the law. Under the new UK act, the only defence to a charge against a company’s officers is that the company has put in place “adequate procedures” designed to stop incidences of corruption. However, the act does not define “adequate procedures”, which are likely to vary between different-sized organisations. Procurement executives will not see any government guidance on what the term means until later this year, at the earliest. Even then, it is not expected to be prescriptive, but to focus instead on the culture of an organisation, in particular a board-down approach of zero tolerance of bribery and corruption.

But the real aim of the new act and equivalent laws in other countries is, says McDaniel, not to catch people out but to change behaviour by encouraging companies to tighten up their procedures and, if need be, self-report.

 “The Bribery Act is aimed at making examples,” he says. “The US and the UK have both made it an enforcement priority to prosecute individuals as a deterrent, and so the further they can go into the boardroom, the better for them. So if the board and executives aren’t thinking about it, then they’re putting themselves at risk.

“Most people are starting by doing some sort of risk assessment to see where their risks lie, because in many cases you’ve expanded and your operations have expanded, and people haven’t really thought about what that meant for risk, so it’s really building that information into your company’s risk profile.

“Some of that is procurement. Procurement is a place that could be high-risk and people are looking at it. So it’s very much about assessing the risk there, doing a bit of gap analysis work against what better practice looks like and what they think the environment should be, and then remediating that, increasing awareness, perhaps adding procedures or implementing them better. Some companies are even changing the structure of procurement, bringing that back into the head office function.”

McDaniel identifies some of the important questions to ask about the procurement function, including: is it centralised or decentralised; where does the power sit; what are the reporting lines; what procedures do you have; and how are they followed.

He emphasises the need to understand who you do business with better before you get into those situations, “doing better due diligence on people who are working with you or for you. People often get into business relationships without really understanding who the person sitting across from them is.”

Norman McLennan was until recently supply chain manager with Oil & Gas UK, the industry association in an area that is regarded as among the highest-risk for bribery and corruption. He argues that his industry overall has solid processes in place for preventing bribery.
“I think typically what the big operators do, and some of the smaller ones as well, is have pretty sound, robust governance procedures in place about contracts and procurement, and they’ll have compliance teams that will review company activity to make sure that there’s good alignment,” McLennan says.

“The challenge is around raising awareness of those procedures across your organisation, especially if you’re a big international player. You need to have people going around educating and compliance teams to check that things are being progressed.”

Report any offer

Part of the solution, advocated by all of the procurement professionals that CPO Agenda spoke to, is to report any offer, however small, to the company immediately, allowing the company’s policies and procedures to swing into action. Assuming those procedures are up to scratch, the buyer directly involved should then be clear of any culpability.

The Serious Fraud Office publishes a list of clues that may indicate that bribery is affecting your organisation. They include abnormal cash payments, pressure for payments to be made urgently or ahead of schedule, payments being made through a third-party country and abnormally high commission percentages being paid.

Suspicious individual behaviour can include staff insisting on always dealing with specific suppliers themselves, unusually smooth processing of cases where the individual doesn’t have the expected level of expertise, and unexplained preference for certain contractors during the tendering period.
“Our advice is that if you are operating in one of these high corruption risk environments, you need to make a thorough assessment of how that risk affects your business,” says Krishnan. “That may also be relevant to the sector you’re operating in, because some sectors are more vulnerable to corruption. For instance, if you’re working in defence or construction or telecoms, you probably need to do enhanced due diligence.

“Then there’s the question of how you operate. If you tend to rely more heavily than others on intermediaries or agents, that’s an area that you need to be paying more attention to. It’s a question of continuous risk assessment, ensuring that your systems meet those risks, ensuring that in your company the anti-bribery policy has the support of the CEO and the board.”
Which all sounds well and good, but high-level commitments and policy implementation can feel very distant to a front-line professional a long way from head office in a place where the culture and prevailing norms are different.


“In many places, particularly in China, corruption is viewed as an acceptable part of the culture,” says one buyer. “It’s how people get ahead. Sometimes it’s hard to distinguish whether or not they’re trying to bribe you. If it involves actual sums of money then it’s pretty clear, but sometimes it might just be common courtesy, where people offer to pay for your trip, your hotels, or to buy your family presents because you’ve got young children.

“And by refusing something that they’re offering, you could be doing yourself a greater disadvantage than accepting, especially if you’re dealing with single sources of supply or restricted supply or if it’s a state-owned entity. It might mean you’re not going to get a response from any other state-owned entity.

“You still want to operate there. The greatest challenge for us in the procurement profession in those places is how to say no without offending the people we’re doing business with.”
As the law enforcement pressure rises, that’s a challenge plenty of companies had better learn to address. 

* Richard Brass is a freelance journalist