Beneath the surface The business response to bribery and corruption Contents

Introduction 01

Key Contacts 02

Foreword 03

Executive summary 04

Chapter 1: 10 It’s time for a more sophisticated conversation

Chapter 2: 18 Tone from the top

Chapter 3: 24 Self-reporting must be considered

Chapter 4: 32 Growing your business means addressing the issues

Conclusion 40 Beneath the surface The business response to bribery and corruption Introduction

Over the past decade, corporate The Eversheds Sutherland strategic –– Sanctions and export controls. leaders have responded to changing combination earlier this year now –– Investigating, quantifying, and social and regulatory expectations. offers our clients access to a team recovering losses arising from There is now widespread recognition of professionals around the globe criminal conduct of employees, that bribery and corruption are bad for who focus on anti-bribery and suppliers, and business partners, profits and reputation; there is increased anti-corruption matters, corporate including by way of private awareness of coordination between investigations, and white collar prosecutions, criminal complaints, law enforcement agencies in different criminal defense. Our multinational civil search orders, freezing orders, countries; and the maxim that bribery team is particularly well known for its and civil fraud litigation. is “just the cost of doing business” handling of complex multi-jurisdictional Tax and duty evasion and misconduct is seen by many as an embarrassing investigations, often across high-risk –– under the Foreign Account Tax anachronism. jurisdictions, and its ability to advise on Compliance Act. the intersection of criminal, civil, and Despite that progress, business leaders regulatory laws. The global capabilities Arbitration and civil litigation involving have never faced greater challenges –– of Eversheds Sutherland include: allegations of bribery or fraud. around bribery and corruption Designing business-friendly systems enforcement than they do today. Investigations and prosecutions by –– –– and controls (including policies and Responding to public outrage over government, law enforcement, and training) to ensure compliance with corruption, legislative bodies worldwide regulatory agencies such as the US criminal law, civil law, and regulatory continue to pass new anti-bribery laws, Department of Justice, the Serious obligations. and prosecutors have increasingly Fraud Office, the Independent sought to bring bribery charges. Commission Against Corruption, and We hope you find Beneath the Surface Governments around the world have other specialized financial crime units. interesting reading and we would sought multilateral solutions to the –– Compliance and criminal defense encourage you to contact us with truly global problem of bribery, and relating to the Foreign Corrupt any comments or questions it might companies whose business crosses Practices Act (US), the Bribery Act provoke. In 2018, Eversheds Sutherland borders must now be focused on 2010 (UK), Sapin II (France) and other will be releasing a follow-up report a multi-jurisdictional approach to anti-corruption laws worldwide. focusing specifically on doing business compliance and addressing bribery in emerging markets and the risks that Internal investigations into alleged and corruption. –– accompany those opportunities. We fraud, bribery, embezzlement, and look forward to sharing this report In 2016, our colleagues compiled unlawful contact. with you. Below we have provided the this report, Beneath the Surface, Compliance and investigations contact information for some of our key which sought the input of 500 senior –– relating to money laundering, team members, whom you should feel executives across 12 jurisdictions. A terrorist financing, and the free to contact regarding any of these key objective was to understand how proceeds of crime. areas. business is responding to those bribery Pre-transaction due diligence on challenges. We are republishing this –– bribery, fraud, and financial crime report for our clients and friends in issues in the context of M&A. the United States in order to share the insight and perspectives of a worldwide –– Financial misstatement, market community of business leaders, as well manipulation, insider trading, as to introduce them to the Eversheds and securities misconduct. Sutherland Corporate Crime & Investigations Group.

1 Beneath the surface The business response to bribery and corruption

Key Contacts

United States Ron Zdrojeski Olga Greenberg Tel: +1 212 389 5076 Tel: +1 404 853 8274 [email protected] [email protected]

Scott Sorrels Meghana Shah Tel: +1 404 853 8087 Tel: +1 212 389 5077 [email protected] [email protected]

Jeff Bialos Yvonne Williams Wass Tel: +1 202 383 0363 Tel: +1 404 853 8008 [email protected] [email protected]

United Kingdom Neill Blundell Emma Gordon Tel: +44 20 7919 4533 Tel: +44 20 7919 4931 [email protected] [email protected]

Zia Ullah Polly Sprenger Tel: +44 161 831 8454 Tel: +44 20 7919 0785 [email protected] [email protected]

Asia Pacific Veronique Marquis Leonie Tear Tel: +852 2186 3288 Tel: +852 2186 3271 [email protected] [email protected]

Europe Mariafrancesa de Leo María Hernández Tel: +44 20 7919 0855 Tel: +34 91 429 43 33 [email protected] [email protected]

Sophie Scemla Dr. Joos Hellert, LL.M. Tel: +33 1 55 73 40 31 Tel: +49 89 545 65 185 [email protected] [email protected]

Eoin Mac Aodha Monika McQuillen Tel: +35 31 66 44 94 7 Tel: +41 44 20 49 29 7 [email protected] [email protected]

Middle East

Rebecca Copley Laura Shingler Tel: +97 14 38 97 04 4 Tel: +97 14 38 97 04 0 [email protected] [email protected]

Africa

Viv Jones Lynne Wells Tel: +44 20 7919 4765 Tel: +44 20 7919 4950 [email protected] [email protected]

2 Beneath the surface The business response to bribery and corruption Foreword

The last few years have seen a dramatic engagement of senior executives is well increase in the activity of national recognised. More surprising perhaps regulators in the investigation of is the fact that only 32% of executives corruption. The USA, who for many years understood their company’s anti-bribery was seen as the regulator of international policy; just one of the significant findings business, has been joined by other that will assist the reader in an nations; all of whom are demonstrating examination of their own position and a real interest in investigating corrupt the urgent action that may be needed. practices and pursuing these issues with The report is not theoretical; it provides new enthusiasm. Stand back and review an invaluable snap-shot of business now. the number of recent investigations in The inclusion of concise summaries of the UK alone. The upward trend is real problems experienced by companies obvious and the rate of increase in many countries and the activity in remarkable. response by the national authorities in This changed landscape has brought those jurisdictions and the subsequent significant new challenges for businesses results, gives the reader a rare insight who must guard against the risks of into issues that have confronted business operating in difficult competitive and what can happen when it goes markets. wrong. Eversheds Sutherland’s close connections Eversheds Sutherland’s access to the with companies around the world has experience and views of those involved led to the production of this unique in business, combined with recent report. Based upon an in-depth survey of international regulatory activity and the the experience and views of 500 senior identification of enforcement trends, executives who do business throughout make this report essential reading for the world, the report provides insight all those involved with anti-corruption into how things are actually progressing. issues. The responses to in-depth questioning are both revealing and invaluable. It Richard Kovalevsky, QC confirms that the risk of exposure to 2 Bedford Row corrupt practices and the need for active London

3 Beneath the surface The business response to bribery and corruption Executive summary

4 Beneath the surface The business response to bribery and corruption

5 Beneath the surface The business response to bribery and corruption

Why bribery and corruption is a serious issue Tone from the top We know that bribery and corruption are key concerns All respondents thought their senior management sent for business – 95% of our senior executive respondents out a clear anti-bribery message to their employees. tell us they see bribery and corruption as a ‘serious issue’. Moreover, 90% of companies would reject a future For the most part, it’s not the risk of being caught and business opportunity if there was an unacceptable prosecuted that motivated respondents to worry about bribery or corruption risk associated with it, and 72% of corruption: instead, business leaders fundamentally businesses had already done so. These were extremely see corruption as a threat to their legitimate business. encouraging signs that businesses are willing to back There are real concerns about the impact bribery up their values with tough commercial decisions. and corruption could have on share price, investor The most important source of intelligence about corrupt confidence, consumer trust and reputation on the conduct is a company’s own workforce: industry data market. suggests 45% of all frauds are detected because Moreover, bribery is generally not a good tool to win employees raise concerns. Corporate leaders need to business or increase profits. Those who pay bribes may encourage employees to speak out about bribery so find themselves exposed to extortion as corrupt public that problems can be addressed early. It’s not enjoyable officials or business partners demand even more money. to be told about corrupt conduct by an employee – but Unsurprisingly, dishonest clients and employees often act it’s better than hearing it first from a police officer or in other ways that put a company at risk. journalist. Employees are more likely to blow the whistle when they hear a strong tone from the top, when they However, even if there is now a consensus that bribery believe the company will respond to their concerns, and corruption are real risks to business, it’s not clear that and when there is a whistleblowing hotline in place. companies are taking effective steps to counter them. Most companies have anti-bribery policies in place but Prosecutors in some jurisdictions are seeking to half of all those surveyed didn’t think those policies were prosecute individual executives for bribery and corruption any better than they were five years ago. More worryingly, offences. Even if an executive is entirely innocent of any less than a third actually understand the policies, with wrongdoing, the stress and disruption of being a potential many taking the view that their anti-bribery training is suspect in the early phase of a criminal investigation can insufficient. be enormous and has the potential to be career-limiting. Strong leadership in anti-bribery can reduce this risk.

6 Beneath the surface The business response to bribery and corruption

Self-reporting and negotiated settlements Growing your business means addressing the issues The risks of bribery and corruption are not just Sophisticated investors consider bribery and corruption hypothetical: 80% of companies had discovered bribery issues before undertaking mergers and acquisitions: 67% or corrupt conduct in their business, and 41% of of respondents said they conduct specific anti-bribery companies self-reported their own misconduct to law due diligence for M&A activity. This is important because enforcement or prosecutors. Almost all respondents buying a business tainted by corruption may mean recognise the growing co-operation between law inheriting legal liability or overpaying for the asset. enforcement agencies in different jurisdictions to Almost all respondents said they expected to do more enforce bribery and corruption laws. business in fast-growing developing markets in the near Respondents overwhelmingly favoured self-reporting their future. However, those markets often bear a higher company’s own misconduct to law enforcement and bribery risk, and 77% of CEOs avoid doing business in prosecutors: 99% of respondents said they would do so if certain countries. There are practical steps that can be they discovered bribery or corruption in their organisation taken to mitigate risks in high-risk markets and it’s worth tomorrow. However, relatively few executives understood it: companies that have a strong anti-bribery programme how self-reporting works in practice, or which jurisdictions grow faster in developing countries. incentivise self-reporting through lower penalties or negotiated settlements. More than 400 negotiated settlements, where prosecutors agree not to prosecute persons suspected of bribery in return for restitution actions, have been reached to resolve bribery charges. More than USD 7 billion of monetary sanctions have paid. Companies appreciate negotiated settlements because they avoid the uncertainty inherent in litigation, and prosecutors formally resolve crime that might otherwise go undetected. However, negotiated settlements are not suitable to resolve every bribery concern: there are particular problems around multijurisdictional schemes, when individuals are involved, and when developing countries do not play a role in their formation.

7 Beneath the surface The business response to bribery and corruption

8 Beneath the surface The business response to bribery and corruption Methodology

The survey was implemented on the following basis:

Methodology: Countries surveyed include: CATI (telephone interviewing) UK Hong Kong Brazil Ireland China Italy Demographic: Dubai Singapore Board level Directors of companies sized France Spain 500+ employees Germany Switzerland

Participants: Countries: 500 in total x12 Fieldwork dates: 2nd – 29th February 2016

Methodology Questionnaire translations This research project was carried out using computer- The questionnaire was originally written in English and assisted telephone interviewing (CATI) in each market. then translated into the additional localised languages All interviews were conducted by native language where necessary in non-English-speaking countries by interviewers in each country on CATI software. In those professional native translators. All translations are carried countries where there is more than one native language, out by one native speaker of the relevant country and the respondents were given a choice as to which then proofread by a second professional native translator. language they would prefer to answer. Translators are also asked to make amendments to a questionnaire (if necessary) to incorporate local All research conducted by Yolo Communications adheres knowledge and provided English translations for any of to MRS Codes of Conduct (2014) and abide by the these changes. Respondents are asked at the beginning ICC/ESOMAR International Code on Market and Social of the questionnaire which of these languages they Research. Within these parameters there are guidelines would like to be interviewed in. that ensure all research is carried out in a professional and ethical manner.

9 Beneath the surface The business response to bribery and corruption Chapter 1:

It’s time for a more sophisticated conversation

10 Beneath the surface The business response to bribery and corruption

11 Beneath the surface The business response to bribery and corruption

How important is bribery and corruption for business and why? One in four senior executives describes bribery and corruption as very Spotlight on: China important, while 70% view it as important. However, this trend is almost reversed when it comes to responses from the largest businesses. In 2013, Chinese public officials and In organisations with more than 5,000 employees, 56% describe GlaxoSmithKline managers received bribery and corruption as very important – perhaps reflecting the anonymous emails accusing the company reduced visibility of day-to-day business operations and because these of acting corruptly in sales to public organisations are subject to bigger investigations. agencies.1 Soon after, an intimate video of an executive accused of complicity in the In terms of role, operations directors are the most concerned about misconduct was distributed; the video had bribery and corruption, with 52% describing it as very important. As the apparently been shot in the executive’s most senior-ranking personnel with responsibility for the day-to-day home and without the consent of those running of the business, they have a unique perspective on the task of filmed.2 A possible motive for the emails protecting a business from corrupt practices. was that the executive had commenced an internal investigation into whether For the majority of senior executives, bribery and corruption are GlaxoSmithKline had been paying bribes to important because of the potentially damaging impact such practices win business from state healthcare entities.3 could have on the commercial success of their organisation. GlaxoSmithKline retained ChinaWhys, a Respondents cited a range of potential consequences from reduced Shanghai private investigations firm that share price, an inability to secure investment and irreparable customer conducted due diligence investigations relationships if corruption were discovered. for the company, to investigate the video’s origins and circulation.4 Questions were Second to purely commercial concerns was the potential damage raised about an ex-employee who had to reputation, with one in five businesses motivated to stamp out been accused of fraud.5 corruption for fear of the bad publicity which could otherwise arise. ChinaWhys’s investigation was soon One in 10 respondents reflected their company’s strong ethical culture, interrupted by the arrest of its principals, believing these issues to be important because good business practice Peter Humphrey and Yu Yingzeng, is simply ‘the right thing to do’. The remainder spoke of the potential on charges alleging illegal trading in legal ramifications – significant fines were referenced a number of times citizens’ private data, including real but none of those surveyed mentioned imprisonment as a possible estate ownership records,6 ID card details consequence of corruption. and international travel records. In an apparently connected development, GlaxoSmithKline found itself under Why are bribery and corruption investigation for corruption,7 allegedly important issues to senior executives? using a travel agent as an intermediary for the payment of bribes to doctors and other healthcare officials.8 After a year of investigation, the principals of ChinaWhys were convicted and sentenced to more than two years in prison.9 GlaxoSmithKline and five of its employees were convicted of corrupt conduct: the company was fined CNY 3 billion (USD 460 million), and the employees received suspended prison sentences.10 (20 other employees had already been dismissed).11 Both trials were conducted in a single day; the ChinaWhys trial was closed to journalists12 and the GlaxoSmithKline trial was held in camera.13

1 “Peter Humphrey trial: GlaxoSmithKline to blame, says son”, Malcolm Moore, Daily Telegraph, 7 August 2014. 2 “Revealed: sex tape blow open Glaxo’s China bribery scandal”, The Sunday Times, 29 June 2014. 3 “GlaxoSmithKline Blamed For Imprisonment Of Man In Chinese Sex Tape Extortion Fiasco”, Jim Edwards, Business Insider, 8 August 2014. 4 “Sex, bribes and videotapes see GlaxoSmithKline ex-boss Mark Reilly deported”, Lucy Tobin, The Independent, 19 September 2014. 5 “Peter Humphrey trial: GlaxoSmithKline to blame, says son”, Malcolm Moore, Daily Telegraph, 7 August 2014. 6 “China’s Chilling Crackdown on Due-Diligence Companies”, Ana Swanson, The Atlantic, 23 October 2014. 7 “Revealed: sex tape blew open Glaxo’s China bribery scandal”, Michael Sheridan, The Sunday Times, 29 July 2014. 8 “Glaxo Used Travel Firms for Bribery, China Says”, David Barboza, The New York Times, 15 July 2013. 9 “China sentences GSK-linked investigators to prison”, Brenda Goh and Engen Tham, Reuters, 8 August 2014. 10 “Sex, bribes and videotapes see GlaxoSmithKline ex-boss Mark Reilly deported”, Lucy Tobin, The Independent, 19 September 2014. 11 “GlaxoSmithKline Blamed For Imprisonment Of Man In Chinese Sex Tape Extortion Fiasco”, Jim Edwards, Business Insider, 8 August 2014. 12 “China sentences GSK-linked investigators to prison”, Brenda Goh and Engen Tham, Reuters, 8 August 2014. 13 “Sex, bribes and videotapes see GlaxoSmithKline ex-boss Mark Reilly deported”, Lucy Tobin, The Independent, 19 September 2014. 12 Beneath the surface The business response to bribery and corruption

Actions speak louder than words Spotlight on: China (cont) While the overwhelming majority of senior executives view bribery and corruption as important, this does not appear to correlate with the way these issues are managed within a business. It appears Chinese authorities intended Just half of respondents said their anti-bribery policies were better than for the ChinaWhys and GlaxoSmithKline they were five years ago, and even fewer at 41% thought their policies convictions to send two strong messages to the market: first, private companies worked well in practice. Businesses appear to be struggling to create and individuals may not gather and effective anti-bribery policies, with just 45% of senior executives describing process citizens’ data except in highly them as “appropriate for our business” and less than a third claiming they circumscribed circumstances; and actually understand their own policy. While this would be less surprising secondly, corruption in state procurement among a more junior audience, it underlines the difficulty those at the very would not be tolerated. Yet for many top have in managing bribery and corruption. domestic and international companies in China, these two messages seem to be in The majority of respondents believe their anti-bribery policies make it tension with each other. more difficult to build their business, suggesting an apparent conflict between the task of managing ethical business practice and commercial Both Chinese14 and foreign15 governments realities. This perception could be explained by an apparent knowledge recommend that private companies conduct due diligence into business gap among these senior executives – only a minority say they have partners and employees in order to prevent undertaken enough training on their anti-bribery policies. bribery, money laundering and organised crime. But the ChinaWhys prosecution, How effective are anti-bribery policies? and a tightening of the information that can be legitimately obtained, may dissuade companies from gathering data about individuals or companies in the course of routine due diligence. (In a similar vein, pre-M&A due diligence and audits are often made costly and difficult by confusing restrictions on the transmission of corporate data internationally). Equally, the personal attack on the GlaxoSmithKline executive who apparently responded say their anti-bribery policy is say their anti-bribery policy is to concerns once they were raised, and better than it was five years ago appropriate for their business the firestorm that engulfed the company soon after, may tempt many companies to simply ignore concerns about corruption in China. Both these outcomes are undesirable, and expose companies to greater legal risk. We strongly believe it is both possible and necessary in China to perform due diligence on business partners, to conduct say their anti-bribery policy say they understand audits and to respond to corruption works well in practice their anti-bribery policy concerns. However, those tasks are highly sensitive, and must be executed with meticulous regard to domestic laws to avoid creating fresh liability. Moreover, the timeframe and costs associated with doing so will be greater than in other markets.

say their anti-bribery policy say they get enough training does not make building their on their anti-bribery policy business more difficult

14 See for example “Chinese Due Diligence Guidelines for Responsible Mineral Supply Chains”, China Chamber of Commerce of Metals, Minerals & Chemicals Importers & Exporters, October 2014. The publisher is supervised by the Ministry of Commerce and the guidelines were developed in consultation with that ministry. 15 “Overseas Business Risk – China”, Foreign & Commonwealth Office, 10 July 2015. 13 Beneath the surface The business response to bribery and corruption

It’s time for a more sophisticated conversation about bribery and corruption Spotlight on: Ireland At the London headquarters of WorldReach Limited, the CEO receives an unexpected phone call from a senior executive in Dubai: “Jenny, In the Irish context, corruption and bribery we’ve got a problem. Our Sales Director just told me we’ve been paying has traditionally been associated with kickbacks to win business. It’s those invoices for ‘community relations’ payments to politicians for favours. In he’s been submitting for years. What are we going to do?” particular, there was widespread concern that decisions around the re-zoning of In the past, Jenny the CEO might have ignored the call, having been land were tainted, particularly when those advised that bribery was merely the “cost of doing business” in certain decisions allowed lucrative commercial and industries and countries. Laws prohibiting companies from bribing public residential developments. The 1990s and officials at home were enforced only in the most serious cases, and 2000s were dominated by inquiries into only the United States made any real effort to prosecute companies for allegations that land developers had passed bribing foreign officials. In some jurisdictions, it was not clear if it was “brown envelopes” to public officials in illegal for executives to bribe other executives to win business. Jenny’s return for favourable outcomes. company either did not have an anti-bribery policy or it lay unread on However, the fallout from the banking a dusty shelf. Companies routinely operated without clear policies or crash of 2008 has shown that bribery procedures on bribery and corruption: this issue was simply not a priority and corruption are not restricted to cash for business or for law enforcement. bribes to local government officials. The spectacular criminal allegations that Those days have gone. In the last decade, many countries have been followed the collapse of Anglo Irish Bank clarifying and tightening their anti-bribery laws and increasing the included the wholesale misleading of penalties for breaching them. Those changes – often in response international markets and the ‘bed and to pressure from the OECD – have taken place in places as diverse breakfasting’ of circa EUR 7 billion in as the United Kingdom (2010), Australia (2010), the Czech Republic loans to boost the Bank’s balance sheet at (2011), Italy (2012), Brazil (2013), Russia (2013) and even Turkmenistan regulatory reporting dates. Two criminal (2014). Prosecutors have used those new laws and powers to step up trials against former officers of Anglo Irish Bank have already taken place and a enforcement: there were 231 foreign bribery cases concluded in 2010- prosecution of the bank’s former chairman 2013 compared to just 11 in 2000-2003. Although the US remains the is forthcoming. Moreover, the bank’s leading prosecutor of corrupt international businesses, jurisdictions such former CEO, David Drumm, was extradited as Germany, France, Switzerland, Korea and the UK have also attempted in a very public fashion from the USA to to consistently enforce anti-bribery law.16 Ireland in order to face criminal charges. Business, too, has changed its attitude to bribery: 95% of respondents The trials have shown that despite Anglo to our survey see bribery and corruption as a serious issue. In our Irish Bank being a public listed company experience, businesses’ sophistication in identifying and managing and subject to top tier regulation by a bribery risk has increased significantly in recent years. If WorldReach respected EU financial services regulator, is like 80% of international companies, then it now has a formal anti- it was not immune to corruption. If improper practices could take place inside bribery policy.17 a mainstream business like Anglo Irish Bank, Why have businesses such as WorldReach changed their approach? Is the public wondered, then where else there truth in the conventional wisdom the change is a response to stricter could it be taking place? Our survey reveals laws and more robust enforcement? that those concerns are well-founded: almost all respondents said that bribery and corruption was a significant issue for Irish business, and 75% of Irish companies have had an issue of some description with bribery or corruption.

16 Figure 19, OECD Foreign Bribery Report: An Analysis of the Crime of Bribery of Foreign Public Officials, OECD, 2014. 17 Page 9, Global Anti-Bribery and Corruption Survey, KPMG International, 2015. 14 Beneath the surface The business response to bribery and corruption

Bribery as a business risk Spotlight on: Ireland (cont) Our research shows that business leaders’ anti-bribery efforts are not primarily driven by a desire to avoid prosecution. In fact, only Yet despite the fallout from the Anglo Irish 10% of respondents saw legal issues as a significant reason to take Bank trial and the importance of bribery bribery and corruption seriously. What’s more, while some of those and corruption to Irish corporate culture, respondents feared potentially high fines, none of them referred to the the legal system remains too fragmented. prison sentences that individual lawbreakers face: up to seven years in Perceptions of bribery and corruption Singapore, 10 years in Ireland and Saudi Arabia – and life in China. among business leaders and the public have become more sophisticated in Ireland This should not be a surprise: although prosecutions of bribery offences in the last few years, but the legal system are on the increase, they remain sporadic and rare. For example, of the has not moved with them. 41 OECD member countries, 24 have never sanctioned anyone for a foreign bribery offence and only 25 have even a single foreign bribery The legislative framework for fighting 19 corruption is outdated (it includes a statute investigation underway. In high bribery risk jurisdictions, substantive from 1889) and vague. Both the OECD enforcement of bribery laws is often either unknown or is itself used as and Transparency International have called a weapon in political disputes.20 for significant legislative reform. In 2012, The majority of corporate leaders in fact see bribery and corruption as the government announced the Criminal Justice (Corruption) Bill, but it never moved a business threat, not a legal one: 69% of respondents identified the to a final vote in parliament. In 2015, the principal risk of bribery as being the resultant negative impact on their Ministry for Justice and Equality announced businesses’ success, and almost three-quarters of companies have the bill’s re-launch and a clarification of rejected a business opportunity because of the bribery risk associated the law around bribery of foreign public with it. This is consistent with economic analysis that shows corrupt officials, business-to-business bribery and conduct does not bring a net benefit to a business once hidden costs corporate criminal liability.18 However, little and missed opportunities are taken into account.21 practical action has so far been taken to transform the bill into law. We have observed that business units that win contracts through bribery are rarely very profitable – not least because they frequently find it We believe that both businesses and difficult to collect payment from dishonest clients, operate in a risky citizens desperately need clarity on how Irish bribery law can be brought into the manner, and are vulnerable to extortion. Moreover, individuals who pay 21st century. In particular, government bribes often act in other ways that decrease efficiency. If WorldReach has should learn from the efforts of other EU discovered bribery, then most likely an investigation will also reveal fraud, states and consult with the private sector theft, harassment and straightforward incompetence. In short, when on how they can work together to fight companies host corrupt conduct, commercial decisions start to be made bribery and corruption. for non-commercial reasons and produce suboptimal outcomes. We believe this insight should affect the way governments go about addressing corporate bribery and corruption. The traditional law enforcement model for economic crime is to target corporations as offenders to ensure that “crime doesn’t pay”: that is, punishment is a counterweight to the incentive to commit the crime. But in the case of bribery, this is too simplistic: most corporations already receive little or no long-term economic benefit from crimes committed under their roof. Law enforcement’s strategy should make it easier for corporations to identify and resolve corruption – including undoing any harm that has been done to others. We discuss this issue further in Chapter 3.

18 “Ireland’s implementation of the United Nations Convention against Corruption”, Press Release, Department of Justice and Equality, 16 July 2015, last accessed on 07 April 2016. 19 Page 2, 2014 Data on Enforcement of the Anti-Bribery Convention, OECD Working Group on Bribery, November 2015. This is the most recently available data from the OECD. The level of investigation and enforcement will probably increase slightly when 2015’s figures are published, presumably in November 2016. 20 See for example Letting the Big Fish Swim: Failures to Prosecute High-Level Corruption in Uganda”, Human Rights Watch, 21 October 2013. 21 “Crime doesn’t pay, says Harvard bribery study”, CFO, 1 March 2016. 15 Beneath the surface The business response to bribery and corruption

A policy is good but effectiveness is better A further critical finding emerges in relation to the companies’ anti-bribery Spotlight on: Italy regimes. The vast majority of the international companies for whom respondents work have anti-bribery policies and procedures in place, Why do companies face such challenging and half of those executives believe those policies and procedures have bribery and corruption issues when doing improved in the last five years. This is encouraging, and it is at least partly business in Italy? The country displays all attributable to the growing awareness around bribery that increased the characteristics typically associated with prosecutions have brought. low bribery risk: it is the world’s eighth largest economy,22 has a “very high” level of However, our research also identifies some uncomfortable truths: only a human development23 and has the highest minority of business leaders think that the anti-bribery policies in place at possible rankings for freedom, civil liberties their companies are generally appropriate and work well in practice. Even and political rights.24 fewer executives actually understand those anti-bribery policies – perhaps Equally, at first glance, Italy’s anti-bribery because most of them do not receive enough training on them. Most laws seem to be world class: all bribery worryingly, only a small minority feel that anti-bribery policies do not get (whether public or business-to-business, in the way of building business. In short, anti-bribery is failing at many domestic or foreign) is comprehensively companies. prohibited under both the Criminal Code25 and Civil Code26. Companies can We have seen that these failures often result from inappropriate be prosecuted for corporate criminal development and rollout of policies. In our experience of advising liability for the corrupt conduct of their clients across the globe, business units in the highest risk markets employees and directors27 and a 2015 law should collaborate in the formulation and design of policies from the has reinforced the prohibition on false earliest stages, for example by proper use of focus groups and needs- accounting, tightening restrictions on mapping. Equally, anti-bribery measures should – wherever possible public officials and increasing criminal – be incorporated into existing business processes, not added on top penalties.28 Also, few Italians believe of them. Finally, anti-bribery policies need to be simply and concisely corruption among police, prosecutors and 29 communicated. Eversheds Sutherland recently assisted a client to radically judges is a barrier. simplify its anti-bribery policies for the simple fact that it was unrealistic Yet, at the same time, 97% of Italians to ask employees to read several hundred pages of dense legalistic text. If believe corruption is widespread in Italy Jenny the CEO does not understand WorldReach’s anti-bribery policy, it is and 42% claim to be personally affected unlikely that her more junior colleagues will either. by corruption on a daily basis.30 The World Bank estimates that corruption accounts More generally, companies need to realise that merely having a policy is for 3% of Italian GDP up to EUR 60 billion.31 not enough. Jenny and her managers need to get back into the business, Moreover, Italians seem to have given asking the right questions: What kind of dilemmas are staff seeing in the up reporting corruption: government market? Which anti-bribery measures are missing or being circumvented? research shows that complaints from the Would staff know what to do if they discovered a problem? Training needs public have been falling even as corruption 32 to be creative, interactive and role-appropriate so that employees acquire continues to rise. In reality, corruption in Italy is growing but it remains largely the skills to identify and fend off corrupt demands. These relatively simple hidden because of underreporting to the and cheap strategies help ensure that anti-bribery policies are effective, authorities and the difficulties inherent in and help create a positive corporate culture, an issue we discuss further in pursuing and resolving corruption cases. Chapter 2.

22 IMF eLibrary Data, last accessed at data.imf.org on 01 April 2016. 23 Table A1.1, Global 2015 Human Development Report, United Nations Development Programme, 14 December 2015. 24 Freedom In The World 2015, Freedom House, January 2015. 25 Articles 317-322 26 Article 2635 27 Under Decree 231/2001 28 Law 69/2015 29 Rule of Law Index 2015, World Justice Project, 2 June 2015. 30 Special Eurobarometer survey n. 397, February 2014. 31 World Governance Indicators, World Bank, 2016. 32 Corruption in Italy. Towards a prevention policy. Analysis of the matter, international profiles and reform proposals, Report, Government Commission for study and development of proposals in the area of transparency and corruption prevention in the Public Administration, 2012. 16 Beneath the surface The business response to bribery and corruption

Spotlight on: Italy (cont) Spotlight on: Scotland

Despite the fact that Italian anti-bribery When the UK Bribery Act came into force in 2011, a common concern was legislation appears to be compliant that companies would be prosecuted for excessive generosity: providing with international standards, effective hospitality or corporate travel in a way that was unacceptably lavish in the enforcement is made much more difficult by eyes of prosecutors. The UK government reassured businesses that hospitality the strict operation of the statute of limitation was a legitimate practice and that its priority was to identify and convict that applies to bribery and corruption cases. persons engaged in bribery, not entertainment. Five years on, two bribery In response to a critical report from the cases resolved in Scotland illustrate prosecutors taking an entirely reasonable OECD in 2011,33 a new law was enacted approach to hospitality, travel and gifts. Running up to 2011, two employees which provided for an increase in penalties of Edinburgh City Council corruptly channelled at least GBP 1.5 million of for corruption crimes.34 However, the statute contracts to a local construction company, Action Building Contracts Ltd. In of limitations clock does not stop ticking 2011, an insider blew the whistle on the scheme, and the council workers and once the suspect is indicted or while decision two directors of the construction company were charged with offences under is under appeal. Consequently, bribery the Public Bodies Corrupt Practices Act 1889 (the conduct having occurred prosecutions become time-barred more before the Bribery Act came into force). Local media reports of the trial frequently in Italy than in other countries. focused heavily on the hospitality the company provided to the two council employees: the court was told that at least GBP 30,000 was spent on taking More generally, Italy has yet to adopt a the men to football matches, bars and lap dancing clubs.36 Ultimately, the comprehensive, integrated anti-bribery council employees were each sentenced to roughly four years in prison, while strategy. Although it is true that the the two directors of the construction company were sentenced to more than government’s priorities in fighting corruption two years. in the public sector have been clarified35 and the National Anti-Corruption Authority has In 2012 and 2013, Brand-Rex Limited provided secret commissions via an been given significant new supervisory and intermediary to employees of a client in return for orders being placed with coercive powers, there is still a disappointing Brand-Rex. The commissions took the form of travel paid for by Brand-Rex lack of guidance on and discussion of how such that a number of the client’s employees travelled on foreign holidays as a businesses can fight public sector bribery result of the corrupt scheme. Brand-Rex discovered the corrupt scheme in the at home and abroad. There is even less course of an internal review, self-reported it to the Crown Office & Prosecutor consideration of business-to-business Fiscal Service (Scotland’s prosecution service) in June 2015, and in September corruption. If meaningful progress is to 2015 paid GBP 212,500 to avoid criminal prosecution under section 7 of the be made in reducing the hidden costs of Bribery Act (failure of commercial organisations to prevent bribery by an bribery to business, consumers and citizens, associated person).37 the Italian state should turn its attention At first glance, these enforcement actions may seem like responses to to practical measures that support private excessive entertainment. Upon closer examination, that is not the case. In the sector anti-bribery efforts. This could include Action Building Contracts affair, the value and nature of the entertainment improved protection for private sector provided were not merely excessive, but wildly inappropriate.38 Further, whistleblowers, greater transparency in the council employees received “tips” of GBP 42,521 over and above the public procurement from private suppliers, hospitality,39 and fraud and money laundering were parts of the conspiracy.40 encouraging the voluntary rollout of anti- Similarly, in the Brand-Rex matter, the travel provided to the client’s bribery measures within private companies employees took the form of foreign holidays: it was entirely unconnected to and, most importantly, engaging directly the company’s business and there was no work-related activities. Moreover, with the private sector to develop a national in both cases, it was the intention of the givers of the bribe to influence business-to-business anti-bribery policy. the recipients and win new business, not just to maintain a professional relationship. We believe that companies are rightly conscious of the actual and apparent bribery risks associated with providing gifts, hospitality and travel. It is wise to reflect on whether it is appropriate to provide foreign travel to clients’ employees – let alone allowing their spouses to travel or providing cash “travel expenses”. But thus far prosecutors in Scotland (like their colleagues in most other jurisdictions) have not shown any interest in taking action against companies for mere excessive hospitality in the absence of any corrupt intent.

33 Phase 3 Report: Italy, OECD Working Group on Bribery, 2011. 34 Law 69/2015 35 Pursuant to Law 190/2012 36 “Corrupt council repairs men in plea for leniency”, Edinburgh Evening News, 16 June 2015. 37 “Glenrothes cabling company pays £212,800 after reporting itself for failing to prevent bribery by a third party”, Press Release, Crown Office & Procurator Fiscal Service, 25 September 2015. 38 The amounts paid in cash to the men had been recorded by the construction company. “Corrupt council repairs men in plea for leniency”, Edinburgh Evening News, 16 June 2015. 39 “Corrupt council repairs men in plea for leniency”, Edinburgh Evening News, 16 June 2015. 40 “Four men sentenced to a total of over 13 years imprisonment for corruption and bribery at Edinburgh City Council”, Press Release, Crown Office & Procurator Fiscal Service, 18 June 2015. 17 Chapter 2:

Tone from the top

Beneath the surface The business response to bribery and corruption

A Consistent Approach? All respondents agree that top management sets a clear tone on bribery and corruption in their organisation. However, only 90% would reject a business opportunity due to bribery or corruption concerns. This is particularly significant given that the respondents are themselves 44% have stopped doing all from senior management positions. business with suppliers Executives from China were the least sure: 28% said they neither agreed nor disagreed on the point, while all respondents from Brazil agreed they would reject such a business opportunity. This concern was greatest among operations directors and perhaps, once again, this is best explained by the Actions speak louder than words nature of their role. There were notable 39% have stopped doing The majority of respondents said their differences between jurisdictions, with business with agents or organisation had focused on the nature 42% of Brazilian executives worried about intermediaries of its business relationships, severing tough growth targets giving rise to corrupt relationships because of concerns business practices. Around a third of about bribery or corruption. respondents in France, Ireland and the UK shared this concern.

Almost three quarters (72%) 16% have stopped doing of businesses said business with customers their organisations had turned down a business opportunity due to concerns around of senior executives are worried bribery or employees would resort to corruption. bribery or corruption when faced with challenging growth targets

12% have stopped sponsoring events or organisations

11% have fired employees 20 Beneath the surface The business response to bribery and corruption

The message from management Spotlight on: England and Wales Setting the right tone from the top is critical if a company’s anti-bribery policies are to be effective. Encouragingly, our research shows that The UK Ministry of Justice’s guidance41 many companies are doing exactly that. The overwhelming majority of on what constitutes adequate procedures respondents believed that there was a strong corporate culture and that for preventing breaches of the Bribery senior managers had communicated the tone from the top clearly. Act 2010 places a heavy emphasis on effective communication between senior Companies also need to give practical effect to the tone from the top management and the workforce. As that by making difficult decisions when integrity is on the line. It is therefore guidance makes clear, anti-bribery policies encouraging that many respondents’ companies back their values when and procedures should be “embedded a bribery risk is identified: there is no better way to demonstrate that and understood throughout the bribery is unacceptable than rejecting a business opportunity or cutting organisation through internal and external ties with certain customers because of bribery concerns. Both these communication…Internal communications behaviours were identified by our research. should convey the ‘tone from the top”.42 We believe this advice is sound – but We believe that successful international companies choose to send the six years on from the enactment of the right tone from the top for three main reasons: Bribery Act, many organisations are still wrestling with what that communication 1. Creating a low-bribery, high-growth environment should look like. We suggest that effective A clear corporate culture sets out a company’s expectations in respect communication means more than rejecting of corrupt activity. Most obviously, this works to dissuade employees bribery and corruption in the abstract – it from using corrupt methods to win or retain business: having been given also means listening and speaking out about the concerns that do arise. clear and non-negotiable instructions to the contrary, an employee acting corruptly can never credibly claim to have been acting in the A strong anti-bribery “tone from the top” company’s best interests. Positive peer pressure also operates to reduce should include encouraging employees to the risk that one individual employee’s poor decisions will be followed raise concerns about practices they think by others. In this way, isolated conduct should not become systemic or are unethical or potentially unlawful, as institutionalised. we discuss at [[Chapter 2 above]]. We have observed that encouraging employees to The deterrent effect works externally as well as internally: if a company’s raise concerns is often most effectively culture is communicated properly, this sets expectations among joint achieved by companies establishing a venture partners, suppliers, customers and even public officials. We are whistleblowing function. In practice, this familiar with a global corporation that exports huge volumes of cargo usually takes the form of a dedicated through seaports in Southeastern China. Once it started promoting its phone number and/or a web interface that rigorous anti-bribery policy, the company received far fewer demands can be used to report concerns. There is for corrupt facilitation payments from local officials and found those no single model for whistleblowing so a demands easier to fend off. This effect works both ways. Companies that company will need to decide practicalities: whether it should be possible to receive are known on the market for engaging in corrupt practices can be seen anonymous calls, whether non-employees as a soft touch and actively targeted by the dishonest. (for example, suppliers and members of the Researchers at Harvard University have found that corporations that public) should be able to raise concerns, engaged properly with anti-bribery grew 14.1% in high risk markets how to deal with a diverse and multilingual over three years, compared to growth of only 2.6% among companies workforce, and what is the most effective 43 to record reports in the light of complex that failed fully to develop anti-bribery practices. We believe this is data privacy concerns. More generally, likely a result of employees being able to discuss bribery risks without companies need to decide whether they run appearing disloyal, such that the company can plan its response to the whistleblowing function internally, or bribery challenges if and when they do arise. On the other hand, we have whether they will outsource management seen companies unable to act when presented with a challenge because of the service to a specialist provider. discussing the issue is seen as somehow encouraging the misconduct. This brings to mind the old sailors’ superstition that learning to swim is unlucky.

41 The Bribery Act 2010: Guidance about procedures which relevant commercial organisations can put into place to prevent persons associated with them from bribing, Ministry of Justice, March 2011. 42 Page 29, The Bribery Act 2010: Guidance about procedures which relevant commercial organisations can put into place to prevent persons associated with them from bribing, Ministry of Justice, March 2011. 43 “Crime doesn’t pay, says Harvard bribery study”, CFO, 1 March 2016. 21 Beneath the surface The business response to bribery and corruption

2. Reducing the impact of bribery and corruption Generally speaking, the earlier corruption is detected within a company, Spotlight on: England and Wales (cont) the quicker it can be resolved and the smaller the liabilities will be. For a large company, the most important source of intelligence is its own If companies need to know how to receive workforce: 45% of all frauds44 are detected as a result of concerns raised difficult information, they also need to by employees. Consequently, companies should work hard to create an know how to communicate it: that is, to environment in which employees feel comfortable escalating concerns. acknowledge when concerns have been In particular, employees should believe that their genuine worries will raised, and to explain how they have been be taken seriously and that they will not suffer retaliation for rocking the responded to. Many large organisations’ boat. On a practical level, whistleblowing hotlines are highly effective in compliance teams circulate activity making sure employees have a means by which concerns can be raised. reports detailing key concerns to senior executives, which is critical for building The recent experience of Standard Bank illustrates how a positive consensus at the top of an organisation: corporate culture can help a company to detect bribery early and then but telecoms company Vodafone goes manage liabilities. In 2012, a handful of senior executives in the bank’s far above and beyond that. Each year Tanzanian affiliate agreed an improper arrangement with local public it publishes a Sustainability Report that clearly explains the ethical standards of officials in relation to a government bond issue. The bond issue took the company (including around bribery) place without that arrangement being detected either by the Tanzanian and how concerns can be raised. The government or more senior bank staff. In March 2013, very large Sustainability Report also describes the amounts of cash were withdrawn from Standard Bank’s retail branches ethical problems the company has faced in Tanzania in order to make payments under the improper arrangement. in the previous year and how it has dealt At least four different employees raised concerns with the bank’s with them. Consequently, employees compliance team about those cash withdrawals: this swiftly led to an and strangers alike can discover from internal investigation which found those concerns to be well-founded. Vodafone’s website that in 2014-2015, 602 By April 2013, Standard Bank notified the UK Serious Organised Crime concerns were raised by whistleblowers, Agency that the bond issue and subsequent payments were potentially of which 132 related to integrity issues i.e. conflicts of interest, corruption and fraud.47 problematic. Subsequent investigations by Standard Bank and the 483 instances of internal fraud that resulted Serious Fraud Office confirmed the employees’ concerns were well- in one or more employees being dismissed founded and that there had been improper conduct. In November 2015, were also identified.48 Many companies the SFO agreed a deferred prosecution agreement with Standard Bank, would avoid disclosing these facts – but the first such negotiated settlement in the UK. in our opinion, the transparency works to Vodafone’s credit. What better way is there Standard Bank’s issue was finalised within 18 months of the last cash to employees, consumers and the market withdrawal. This is in stark contrast to the more than seven years it that Vodafone seeks to operate ethically 45 takes for the average foreign bribery case to be concluded. Moreover, than explaining how it has dealt with ethical Standard Bank’s co-operation with the Serious Fraud Office unlocked dilemmas in the past? the door to the deferred prosecution agreement, which in turn resulted in a 33% discount to the USD 25.2 million penalty that the court would otherwise have imposed.46 It is safe to say that employees’ willingness to raise concerns about bribery, and the bank’s proper response to those concerns, were critical factors in Standard Bank avoiding another five years of uncertainty and cost, and receiving a penalty reduction of around USD 8.4 million.

44 Page 22, Report to the Nations on Occupational Fraud and Abuse: 2014 Global Fraud Study, Association of Certified Fraud Examiners, 2014. 45 Page 14, OECD Foreign Bribery Report: An Analysis of the Crime of Bribery of Foreign Public Officials, OECD, 2014. 46 See para 16 of the decision in SFO v Standard Bank plc. 47 Page 132, Sustainability Report 2014/15, Vodafone Group plc, 2015. 48 Page 133, Sustainability Report 2014/15, Vodafone Group plc, 2015. 22 Beneath the surface The business response to bribery and corruption

3. A little bit of self-interest Spotlight on: Spain Finally, senior managers should consider their own interests in ensuring that Recent reforms to Spanish criminal law underscore the importance of their organisation is sending the right directors and senior management sending the right tone from the top. tone from the top on bribery. In many jurisdictions, prosecutors are increasingly First, the Spanish Criminal Code49 now provides for the corporate criminal seeking to bring criminal cases against liability of companies if their employees or directors breach provisions on bribery, influence peddling or bribery of foreign government officials.50 individual company executives. In Penalties upon conviction are severe: a corporate offender may be fined up particular, the US Department of Justice to EUR 9 million, be dissolved, have its business suspended for five years, is working to correct a perception that and/or be subject to judicial management of its business for five years. it has allowed crooked executives to escape consequences for their corrupt However, there is an important defence to charges brought against a actions while punishing the companies company under the Criminal Code: in general terms, if the company had in place an effective compliance programme that was overseen by an internal that employed them. The Deputy compliance officer or body before the relevant offence took place, then the Attorney General has explicitly instructed company may not be found guilty of the offence. What “effective” means her prosecutors that “corporate in this context is not fully articulated by the Criminal Code, but it seems investigations should focus on individuals unlikely a company that had not set a strong tone from the top would be from [the investigation’s] inception”. Even able to leverage the defence. if an executive is entirely innocent of any Second, under the Corporate Enterprises Act (as in other jurisdictions) wrongdoing, the stress and disruption directors of a company are considered to be guarantors of the company’s of being a potential suspect in the early good conduct. Directors of Spanish companies have a legal duty of diligence phase of a criminal investigation can be (supervision, monitoring and control) in respect of the company’s activities. immense. The combined effect of the Corporate Enterprises Act and the Criminal Code is likely to be that a director who fails to take sufficient measures to Furthermore, in many jurisdictions ensure that employees do not engage in bribery may bear personal criminal criminal charges can be brought against responsibility. In other words, a director that committed no corrupt act may the directors of companies as a result still be prosecuted for his or her omission in failing to prevent one in certain of an employee’s corrupt conduct, even circumstances. It will be particularly problematic for the director if the when the director has not personally employee who engaged in the corrupt conduct was (or should have been) engaged in any wrongdoing and was under their supervision and control. entirely unaware of it. We discuss the To date, there have been no major criminal prosecutions of company situation in Spain, which is illustrative directors for the corrupt conduct of employees under their supervision. of that in many countries [see sidebar However, We believe it is only a matter of time before one takes place: in opposite]. More generally, regulators, 2015, more than 2,400 people were arrested for corruption in Spain, up from employers and shareholders alike will ask a mere 389 in 2010.51 Equally, the Spanish government recently reaffirmed its tough questions of a manager who fails commitment to vigorously enforcing its foreign bribery laws.52 to detect corrupt conduct in a business Companies and directors should therefore examine critically their existing unit under his or her supervision. Such anti-bribery policies to see if they are really effective and there are no an experience is likely to be extremely important omissions. When only 40% of Spanish respondents think uncomfortable and has the potential to their anti-bribery policies work well in practice, and only 15% of Spanish be career-limiting. Few managers would respondents understand those policies, it seems that many companies have be happy to hear from an employee a lot of work to do. that there is corrupt conduct occurring in their business – but it is far more unpleasant to hear the same news from the CEO, the media or a police officer.

49 Article 31 bis. 50 Articles 427, 430 and 445, respectively, of the Criminal Code. 51 “Solo en 2015 se detuvieron en España a 2.442 personas por corrupción”, La Informacion, 18 February 2016. 52 “Ministry of Justice confirms full compliance by Spain with OECD recommendations to combat bribery in international transactions”, Press Release, Ministry of Justice, 16 March 2016. 23 Beneath the surface The business response to bribery and corruption

Chapter 3:

Self-reporting must be considered

24 Beneath the surface The business response to bribery and corruption

25 Beneath the surface The business response to bribery and corruption

Responding to bribery and corruption A willingness to speak out? Without exception, all A significant minority of respondents (41%) took the decision to self-report on respondents who had discovering bribery or corruption in their organisation. However, there were discovered bribery in substantive differences between jurisdictions. More than two-thirds of respondents their own organisation in China said they had informed law enforcement agencies, while just 14% had done said they took steps to the same in Brazil. address the issue. This could be explained by an apparent lack of knowledge regarding self-reporting Businesses are not very regimes around the world. Less than one-third of respondents could identify any likely to fire employees jurisdiction that rewards companies for voluntary disclosure. If prosecutors want (12%) or inform to see higher levels of self-reporting by international companies, then they need shareholders (11%) to make sure the benefits of doing so (for instance, easier access to negotiated following the discovery of settlements or reduced sentences upon conviction). bribery or corruption. Despite the need for greater understanding, respondents nevertheless revealed a willingness to self-report, with 99% stating they would self-report to law enforcement or regulators if they discovered bribery or corruption in their organisation tomorrow. Almost all respondents recognise the growing co-operation between law enforcement agencies in different jurisdictions to enforce bribery and corruption laws. This was most keenly felt by Brazilian respondents, perhaps due to the relatively recent introduction of anti-bribery laws in this jurisdiction (at the beginning of 2014). Operations directors were the most attuned to the increased collaboration between law enforcement agencies, which once again underlines their role as the most hands- on when it comes to the practical management of bribery and corruption.

What do businesses do when they discover bribery or corruption?

Terminate tainted Change policies Inform law contracts and procedures enforcement agencies

26 Beneath the surface The business response to bribery and corruption

Negotiated settlements Spotlight on: France Negotiated settlements – under which prosecutors agree not to prosecute persons suspected of bribery in return for restitution actions French law does not provide for negotiated – are big business: more than 400 worldwide have resulted in more settlements, which are usually regarded as than USD 7 billion of monetary sanctions.54 In fact, in a world where creatures of Anglo-American jurisprudence. 69% of all foreign bribery cases are resolved by way of negotiated Proposals in February 2016 that negotiated settlements, it is no exaggeration to say that they are the mainstay of settlements could be included in a foreign bribery enforcement as we know it.55 forthcoming corruption bill were quickly withdrawn in response to professional Proponents of negotiated settlements claim that they incentivise scepticism expressed by many French offenders to self-report bribery that would otherwise go undetected judges, legislators and practitioners. and unaddressed by law enforcement. Foreign bribery is particularly Consequently, a company that discovers difficult to detect: only 14% of foreign bribery cases are initiated as corrupt conduct that breaches both French a result of law enforcement agencies’ own investigations.56 For their and foreign law cannot reach a negotiated part, corporations seek negotiated settlements because they reduce settlement with French prosecutors in uncertainty around whether there will be a prosecution because parallel to other jurisdictions as part of a the restitution costs are lower than the (often fearsome) maximum “global settlement”. penalties for offending and because avoiding conviction means the Prosecutions in which offenders faced offender remains eligible for public procurement. punishment in two different jurisdictions for substantially the same conduct have been The vast majority of negotiated settlements to date have been with US seen as formally correct but substantively prosecutors. This is no surprise considering that for 20 years the US improper and a violation of the general was almost the sole enforcer of foreign bribery laws and that so-called principle of non bis in idem. Moreover, in alternative disposals of one sort or another have long been a mainstay the specific context of the bribery of foreign of criminal and regulatory enforcement in the United States.57 In recent public officials, prosecutors could choose years, other jurisdictions have sought to replicate the perceived success to have regard to article 4(3) of the OECD of the US approach. Canada, Nigeria, Costa Rica, Germany, Kazakhstan Anti-Bribery Convention53 (which suggests and Switzerland have all used negotiated settlements to resolve bribery prosecutions for corrupt conduct across 58 multiple jurisdictions should generally cases. The introduction of deferred prosecution agreements in the take place in only one jurisdiction) when United Kingdom was specifically intended to increase the number deciding whether to bring charges. In these of formal resolutions under the Bribery Act.59 Ireland and other circumstances, how should companies jurisdictions are now considering introducing negotiated settlements that self-report corrupt conduct to foreign for bribery offences. prosecutors expect to be treated by French prosecutors if there is a French dimension We agree that there are many arguments in favour of allowing to the conduct? prosecutors the option to form negotiated settlements with wrongdoers, and particularly those that self-report bribery that The question is not merely theoretical, otherwise would likely have gone undetected. However, there are still a as the Vitol case shows. Like a number of number of issues that mean negotiated settlements will not always be companies, the oil company Vitol SA was found to have bribed Iraqi public officials to appropriate for every circumstance. win business under the UN-administered Oil for Food scheme in the 1990s. Having pleaded guilty to a criminal charge of grand larceny under New York law pursuant to a 2007 plea agreement with the Manhattan District Attorney’s Office, Vitol was 53 Formally the Convention On Combating Bribery Of Foreign Public Officials In International Business Transactions. Both France and the United States are parties to that convention. subsequently indicted in France and referred 54 Page 19, Left out of the Bargain: Settlements in Foreign Bribery Cases and Implications for Asset Recovery, Anyango Odour to the Paris Criminal Court. The same Iraqi et al, Stolen Asset Recovery Initiative, 2014. 55 Page 19, OECD Foreign Bribery Report: An Analysis of the Crime of Bribery of Foreign Public Officials, OECD, 2014. schemes that were the subject of the New 56 Page 15, OECD Foreign Bribery Report: An Analysis of the Crime of Bribery of Foreign Public Officials, OECD, 2014. York plea agreement were the basis of the 57 Page 2 and Chapter 2, Deferred Prosecution Agreements: The law and practice of negotiated corporate criminal penalties, Polly Sprenger, 2015. foreign bribery charges under French law. 58 Page 18, Left out of the Bargain: Settlements in Foreign Bribery Cases and Implications for Asset Recovery, Anyango Odour et al, Stolen Asset Recovery Initiative, 2014. 59 Page 20, Consultation on a new enforcement tool to deal with economic crime committed by commercial organisations: Deferred prosecution agreements, UK Ministry of Justice, May 2012.

27 Beneath the surface The business response to bribery and corruption

When global settlements aren’t global For corporations, a key incentive to self-reporting and engaging Spotlight on: France (cont) prosecutors in settlement negotiations is that it reduces the risk of prosecution. As a result, 31% of foreign bribery cases result from In July 2013, the Paris Criminal Court the offender informing law enforcement about their own corrupt handed down a first instance decision in conduct.60 This reflects the long-standing principle in the domestic Vitol. It found that French courts should criminal law of many jurisdictions (often informal, but sometimes regard an existing foreign negotiated formal, as in the Spanish Criminal Code) that self-reporting offenders settlement as a bar to prosecution in should be treated more leniently than those whose offending is France over what is fundamentally the discovered by authorities. same underlying conduct. That court took an analogous decision in June 2015 However, negotiated settlements are often problematic when applied in respect of other companies that had to foreign bribery cases as they almost invariably involve conduct across reached a foreign negotiated settlement multiple jurisdictions. In order to avoid prosecution in any jurisdiction, over Oil for Food issues. suspects will need to negotiate a so-called global resolution that In February 2016, the Court of Appeal gave covers all of the relevant jurisdictions. At best, this will be delicate and judgment in an appeal of the Paris Criminal complicated, but if negotiated settlements are unavailable in one of Court’s July 2013 decision in Vitol. The the jurisdictions, it will simply be impossible. Moreover, negotiated Court of Appeal found as a matter of law settlements in the US and UK often require the parties to admit publicly that foreign negotiated settlements should certain facts about the problematic conduct – admissions that would be a bar to subsequent prosecutions in quickly make their way to prosecutors in other jurisdictions. France, stating: “considering the growing risk of multiple prosecutions, it is legitimate These tensions can be illustrated by examining the negotiated for the protection of citizens seeking settlements reached between BAE Systems plc, the US Department of justice to follow the same logic. So, the Justice and the UK Serious Fraud Office in relation to the company’s lower court rightfully ruled in the context conduct in selling radar systems to Tanzania. Although described as a of the application of Article 14, 7° of the global settlement, the settlements only resolved allegations under US Covenant, and added that Article 6 of the Code of Criminal Procedure, which deals and UK law. If there had been conduct under the law of Tanzania that with the extinguishing of the charges with was problematic, then Tanzanian prosecutors would still be entitled to res judicata, makes no distinction as to bring proceedings against responsible persons. whether res judicata is in France or abroad”. In the past, when only a handful of jurisdictions bothered to enforce However, on the specific facts of Vitol, the Court of Appeal found that the substance their bribery laws, this was a mostly theoretical risk. But as jurisdictions of the New York grand larceny charges was such as France ([[see sidebar]]) step up their enforcement efforts, not coterminous with the French foreign the risk of being unable to negotiate settlements with all relevant bribery allegations. Consequently (the jurisdictions increases. Subsequently, an unintended consequence of Court of Appeal said) there was no non greater enforcement by more jurisdictions may be that self-reporting bis in idem issue, and there was no bar to in any jurisdiction is less attractive. further prosecution of Vitol. The Court of Appeal’s decision has been appealed to the French Supreme Court. Similarly, the Paris Criminal Court’s June 2015 decision in respect of the other Oil for Food companies will be appealed to the Court of Appeal. In the meantime, the inability to form negotiated settlements in France, and the continuing ambiguity around how foreign negotiated settlements will be regarded in French law, presents companies with real dilemmas in determining whether to self-report corrupt conduct. Under these circumstances, there is a real risk that prosecutors will not be informed of corrupt schemes, and a chance to transparently and formally address them will be missed. 60 Page 15, OECD Foreign Bribery Report: An Analysis of the Crime of Bribery of Foreign Public Officials, OECD, 2014. 28 Beneath the surface The business response to bribery and corruption

The position of individuals Spotlight on: Switzerland A further problem arises around the position of individuals who are accused of wrongdoing. In some jurisdictions, most notably the United Swiss law enforcement officers are presently Kingdom, Negotiated Settlements are only available to corporate entities engaged in a vigorous and wide-ranging and not individuals. In other jurisdictions, there is an increased emphasis investigation into allegations of bribery, on the prosecution of individuals, regardless of how a case against a corruption and fraud at football’s ruling corporation is resolved. This is particularly the case in the United States, body, FIFA. Many suspects have been where the Department of Justice has reoriented itself to targeting arrested and a number of premises linked executives involved in corporate crime. to FIFA and its officers have been raised. Swiss authorities are co-operating with The prospect of settling the legal liability of the company while a number of other jurisdictions including being unable to resolve the reputational, administrative and financial the United States and France. There is an liabilities of having individual employees or officers prosecuted will be obvious determination among prosecutors an unattractive one. The company will not be able to move on and to ensure that Switzerland is not a locus of learn from the issue if it remains embroiled in a practical sense with international bribery, and that bribery and investigations or prosecutions of associated individuals. Under these corruption is not a major risk for companies circumstances, negotiated settlements are less likely to be a viable tool doing business in Switzerland.61 to comprehensively resolve allegations of bribery and corruption. Despite this generally positive picture, the country has not – to date – provided What voice for victims in developing countries? businesses or prosecutors with a leading The failure of negotiated settlements to be truly global has also been a framework of anti-bribery laws. Specifically, criticism voiced by Transparency International, Corruption Watch and Article 322ter et seqq. of the federal Criminal Code prohibits the bribery of the UNCAC Coalition. Advocating the interests of developing countries, Swiss and foreign public officials, and they argue that negotiated settlements around foreign bribery are often provides for significant criminal penalties finalised without proper consideration of the impact on the countries upon conviction. But B2B bribery is not which suffered the greatest harm from bribery. per se an offence under the Criminal The World Bank notes that 97% of bribery penalties were imposed Code. Instead, it can only be investigated as unfair commercial competition under by countries other than those whose public officials were bribed. Article 4a of the Unfair Competition Act. In Furthermore, only 3% of those penalties were transferred to the 2012, the Federal Sports Office concluded countries whose public officials were bribed.63 More than USD 20 that the emphasis on competition left the billion per annum is stolen from developing countries and hidden in position around employees and officers industrialised countries every year, while only USD 197 million has ever of international sports organisations been returned to those same countries as a result of foreign bribery 62 unacceptably ambiguous. settlements.64 The true victims of most foreign bribery schemes – the Within the scope of the Unfair Competition citizens of developing countries – see little in the way of restitution as a Act, public prosecutors are entitled to result of negotiated settlements. commence an investigation only upon filing of a formal criminal complaint by a third party: in other words, it is not possible for a prosecutor to commence a B2B bribery investigation at their own initiative e.g. because they have received intelligence from an informant or foreign law enforcement agency.

61 Switzerland is considered a low risk jurisdiction in the TRACE Matrix that assesses global business risk in different countries. Switzerland is ranked as the 7th least corrupt jurisdiction in Transparency International’s Corruption Perceptions Index which examines perceptions of state corruption among civil groups. 62 “Swiss move to show corruption a red card”, Simon Bradley, SwissInfo, 05 December 2012. 63 Page 73, Left out of the Bargain: Settlements in Foreign Bribery Cases and Implications for Asset Recovery, Anyango Odour et al, Stolen Asset Recovery Initiative, 2014. 64 Page 78, Left out of the Bargain: Settlements in Foreign Bribery Cases and Implications for Asset Recovery, Anyango Odour et al, Stolen Asset Recovery Initiative, 2014. 29 Beneath the surface The business response to bribery and corruption

The risk of discretionary disbarment Negotiated settlements have traditionally been attractive to Spotlight on: Switzerland (cont) corporations because they usually do not involve a conviction for bribery or corruption being recorded, which would ordinarily disbar This potentially exposes corporations the offender from public procurement for a number of years. However, to the risk that its employees or officers the incentives to self-report and reach a negotiated settlement may be could be secretly bribed to act against the weakened according to the provisions of the latest Public Procurement company’s interests and if it does not file Directive of the European Union that came into force in February 2015. a complaint itself (because it is unaware or because the corrupt individual prevented This is because – as before – those convicted of a bribery offence it), nothing would be done. A 2011 report face mandatory debarment from all public procurement. However, by the Council of Europe’s Group of States a corporation may also be disbarred on a discretionary basis if it “is Against Corruption recommended repeal guilty of grave professional misconduct, which renders its integrity of the requirement for a criminal complaint questionable”.65 If a corporation admits to misconduct as part of a before investigation.69 Finally, the maximum bribery-related negotiated settlement, and if the public body is aware penalties applicable upon conviction of those admissions (perhaps because competitors have gleefully for breach of Article 4a of the Unfair Competition Act are lower than for the drawn it to the public body’s attention), then the corporation could bribery offences in the Criminal Code. end up debarred from public procurement even when one of its objectives in reaching a settlement was to avoid debarment. In response to these perceived weaknesses, the federal parliament recently passed Corporations who rely heavily on public procurement should see this the so-called “Lex FIFA”, a law to reform (and analogous provisions in public procurement rules outside the EU) the Criminal Code. The Lex FIFA created a as a significant risk. Landmark bribery-related negotiated settlements per se B2B bribery offence (i.e. regardless are often in sectors such as arms manufacturing,66 telecoms67 and of whether the conduct took place in a pharmaceuticals68 precisely because they are so dependent on state context of competition), fixed the maximum procurement. If negotiated settlements are not seen as reducing the penalties for B2B bribery as three years’ uncertainty around debarment, then corporations may be tempted imprisonment, and ensured that private associations and sports federations would simply not to self-report their conduct in the first place. both be covered by the B2B offence. Also, parliament allowed prosecutors to commence major bribery investigations at their own initiative. It is unclear when the reforms will actually come into force. To date, most media attention has been focussed on the impact of the Lex FIFA on international sports organisations based in Switzerland, of which there are at least 60. It is true that in recent years UEFA (football), UCI (cycling) and the International Olympic Committee have all been affected by corruption allegations of the type that could be investigated under the reformed Criminal Code. However, Switzerland is also a popular location for commodities trading houses, financial institutions and EMEA headquarters, which are often required to do business in high bribery risk markets outside Switzerland. Consequently, we expect the Criminal Code reforms will lead to an increase in the number of B2B bribery investigations commenced by Swiss prosecutors.

65 Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public procurement and repealing Directive 2004/18/EC, Official Journal of the European Union, L 94/95, 28 March 2014. 66 For example the BAE Systems and Lockheed Corporation negotiated settlements. 67 For example the Alcatel-Lucent and Siemens negotiated settlements. 68 For example the Novo Nordisk and Pfizer negotiated settlements. 69 Third Evaluation Round Evaluation Report on Switzerland on Incriminations, Council of Europe GRECO, 21 October 2011. 30 Spotlight on: Germany

The healthcare sector bears a higher bribery risk than many other sectors. Probably the most important reason for this is that (outside the USA) most healthcare products are approved, shortlisted and/or purchased by state-funded healthcare systems. The relevant gatekeepers for these sales are doctors, hospital directors and health ministers, but they are neither using the products themselves nor spending their own money. These factors create an environment where gatekeepers are more likely to request or be offered bribes in return for sales. As those gatekeepers are considered public officials under most foreign bribery laws, regulators have targeted pharmaceuticals companies and there have been a number of major enforcement actions arising from exactly such circumstances.70 For example, SciClone paid penalties of USD 13 million after doctors and hospital administrators were bribed with travel, hospitality and cash gifts;71 Eli Lilly paid USD 29 million after bribes were paid to health ministry officials by way of bogus market research arrangements;72 and Novartis paid USD 25 million after physicians were paid secret commissions to prescribe its drugs. In this global context, the position of Kassenärzte under German anti- bribery law is anomalous: these physicians are formally self-employed but treat patients within (and are remunerated by) the public health insurance system. The Federal Court of Justice has held that Kassenärzte are not public officials for the purposes of articles 331 and 332 of the Criminal Code which prohibits public officials from accepting bribes, but neither are they businesspeople for the purpose of article 299 of the which criminalises B2B bribery. Consequently, pharmaceuticals companies and other healthcare market participants could not be prosecuted under criminal anti-bribery laws if they were found to have provided Kassenärzte with cash, favours or gifts. Although certain civil actions were still available (under the law against unfair competition, the physicians’ professional law, the social law and industry codes), this situation was widely seen as creating uncertainty. The federal government has now proposed to address this issue by adding new provisions to the Criminal Code which will criminalise passive bribery and active bribery respectively.73 The proposed reforms will specifically extend the B2B bribery provisions to all state-regulated healthcare professions, including all academic health professionals such as physicians, dentists, veterinarians, pharmacists, psychological psychotherapists as well as child and youth psychotherapists. Non-academic health professionals including nurses and physiotherapists will also be included. No distinction will be made between employed and freelance professionals and between statutory and private health insurances. These proposed reforms are now before the federal parliament and should be passed shortly. We believe that this will bring German law into line with global best practice and provide greater certainty to healthcare companies and professionals alike.

70 See for example the remarks of Andrew Ceresney, the Enforcement Director of the US Securities and Exchange Commission, to the 2015 Pharmaceutical Compliance Congress: “FCPA, Disclosure, and Internal Controls Issues Arising in the Pharmaceutical Industry”, Speech, Ceresney/US Securities and Exchange Commission, 03 March 2015. 71 “SciClone Announces Final Resolution With The Securities And Exchange Commission And The Department Of Justice”, Press Release, SciClone Pharmaceuticals, 04 February 2016. 72 “SEC Charges Eli Lilly and Company with FCPA Violations”, Press Release, US Securities and Exchange Commission, 20 December 2012. 73 Articles 299a and 299b. Chapter 4:

Growing your business means addressing the issues

Beneath the surface The business response to bribery and corruption

Dotting the Is and crossing the Ts Modern, sophisticated investors will now consider bribery and corruption Spotlight on: Brazil issues before entering into mergers and acquisitions. This is wise in the light of issues around successor legal liability, the risk of buying business Outrage over bribery and corruption has that might turn out to be far less valuable than described, and the caused a wave of popular dissent across reputational issues that might arise acquiring an unethical business. Latin America. In Guatemala, tens of thousands of people took to the streets This is clearly on the minds of many respondents to our research, who to express their fury over a corrupt duty expressed concern over the effect that discovery of bribery or corruption evasion scheme known as “La Linea”.74 The in their organisation could have on potential investors. Moreover, if International Commission Against Impunity bribery and corruption issues were to be discovered during the due in Guatemala concluded the corruption was diligence process, the price a buyer would be willing to offer would be directed from the highest echelons, and Vice substantially reduced. President Roxana Baldetti and President Otto Perez Molina resigned and were arrested However, there is no consistency on this issue between board members. on bribery charges.75 In Chile, allegations of 81% of finance directors say they conduct anti-bribery due diligence on corrupt conduct by members of President deals, while only 43% of operations directors agree. Bachelet’s family caused her approval rating to plummet and led to calls for her resignation.76 And in Honduras, torchlit demonstrations took place after allegations that patients in Fear of the unknown the state healthcare system had died due As well as exploring M&A opportunities, to drug shortages while USD 350 million almost all respondents said they plan to do was embezzled from hospitals77 – including more business with developing markets improper transfers to campaign funds. during the next five years. However, this But nowhere have bribery allegations potential for growth is being held back of respondents said had a more dramatic effect than in Brazil. due to fears of doing business in particular they conduct specific Operation Carwash is an ongoing federal countries. CEOs were the most risk averse, police investigation into bribery, fraud and anti-bribery due with 77% avoiding certain jurisdictions corruption at Petrobras, the state-owned diligence for M&A for commercial activities. Respondents in oil company. Project Carwash is a hybrid activity China were even more cautious, with 88% of public sector and B2B corruption. ruling out certain jurisdictions as too risky. Investigators allege that contractors formed a bid rigging conspiracy to raise the price Respondents cited multiple and varied Petrobras paid for construction; in order reasons for avoiding certain countries, to keep the cartel on track, bribes were including: paid to Petrobras employees, politicians and government employees. Prosecutors –– threat of terrorism / violence estimated the bribes could total more than –– economic / political instability USD 5 billion.78 Even Brazilians inured to of respondents said corruption were shocked, and millions took cultural differences they would avoid doing –– to the streets to demand President Dilma business in certain –– scarcity of resources / raw materials Rousseff’s removal.79 jurisdictions –– labour shortages –– transportation issues due to geography

74 “An End to Impunity in Guatemala?”, Mike Allison, Al Jazeera, 29 June 2015. 75 “From President to Prison: Otto Pérez Molina and a Day for Hope in Guatemala”, Francisco Goldman, The New Yorker, 04 September 2015. 76 “Chile’s President Michelle Bachelet Approval Sinks Over Economic Malaise, Corruption And Stalled Reforms”, Brianna Lee, International Business Times, 16 September 2015. 77 “How hitmen and high living lifted lid on looting of Honduran healthcare system”, Nina Lakhani, The Guardian, 10 June 2015. 78 “Petrobras corruption scandal could reach US$ 5.3bn”, MercoPress, 12 October 2015. 79 “Millions join Brazil impeachment chorus in threat to Rousseff”, Anna Edgerton and Raymond Colitt, Bloomberg, 14 March 2016. 34 Beneath the surface The business response to bribery and corruption

Doing business in risky markets Spotlight on: Brazil (cont) IIbn Battuta may have been the world’s first globaliser: between his birth in 1304 and his death in 1368, he criss-crossed Africa, the Middle East The question for companies operating in and Asia gathering and disseminating information about the cultural, Brazil now is whether the Project Carwash religious and trading practices of the peoples he encountered. In doing allegations and the stringent Anticorruption so, he helped develop a global network of commercial and cultural Law of 2013 have precipitated a genuine exchange. Over the following six centuries, those global networks have change in Brazilian corporate culture. continuously intensified to the point where, as Martin Luther King put Our research suggests that the business it in 1967, “before you finish eating breakfast in the morning, you’ve community has hardened its attitude depended on more than half of the world.”81 towards corporate corruption: fully 100% of Brazilian executives believed that their It is therefore no surprise that almost all respondents to our survey see company’s top management would further engagement with new markets as critical to their companies’ reject new business if there were bribery continued success. In fact, developing markets may be more important and corruption concerns associated. than ever: more than 40% of the world’s population lives in developing Considering Brazil has been classed as a countries and the World Bank expects developing markets to grow twice high bribery risk market,80 this is a surprising as fast as high-income countries in 2016.82 finding: has the public revulsion at the scale of the bribery alleged in Project Carwash But high-growth developing markets also tend to bear higher bribery translated into a fundamental shift in the and corruption risks.83 Each of the once-lauded BRICS economies has way business operates? been blown off course by corruption scandals, perhaps none more so Perhaps not: our Brazilian respondents than Brazil ([[see sidebar]]). So how can corporations grow their business were also twice as likely to worry that in developing markets without becoming entangled in corrupt conduct? aggressive targets set by management would induce employees to use bribery as a short cut to growing business: 42% of respondents held that concern, compared to only 19% of respondents worldwide. Under these circumstances, is seems possible that some Brazilian businesspeople could revert to the “bad old ways” when the pressure to close deals is applied. For companies doing business in Brazil, there is a unique opportunity to capitalise upon the post-Carwash sentiment of businesspeople and civilians alike. Those who are able to show a track record of anti-bribery will find it easier to be accepted as trusted business partners; those who proactively engage with their employees around training and whistleblowing will find a newly-receptive audience; and most importantly, those who learn from the lessons of Petrobras can avoid the legal and reputational firestorm that has enveloped that company.

80 See the TRACE International Gobal Business Bribery Risk Index. 81 “A Christmas Sermon on Peace”, Rev Martin Luther King Jr, The King Center, 24 December 1967. 82 See table on p.4, Global Economic Prospects, World Bank Group, January 2016. 83 “Quantitative relations between corruption and economic factors”, Shao et al, The European Physical Journal B, 12 April 2007 (Eur. Phys. J. B 56, 157–166 (2007)) 35 Beneath the surface The business response to bribery and corruption

How should corporations measure risk anyway? In order for anti-bribery measures to be effective and efficient, they have Spotlight on: Hong Kong to be focused on the markets that pose the highest bribery risk to the company. Individual businesses often find it difficult to identify those Until recently, companies in Hong Kong markets for two reasons. regarded the US Foreign Corrupt Practices Act as the only game in town. This First, there is not yet an established and satisfactory index that measures reflected the fact that for many years the the bribery risk posed to international businesses around the world. We United States was the only jurisdiction to have observed many companies that look at a country’s ranking on the consistently enforce its foreign bribery Corruption Perceptions Index (CPI). Compiled by the international non- laws across Asia. Moreover, half of all US governmental organisation Transparency International since 1995, the Foreign Corrupt Practices Act corporate CPI compares civic organisations’ subjective perceptions of corruption enforcement actions in 2014 and 2015 in the public sectors of different countries. The CPI is certainly the involved Asia. Most companies in Hong best known bribery index – but it may not be the perfect tool for Kong developed their anti-bribery informing business decisions. That is because bribery affects citizens programmes to reflect the requirements and corporations in different ways, and works differently in the public of US law, and paid little attention to other jurisdictions’ anti-bribery laws. But in and private sectors. Consequently, the intensity and nature of citizens’ doing so, have they unwittingly exposed subjective concerns reflected in the CPI may be different from those of themselves to risk in the light of changing international businesses. enforcement trends? The World Bank’s Worldwide Governance Indicators report takes a We believe that two emerging trends different approach to the CPI in that it aggregates objective metrics that suggest the answer is yes. Domestically, the indicate the quality of state governance. This includes production of a Prosecutions Division of the Hong Kong specific control of corruption metric across most countries of the world. SAR Department of Justice has become Better control of corruption (and state governance generally) should be increasingly assertive in enforcing the associated with a lower corruption risk posed to corporate investors, Prevention of Bribery Ordinance (POBO), so corporations should find this report informative. Yet its utility may be Hong Kong’s primary anti-bribery law. A greater number of prosecutions have been limited by its orientation to civil society concerns and the fact that the brought in recent years, and the penalties last analysed data appeared in 2014. applied by Hong Kong courts have increased Rand Corporation and TRACE International have attempted to plug in severity. (An offender may be fined HKD the information gap by producing a specific tool for measuring the 500,000 and imprisoned for 10 years.) While POBO enforcement action is still focused on bribery risk posed to international investment. By analysing indicators of individuals, corporate entities may also be concern, the Global Business Bribery Risk Index (GBBRI) provides figures prosecuted under Hong Kong law. that are particularly useful to international business. This has produced some interesting findings: Brazil, for example, is seen as posing a Internationally, the recent enforcement significantly higher bribery risk to businesses (as measured by the GBBRI) actions against Standard Bank (which than it does to private individuals (as measured by the CPI). Yet thus far, received a penalty of USD 33 million) and Sweett Group (which received a penalty of only 2014’s data has been published and the next report is scheduled for GBP 2.2 million) placed the UK’s Bribery Act late 2016. It remains to be seen whether the GBBRI will develop into an into the spotlight. The Standard Bank action established tool for business. attracted particular attention in Hong Kong because the bank became a subsidiary of the Chinese ICBC after the problematic conduct took place. If the UK Bribery Act was previously seen as a paper tiger, it now seems to have real teeth. The implications of ignoring Hong Kong and UK law are significant. A practical example is the potential response to the bribery risk of hiring so-called “Princelings”: the offspring of influential decision makers.

36 Beneath the surface The business response to bribery and corruption

Secondly, even where it is possible to get an idea of the bribery risk Spotlight on: Hong Kong (cont) associated with a country as a whole, that prevalence may not reflect the bribery risk attached to investment in a particular sector. In our experience P Morgan and Qualcomm paid high penalties of bribery risk often varies significantly between industries: for example, after US regulators established they had hired a telecoms operator that is dependent on government for allocation of Princelings to win business from state entities number blocks and spectrum will often face a higher bribery risk than a under their parents’ control. A number of manufacturer of an unregulated non-consumer product. other, similar investigations are ongoing. In the absence of a single number that quantifies the bribery risk, the An FCPA-centric response to Princelings decision about whether to proceed will have to be made based on the would probably consist of screening judgement of a company’s key executives. That decision can best be prospective employees for connections made when there is a shared understanding of the corporate culture in with public officials (including senior respect of bribery risk (a topic we discuss in Chapter 2), a business plan employees of state-owned enterprises) and creating an information barrier between a that considers bribery issues from the start, and an understanding of how Princeling employee and work performed the company has successfully managed bribery risk in the past. for their parent’s organisation so the employer cannot be accused of receiving an advantage in return. But this does not fully cover the bribery risk. Unlike the FCPA, the POBO and UK Bribery Act also criminalise B2B bribery. Consequently, it would be an offence under both these laws to hire a Princeling if the intention was to improperly influence the private sector company managed or controlled by the parent. The appropriate response to Princelings would need to involve screening for personal connections to not only government officials and managers of state-owned enterprises, but also privately-owned future or ongoing customers. Moreover, the POBO prohibits the sweetening of a public official (to maintain an overarching relationship even in the absence of identifiable business or business advantages). The FCPA-inspired information barrier method would fail as it does not matter whether there was an intent to obtain business. However, even simply to offer the Princeling employment to sweeten the public official would breach the POBO. What the Princeling example demonstrates is that anti-bribery programmes that are overly focused on FCPA compliance may result in companies doing business in Hong Kong having inadequate controls and being exposed to unacceptable levels of risk. Instead of levelling down compliance to the standards of the FCPA, it is much better to adopt the highest standards applicable to the business worldwide and roll that out across the organisation.

37 Beneath the surface The business response to bribery and corruption

Not just whether to invest, but how? More generally, companies can mitigate and more closely When launching or reviewing business in high risk monitor bribery risk by taking practical steps such as: environments, companies have a choice about how they taking in-house certain functions that involve frequent can structure their investment in order to mitigate bribery –– or high risk contact with government agencies, even risk. The most significant issue to consider is the degree to when those functions are usually performed by third which local actors will play a role in the business. In some party service providers e.g. customs clearance, product markets (particularly in the Middle East), there is great certification external pressure to partner with a local investor. In others, it may simply be seen as a way of reducing start-up costs, –– scheduling compliance audits and trainings on a gaining market knowledge and leveraging local networks. risk-sensitive basis so that business units in higher risk The risk is, of course, that your partner does not share your jurisdictions are reviewed more frequently compliance values and that their success on the market –– reducing or eliminating the use of agents or third party to date has resulted from bribery. Even aside from the representatives, especially for sales to public institutions reputational and commercial liabilities, corrupt conduct by –– ensuring that employees in the high-risk market have your joint venture partner can easily create legal liability for frequent contact and support from colleagues in other you – even if you are unaware of it. markets. This reduces the risk that local employees will A further significant consideration revolves around the feel isolated from the rest of the organisation and are use of agents and other third parties. Almost 54% of unable to raise concerns about potentially improper foreign bribery cases involve the use of such persons to conduct pay bribes.84 In some cases, those entities were deployed precisely for the purpose of engaging in corrupt conduct, but on other occasions, the business simply failed to have proper oversight of their activity. The use of agents in high bribery risk markets should only take place where there is a sound business case for their use and where their activity can be closely monitored.

84 Page 29, OECD Foreign Bribery Report: An Analysis of the Crime of Bribery of Foreign Public Officials, OECD, 2014. 38 Spotlight on: Singapore

Companies based in Singapore often serve as hubs for the whole had obligations as professionals over and above just complying Asia-Pacific region: for them, the greatest anti-bribery challenge with the criminal law. can be ensuring employees across multiple jurisdictions and “When you operate across multiple jurisdictions, you have to business units share the same values. We spoke to a professional understand all the legal regimes upon you – and then pick the with real insight into this important topic: drawing on her extensive toughest applicable regime as the base level for compliance experience as a General Counsel and Director, she explained how across the whole business. Right now, I think that’s the UK she strengthened her company’s anti-bribery culture across Asia- Bribery Act, but standards are always improving. Pacific and worldwide: “Fundamentally, I think that most employees are good people “Tone from the top is critical: my CEO was on board, and I who want to do the right thing, but in large organisations there helped him prepare a personal anti-bribery message to all our will always be some people who make poor choices. The employees. We explained not only that we had to comply with critical moment is what happens after those poor choices: an anti-bribery law, but that we rejected bribery as a value. Our organisation with good corporate culture will be resilient and message was positive: “we will provide you with the support you will be able to resolve the consequences of those choices, but need to do your business in an ethical and legal manner”. There in an organisation with poor corporate culture those choices was a breakthrough when we rejected a business opportunity can become a systemic practice or an existential threat. because the bribery risk was too high – and then we explained that decision to the employees involved. We demonstrated that “Employees want more than a paycheck from their job: they when push came to shove, we put our long-term values over want to build something of which they can be proud. So when short-term gain. you’re responding to ethical problems, you have to be aware your response could really impact your colleagues’ sense of “The support of the CEO and the Board improved take-up across self-worth and purpose. When people were dismissed for ethical different regions and business units. Some people initially said lapses, we told our workforce: that deterred some employees “you corporate guys don’t know it works here”, but if you make from transgressing, but more importantly it sent the message a business case for change people will listen. As general counsel, that if employees raised concerns, the company would take obviously I saw bribery as a legal risk, but it was a commercial issue them seriously and act upon them. And once we showed that, too: our brand and our integrity were critical to our commercial employees initiated more conversations with the legal team – future. I think the “social licence to operate” concept was highly not just about anti-bribery, but also about compliance and relevant to us: we needed the confidence and support of the legal issues generally”. communities in which we operated, and we felt strongly that we

Spotlight on: United Arab Emirates

Companies operating in the UAE face an anti-bribery trade is hugely important to the UAE economy; a sophisticated conundrum: the domestic bribery risk is low but the bribery outward-focused financial market exists in the UAE; and risks faced by the typical UAE-based company can be rather international companies often use Dubai as an operational high. This apparent contradiction arises as a result of the hub for the region. Consequently, companies doing business country’s unique place in the world and the cross-border in the UAE also need to consider the bribery risk posed by the activities conducted by most UAE companies. Anti-bribery economies with which the UAE is closely connected – and legislation in the UAE is generally sufficient for the protection those economies are often significantly riskier than the UAE. of businesses. At a federal level, articles 234-239 of the For example, the UAE has often acted as a trading post and Penal Code prohibit bribery of domestic public officials and financial service centre serving customers in Iran, Iraq, Pakistan businesspeople, and a person convicted of bribery may be and Sudan, each of which is a high bribery risk jurisdiction. fined and imprisoned for up to ten years. Moreover, the sanctions and export control regimes that target certain economic actors in those countries provide an added Anti-bribery is recognised as a developing area and the Penal motive for corrupt transactions. Code is supplemented by other federal and Emirate-level laws. In the Emirate of Dubai, Articles 118 to 122 of the Dubai Penal The UAE does not yet have a federal law that prohibits the Code prohibit bribery of domestic public officials, and the bribery of foreign public officials or businesspeople outside Dubai Financial Fraud Law criminalises the receipt of illicit the UAE. However, much (if not most) foreign bribery by funds (which would include bribes) and the fraudulent receipt UAE persons and entities will be illegal as a result of the of public funds (which would include funds received from extraterritorial operation of foreign anti-bribery laws – for state-owned enterprises). example because they are subsidiaries or agents for foreign companies, because their employees are citizens of foreign The country performs well on the relevant corruption indices: states (more than 80% of UAE residents are expats),85 or Transparency International ranks the UAE alongside France as because the transactions are conducted through foreign the 23rd “cleanest” country in respect of public sector bribery correspondent banks. and TRACE International considers the UAE to be a country that poses a “low” bribery risk to businesses – lower than Portugal Under these circumstances, companies located in the UAE and Spain, for example. In each case, these ratings are better face a significant bribery risk even when the UAE itself is than any other country in the Middle East. not a particularly risky environment. As always, an adequate understanding of an organisation’s exposure to high risk However, the relatively tranquil bribery landscape in the UAE activities and markets will be critical to managing that risk. cannot be divorced from the UAE’s regional context. Foreign

85 “Give expats an opportunity to earn UAE citizenship”, Sultan Sooud Al Qassemi, Gulf News, 22 September 2013. Beneath the surface The business response to bribery and corruption Conclusion

Our research has shown that the international business Starting points for those conversations could be: community has good awareness of bribery and do we really understand how our anti-bribery corruption as overarching concerns. There is also –– policies relate to the laws of the countries we recognition that bribery is a commercial risk as well as a work in – and to the business we do there? legal one, and that anti-bribery policies are designed to protect the value of a business. Business leaders are also –– how would we respond to a whistleblower, a prosecutor, aware that investigations and prosecutions for bribery are a journalist or an investor who had concerns about the taking place in greater numbers and in more jurisdictions way we do business across multiple countries? than has been the case previously. –– do we think that all our colleagues share our values – or what they would do if they thought we had breached However, business leaders are also aware that addressing ours? those issues is not always easy. Developing anti-bribery policies that are practical requires thought and planning. –– are we missing commercial opportunities because Spreading awareness among colleagues and sending our compliance procedures are less sophisticated than the right “tone from the top” requires a concerted effort. our ability to manage risk? Responding to concerns once they have arisen often involves The responses you get might be surprising, shocking accepting short-term pain to protect long-term gain. or reassuring. As we have discussed throughout this report, there are practical anti-bribery tools that can be deployed. We We are ready for a more sophisticated conversation believe the most effective anti-bribery tool is also the around bribery and corruption – will you join us? simplest: the conversation. If you’re a business leader, we would encourage you to open a dialogue with front line business units.

40 eversheds-sutherland.com

© Eversheds Sutherland (US) LLP 2017. All rights reserved. Eversheds Sutherland (International) LLP and Eversheds Sutherland (US) LLP are part of a global legal practice, operating through various separate and distinct legal entities, under Eversheds Sutherland. For a full description of the structure and a list of offices, please visit eversheds-sutherland.com. 042417