The Campaign Against International Political Corruption
By Scott Proudfoot, Principal
The OECD Convention against the Bribery of Foreign Officials falls under the category of imported public policy developed elsewhere. The Canadian government has bought the package with all the principal elements in place.
Most Canadians don’t know that Canada’s first Cabinet had ministers serving on the boards of railway companies openly promoting their corporate interests; or the first commissioner of the RCMP embezzled funds and fled; or Mackenzie King almost had his long political career cut short by the "Beauharnois scandal" in the thirties.
The history of political corruption in Canada is a story of individual greed and occasionally a story of widespread rot within a particular government institution. It is also a story about growing public intolerance for political practices previously accepted (i.e. buying votes).
Political corruption has become a marginal problem in Canada. Generally public business is carried out honestly if not always competently.
Political corruption can be endemic in some other countries, undermining both public safety and market efficiency. It results in a massive misallocation of public resources.
Having been ignored for so long, the issue of political corruption in developing and newly industrialized countries has arrived on the international political agenda with a vengeance.
Concerted efforts are underway by prominent international agencies to reform the internal governance policies of corrupt regimes by imposing conditions on financial assistance and aid.
Of particular note, attention is being directed at the “supply-side” of the political corruption equation — multi-national corporations who offer bribes to foreign officials.
The anti-bribery offensive is being spearheaded by the Organization for Economic Co-operation and Development (OECD) which recently announced its Convention On Combating Bribery of Foreign Public Officials in International Business Transactions. The Canadian Government is a signatory to this convention and legislation to put the Convention was summarily passed by the Canadian House of Commons at the end of 1998 with minimal public discussion and debate.
That means that internationally active Canadian companies have been drafted into this new battle. Many are still unaware of the liability and cost issues that surround this legislation. It changes the way companies do business internationally — even if they are not in the habit of offering bribes to foreign officials.
Violators of the law will risk large fines, the jailing of executives and public embarrassment.
In complying with the law, corporations will lose business to less scrupulous competitors who may have the advantage of a national government prepared to adopt a more flexible, pragmatic approach.
Corporate administrative procedures must be established which entail direct costs and will slow down the corporation’s response time and remove some degree of flexibility in international marketing programs.
Political Corruption Policy Shows Up on the Radar Screen
Until very recently, political corruption has been a taboo topic internationally.
Its untouchable status has been lifted. Combating political corruption is showing up on international agendas around the world and the rules of international business are quietly starting to shift. The business implications go beyond the specifics of the OECD’s Convention against foreign bribery.
Here are some of the sightings:
- The past G-7 meeting in Denver placed political corruption on the agenda.
- It was on the agenda at the World Economic Forum at Davos.
- The Organization of American States introduced its own wide-ranging convention against corruption covering bribery, bank transparency, and money laundering.
- The Global Coalition on Africa, co-chaired by Robert McNamara has been formed to stamp out graft in Africa by encouraging major companies to forbid their employees from paying bribes to win lucrative contracts. Companies that fail to meet these terms could be fined and barred from doing business in the region for up to five years.
- In September of 1997 over 1,000 delegates from 93 countries gathered in Lima, Peru and endorsed a wide-ranging program to combat corruption.
- Both the World Bank and International Monetary Fund (IMF) have tied loans policy to corruption issues (e.g. Kenya).
- The IMF has even offered to provide its seal of approval to a country that commits to improving it governance process instead of simply meeting strict economic targets.
- Regional development banks and groups such as the Council of Europe, International Chamber of Commerce, International Bar Association, World Customs Organization, etc. — all have initiatives underway to encourage measures against political corruption.
Why the Campaign Against Political Corruption?
Having been ignored for so long, the issue of political corruption now moving up the international agenda for a number of reasons.
Political corruption is bad for business and the global economy!
Global economic expansion is undermined by corruption, which depresses consumer demand and raises the hurdle rate for foreign investment.
A self-evident feature of a global economy is that more and more businesses and individuals do business internationally, investing directly and indirectly in other economies. Consequently, more business people and investors are running up against the issues of political corruption for the first time and recognizing some of the significant business costs.
Corruption is being cited by a number of sources as one of the contributing factors to the current Asian financial crisis. Corruption concerns are starting to temper some companies’ enthusiasm about investments in China.
The impact of corruption on international business transactions is significant. Since mid-1994, the US Commerce Department alone has identified allegations of bribery by foreign companies in some 180 international commercial contracts valued at nearly $80 billion US.
The experience of developed nations suggests more wealth generation and less business risk is possible if a common willingness exists to adhere to some basic ground rules including competitive marketplaces, public budgetary accountability, transparency in public procurement, and the maintenance of the rule of law, particularly business contract law.
There is growing awareness of the human costs of political corruption. This awareness has been heightened by the activities of groups such as Amnesty International and, particularly, Transparency International, a Berlin-based interest group with 60 national chapters around the world. It has been leading an international lobby to establish anti-corruption programs by placing pressure on national governments and international agencies.
It becomes less acceptable to tacitly tolerate political corruption when it can be clearly linked to human rights abuses, the maintenance of repressive, authoritarian regimes and the strangling of fragile democratic institutions.
Political corruption undermines the foreign aid business.Many billions of dollars have been transferred from developed countries to developing countries in the form of bilateral and multilateral aid. Some portion of those aid monies has been diverted to enrich public officials in those countries. There have been repeated examples of corrupt regimes negating many of the intended benefits of aid contributions.
It is difficult to defend aid programs if the most visible result are malnourished peasants in the countryside with minimal sanitation, education and health services while the country’s leaders drive around in Mercedes, scheming how to pad their Swiss bank accounts.
The United States government is pushing the anti-bribery agenda.The US is the pioneer of both introducing and strongly enforcing legal sanctions against the bribery of foreign officials. The US Foreign Corrupt Practices Act has been in place since the mid-seventies.
This Act has also resulted in US businesses losing many contracts overseas and it has inhibited their ability to compete against less constrained competitors. A few years back, CEOs from some of the most important US companies sought a private audience with the American President and told him something would have to be done. President Clinton stated that the Act would not be diluted — but he would make every effort to ensure other countries got in step with the US approach.
The US government has been making a concerted effort in this regard in a number of international fora. As the one super-power left in the world, its wishes carry some weight.
International bureaucracies both reflect and drive international agendas.
The efforts by the OECD, the World Bank, the IMF, the OAS and other agencies is an attempt to propagate and impose the critical features of western business governance on societies with political and cultural traditions less hospitable to secure capital investment and rapid business expansion. To achieve these goals, they are willing to extend their authority into areas traditionally regarded as the purview of national governments.
This is not occurring due to a ground swell in developed countries to reform the internal politics of the developing and newly industrializing countries. It is occurring because a critical mass of international bureaucrats, together with pro-active political, public service elements in OECD countries have some specific views about how international markets should work and they are willing to push some levers to attempt to make it happen.
For all the reasons cited, issues of political corruption are firmly lodged on the global political agenda and there will be pressure to move this agenda along in some desired direction.
Ultimately, this affects how Canadian companies conduct their business internationally.
OECD Convention on Combating Bribery of Foreign Officials in International Business Transactions
The OECD Convention against the Bribery of Foreign Officials falls under the category of imported public policy developed elsewhere. The Canadian government has bought the package with all the principal elements in place and Canadian legislation directly reflects this Convention. The elements are as follows:
- It is a criminal offense to, directly or indirectly, offer or promise any pecuniary or other advantage (a bribe) to a foreign public official so that officials will act or fail to act in a fashion that gives you an unfair business advantage.
- Foreign public officials are defined broadly to include any person holding a legislative, administrative or judicial office, whether appointed or elected and including any public agency or enterprise and including a public international organization.
- The criminal sanctions and penalties should be no different than if the action had been taken in the home market, i.e. national treatment.
- Corporations will be liable for the actions of their employees or local agents.
- Penalties against bribery should be “effective, proportionate and dissuasive” and include deprivation of liberty sufficient to action effective mutual legal assistance and extradition. Monetary sanctions are also expected. In other words, fines will have to be paid and someone in the company may have to go to jail.
- Assets may be seized to ensure the payments of any monetary penalties.
- Any applicable statute of limitations should allow an adequate time for the investigations and prosecution of offenses.
- Any money laundering legal penalties applicable domestically have to be extended internationally.
- Such measures as necessary shall be enacted to ensure the proper maintenance of financial books, records and accounts and provide the necessary access to those books, records, and accounts.
- Legal penalties should be put in place for omissions or the falsification of financial books, records, or accounts.
- Bribery of a foreign official is an extraditable offense.
- Allowance is made for “facilitation” payments which are normally required in some jurisdictions to encourage officials to issue permits and licenses and clear goods through customs in an expeditious fashion.
- There must be a related measure to ensure that bribes are not tax-deductible. There are 29 signatory countries to this Convention.
The OECD intends to enforce the convention by a form of institutionalized international jawboning. OECD representatives from other countries will be reviewing and publicly commenting on individual state’s compliance with the Convention. These reviews will be periodic but they also may be initiated on the basis of complaints from other OECD member-states. Beyond publicly chastising a state, it is not clear the OECD has any particular power to force a state to live up to the terms of the convention.
If Canadian businesses want to understand what life might be like under the OECD convention, then look ‘due south’ at US business experience under their Foreign Corrupt Practices Act.
US Foreign Corrupt Practices Act
There are very good reasons for examining the US Act closely.
As the only Act of its type in existence for the last 20 years, it provides practical business experience.
There are strong similarities between the US Act and the OECD convention. In preparing its act, the Canadian government was under considerable pressure to harmonize our legislation with the US Act.
Sizable portions of the Canadian Business 500 are Canadian subsidiaries of US parent companies. They must comply with the US Act so they have a direct interest in Canada adopting similar legislation.
The United States is our Free Trade partner and the most important market for our exports. There are many harmonization initiatives underway between our two countries. Many Canadian-owned firms want harmonization.
Some of the practical aspects of the US Foreign Corrupt Practices Act (FCPA) in action are as follows:
- There seems to be little doubt that it deters the bribery of foreign officials. The fact that so many US businesses complain of lost business opportunities due to the Act suggests its effectiveness.
- While the Act deters bribery, it does not prevent it. In 1995, FCPA violations resulted in fines to Lockheed Corp. of $24.8 million dollars and a one and a half year jail sentence for a former employee.
Compliance or non-compliance with the Act is likely the result of a number of factors:
- Due to morality or inherent caution, a large number of American companies simply will not engage in activities they know to be illegal, even with a minimal risk of detection.
- Traditionally North American companies do not like bribery and engage in it reluctantly and only when reacting to another country’s practices. Many US companies are quite happy to use the Act as a legitimized excuse to say ‘no’ in international dealings.
When US companies do engage in bribery, reports suggest they try to protect themselves by managing it at arms-length either via local agents or local joint venture partners. The former is not an absolute guarantee against prosecution and the latter means the US partner relinquishes leverage and control.
Most US corporations who bribe foreign officials probably get away with it — but the law of averages has to catch up with some companies.
A big sale can then turn into an embarrassing legal morass. It would not take much — a careless piece of paper; someone in the foreign country cut from the deal and seeking revenge; a prosecutor offering a reduced jail-term to an employee to name names, and so on.
Corporate officials who arrange bribes are assuming a higher level of personal legal risk (i.e. incarceration).
If the US Act does not stop foreign bribery totally, there would appear to be little argument that it constrains and tempers it.
Despite over 20 years of existence, there is remarkably little case law surrounding the FCPA. The US courts have not effectively tested the law because accused companies inevitably plea bargain, willingly paying exorbitant fines. Fear of public embarrassment provides US Justice Department prosecutors with tremendous leverage.
Justice Department officials make no concerted attempts to audit or review individual corporate practices.
Investigations are usually triggered by a complaint by a disgruntled competitor or an internal investigation in the affected country turns up evidence or allegations. Since the US applies its Act to the external behavior of its companies, an investigation or conviction in one country can trigger an investigation in the US — double jeopardy.
American companies have to put elaborate procedures in place to ensure that their employees are fully aware of the FCPA and understand which business practices are acceptable and which are not. This usually involves written policy procedures, employees attending seminars, and employees signing annual declarations that no improper action has been taken. It can also involve having international marketing expenditures approved, usually by internal legal counsel with responsibility for corporate compliance with the FCPA. Sometimes a Committee of Senior Executives must approve these expenditures.
Having to pre-approve these expenditures means company officials must spend part of their time trying to negotiate their marketing programs with internal legal counsel.
Bribery is easy to recognize when you see it but it is important to note that most of the costs under the FCPA are created by the need to manage ‘goodwill’ marketing expenditures to ensure they do not violate the Act.
American corporations need to have these controls in place to protect themselves if individual employees violate the Act. Having the necessary procedures in place would form part of any corporate defence.
Ultimately, American corporations are liable for the actions of their employees and may be fined — even if they can prove senior executives were non-complicit and unaware of the employee’s violation.
Beyond recognizing facilitation payments, the US law makes little allowance for local custom and practices.
One US business executive who had worked for a number of companies on international marketing assignments suggested the FCPA had its pluses and minuses. On the plus side, it provided an excuse to evade bribe requests. The due diligence required under the Act was time-consuming and overdone, but not always without merit.
On the downside, conservatism creeps into international marketing programs. ‘On the ground’ quick responses are discouraged. Anything touching on government has to be ‘sent up the line’ for approval. International executives are reluctant to push a new government-related marketing initiative if it will involve prolonged internal negotiations or be the subject of a senior review. As well, the day-to-day costs of administering the Act were not insignificant.
The Cost$ of Compliance
Hillwatch has developed a basic checklist of actions required to meet the expected compliance requirements. The model for this program was based on American corporate practices common under the US Foreign Corrupt Practices Act.
Companies with a small international presence (i.e. network of local sales agents) could assign responsibilities to the Corporate General Counsel to manage on a part-time basis with some internal administrative support and use of outside counsel. Companies with a large international presence (i.e. facilities, joint ventures, sales and distribution networks) should expect to assign a corporate counsel full time to this responsibility and provide a small administrative staff.
In order to have a reasonable program in place and running, the annual direct administrative costs could range between one hundred thousand dollars to a half million dollars ($100k - 500k). An additional 35% -50% increment would be required in the first year to cover start-up costs.
The indirect costs of executives filling out declarations of compliance, approval forms for expenditures, attending briefing sessions, responding to compliance officer inquiries, ensuring direct report compliance, performing additional due diligence on local hires, could equal, or in some cases, exceed the direct administrative costs.
Compliance Task List
- Brief Board of Directors and Senior Managers
- Consult with outside Counsel
- Develop Action Plan and Budget
- Consult with CFO to establish appropriate internal accounting procedure
- Develop Internal Communications Strategy
- With Outside Counsel develop Declaration of Compliance Forms for employees.
- Develop authorization form for prior expenditure approvals for entertainment, gifts, payment or any offer of value
- Develop corporate policy manual or brochure on Doing Business Internationally
- Create or revise corporate policy manuals on related topics (e.g.) Political Contributions, Hiring Local Agents or Marketing Executives Overseas, Offering Business Courtesies to Customers, Travel and Entertainment Expenses, and so on
- Establish detailed policy on facilitation payments and approval process
- Establish internal disciplinary system for employees
- Institute Communications Plans
- Brief key managers and all international marketing executives
- Ensure all key managers and international marketing executives have signed Declarations of Compliance
- Ensure proper accounting procedures are in place
- Annually re-educate senior managers and international marketing executives via presentations
- Annually update Declarations of Compliance
- Maintain internal communications plan
- Revise corporate manuals/materials as needed
- Review and approve in advance all relevant international expenditures