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October 18, 2012

Do you know how your subsidiaries are winning contracts in the most corrupt countries in the world?

Do you know how your equipment is being cleared through customs in countries where graft is rife in every aspect of life?
Do you know how your subsidiaries obtained their licences or regulatory approvals to operate, navigating multiple layers of bureaucracy and underpaid civil servants?

Do you want to know? Do you need to know?

In the 20th century, the answer from most senior executives in the US and Europe to these questions would have been an emphatic "no." However, over the past ten years the answer to the latter two questions has been changing - first in the US and more recently across Europe - and no-one is going to be reverting to a response of "no" any time soon. The introduction of new and improved legislation and regulation, changes in law enforcement and regulatory attitudes, priorities and tools, and an increased political and social appreciation of the prevalence of corruption and the harm it causes, have all combined to alter the individual and collective consciences of corporate boards and their trusted advisors.

It is in the nature of energy and extractive industries to operate in some of the more unusual corners of the globe, with different local praxis (and often along with armaments, mobile telecoms, and pharmaceuticals).

Criminal payments are not tax deductible in the UK (Section 1304, CTA 2009). The Serious Fraud Office (SFO) has been reportedly expressing interest in UK Tax Computations as a source of information on this area, and there are established Information Access protocols for HMRC to assist. UK legislation is seen as more severe than the corresponding provisions in the US or on the Continent.

So what will your overseas subsidiaries be getting up to if you leave their activities unchecked? What are the consequences of such activities for the overall business and its management? What should businesses be doing to avoid or mitigate such consequences?

Risks
International companies operating in developing countries in Africa, South America, Eastern Europe, the Middle East and Asia face heightened risks of corruption in every aspect of their business.

  • Bribery of foreign government officials to assist in winning or retaining business:
    • Opportunities to bribe government officials to obtain confidential tender information such as competitor pricing or to influence the outcome of a competitive tender.
    • Opportunities for bribes to be solicited by officials of government regulatory authorities in return for the approval of private-to-private enterprise contracts.
  • Bribery of foreign government officials to influence the exercise of governmental discretion:
  • Opportunities to influence government officials in: clearing goods through customs; granting licences, regulatory approvals, work permits or visas; negotiating taxes; the conduct of audits of environmental issues or health and safety.

Bribes may be solicited in cash or in kind (e.g., employment of relatives of government officials, entertainment, gifts, "training" trips overseas) and be overt or dressed up as charitable, political or community donations. The risks for businesses are heightened when third party agents or government service providers are used to interact with government officials, and where businesses acquire or merge with new entities or enter into joint venture agreements.

Consequences
US and European corporations paying bribes overseas are now more likely to be brought to the attention of law enforcement and regulatory authorities than ever before.

  • Following changes in legislation and attitudes to whistle blowing in the US and Europe, blowing the whistle on the illegal acts of co-workers, management or competitors is now encouraged, protected and even rewarded in the case of the US under the Dodd-Frank Act.
  • Changes in the carrots offered to corporations that self-report their misdemeanours or sticks taken to those that do not are now strongly influencing the incidence of corporate self-reporting in the US, and, to a lesser (but increasing) extent, across Europe.

Once identified, the ability and appetite of law enforcement and regulatory authorities to investigate and prosecute corruption offences has increased significantly.

  • Corporations are increasingly being held liable for the actions of their employees, even where the controlling minds of the corporation had no knowledge of such actions (e.g., the corporate offence of failing to prevent bribery under the UK Bribery Act). It is no longer a reliable defence for a director that he had his head buried in the sand.
  • The extraterritorial reach of anti-corruption legislation means that businesses need to be aware of their potential exposure to other countries' legislation (e.g., the US Foreign Corrupt Practices Act and the UK Bribery Act).
  • Law enforcement and regulatory authorities are now equipped with a wider range of criminal and civil sanctions and tools to facilitate settlements (e.g., prison sentences for individuals, significant fines and disgorgement of profits for corporations, external compliance monitors, debarment from government contracts).

Mitigation
It is important that international companies ascertain how their overseas subsidiaries are doing business and take steps to identify and mitigate the risks of overseas corruption.

  • Perform regular risk assessments of international operations (e.g., identify country, sector, business opportunity, transaction and business partnership risks).
  • Visit those countries at higher risk of corrupt activity - understand what it is like to live and do business in those locations and identify the inevitable difficulties that will be faced by the local employees in meeting international anti-corruption standards.
  • Review and amend compliance policies and procedures and internal controls to provide protection proportionate to the risks faced, and provide regular tailored face-to-face anti-corruption training to employees (i.e., there is a defence to the corporate offence of failing to prevent bribery under the UK Bribery Act if the organisation had implemented "adequate procedures" to prevent bribery).
  • Ensure that specific identified risks are mitigated to the maximum extent possible.
  • Perform regular risk-based due diligence on third party customers, suppliers and business partners.
  • Regularly audit and monitor transactions and controls.

Conclusion
There will be risks of corrupt activity in the overseas subsidiaries of US and European headquartered businesses. Senior executives should know and will increasingly demand to know how their corporations are identifying and mitigating the risks of overseas corruption faced by these operations.

In some countries, employees will regularly face pressure to provide bribes in their personal lives - from trying to connect their home to electricity, to turning right at a traffic light, to obtaining vital medicines for their sick children.

How quickly organisations recognise such realities and appreciate the challenges that they face in ensuring that employees who culturally accept bribery at home will not do so in the work place - when greater pressures may come their way - will determine how well they can avoid or mitigate the consequences of being party to bribery overseas.

Authors

Keith Williamson
Managing Director
London
+44 207 715 5218

Andrew Gavan 
Managing Director 
London 
+44 207 663 0406