CORRUPTION

CORRUPTION

The New Corporate Challenge

Nick Kochan and Robin Goodyear

Palgravemacmillan

* © Nick Kochan and Robin Goodyear 2011 Softcover reprint ofthe hardcover 1st edition 2011 978-0-230-29843-9

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First published 2011 by PALGRAVE MACMILLAN

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ISBN 978-1-349-33458-2 DOI 10.1057/9780230343344

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This book is dedicated to Miriam Kochan, materfamilias

CONTENTS

List of figures and table xi Preface: a time to act on corruption xiii Acknowledgments xvii Foreword from Richard Alderman, Director, UK Serious Fraud Office xviii

Introduction: Corruption and bribery: the global context 1 Civil society's campaign against corruption 2 Recognition by government: domestic responses with

international implications 6 Transnational initiatives 7 Business attitudes to bribery 11 The Prisoner's Dilemma: If we don't pay bribes our competitors

will 13 Cultural attitudes to bribery: it's just how things are done 14 A bad reputation 15

Part 1: Threats 17

1 The threats: Economic, social, and political effects of corruption and bribery The economic effects of corruption: bribery and business The political effects of bribery and corruption The impact of bribery on society

19 20 21 23

Part II: Law 27

2 The global legal context 29 The Foreign Corrupt Practices Act: the United States leads the

way 29 Examples of FCPA enforcement 41 Case study: Bribery and the CIA defense- james Giffen 47 Case study: The longest prison sentence for bribery: it's better

to come clean -the jumet case 52

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CONTENTS

3 British bribery legislation: How the UK Bribery Act came about 55 The Redcliffe-Maud Committee 58 The Salmon Commission 58 The Nolan Report 1995 59 The Law Commission Report 1998 61 The OECD Convention 62 The Draft Corruption Bill 2003 63 joint Committee on the Draft Corruption Bill 63 The Bribery Consultation Paper 2005 64 The Transparency International Corruption Bill 2006 64 Law Commission Consultation 2007 64 The OECD Working Group Report 65 The Final Law Commission Report and Draft Bribery Bill 65 The joint Committee on the Draft Bribery Bill 66 Passage of the bill 67 Case study: BAE- the catalyst for the Bribery Act? 67

4 The UK Bribery Act- Britain's new legal landscape 74 Section 1 : Active bribery 75 Section 2: Receipt of bribes 75 Section 6: Bribery of a foreign public official 76 Section 7: The corporate offense of failing to prevent bribery 77 Case study: Lord Goldsmith on the significance of the UK

Bribery Act and the Guidance for company managers 81 Case study: corporate hospitality, the civil law of bribery,

address commissions, and facilitation payments- the Fiona litigation 84

Part Ill: Corporate response 89

5 The geographic factor 91 Corporate exposure: the geographical factor 95 Weak governance zones 96 Case studies for regional corruption 97 Case study 1: Indonesia and construction 97 Case study 2: Iraq and reconstruction 101 Case study 3: Angola -the oil and gas sector 103 Case study 4: Bangladesh and aid 109 Case study 5: The Gulf States and local agents 113 Case study 6: Shell and the US Foreign Corrupt Practices Act

(FCPA) in Nigeria 115

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CONTENTS

6 The sectoral factor 122 Telecoms 123 Food 124 Construction 124 Healthcare 127 Sport 128 Defense 129 Extractive industries 130 Subsector to watch: rare earth elements 131

7 Third party risk and corporate exposure: How can the company get involved, and why? 134 Supply chains 134 Supply chains in a war zone 136 Intermediaries 137 Case study: BAE and Tanzania 138 Corporate hospitality 139 Facilitation payments 144 Constraints on the FCPA exemption 146

8 Spotting, stopping, and combating corporate corruption 152 Assessing risk 152 Common elements 155 Code of conduct 156 Training 158 Creating an ethical culture 159 Anti-corruption and anti-bribery rules 162 Due diligence 164 Internal controls 167 Whistleblowing policies and communication 168 Auditing, monitoring, and adapting - internal auditing

procedures 171 Auditing, monitoring, and adapting -external auditing

procedures 172 Red flags 172 Recommended procedures when bribery is suspected in an organization (as either giver or receiver) 174

Discovering and investigating bribery 175 After the investigation 176 Case studies from the Ministry of justice 178

9 Who would be a director? Directors' liability 188 The sales director and "a small part" in corruption 188

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CONTENTS

The CEO and substantial payments to senior government officials 189

The "director" of marketing 191

Part IV: The law enforcement response 195

10 Forces fighting bribery 197 The UK anti-corruption agencies 198 Bilateral relations: Britain and Nigeria 202 Multilateral enforcement initiatives: constraints on law enforcement and barriers to cooperation 202

The problem of finite resources 204 Uncertainty 206 The popularity of negotiated settlements 207 Disadvantages and criticisms of settlements 208 The way forward 209

11 Global efforts: battling against the chain of corruption 211 The Egmont Group 212 The EU anti-corruption agenda and the Stockholm Programme 213 The World Bank 214 Strengthening law enforcement and building institutions in

developing countries: spotlight on South-East Asia 216 Contrasting approaches to enforcement: Russia and China 217

12 Curbing bribery and the way forward: anti-bribery processes, for companies, police, and the courts 219 Part one: Who commits bribery, and why 219 Part two: The institutional imperative, prevention followed by

cure 223 Part three: Preventing bribery through policy and procedure 224 Case study: Aon, the FSA, and preventive measures 225 Part four: restitution of the losses to the victim 226

Conclusion: bribery and corruption, the unfinished business 232

Appendices: 1 Case study: phone hacking and corruption 235 2 Interview with Richard Alderman, june 27, 2011 241 3 Maplecroft's Business Integrity and Corruption Index 2011 248

Notes 251 Index 287

X

FIGURES AND TABLE

Figures

1.1 How natural resource corruption is facilitated and the need for a joined-up anti-corruption strategy to tackle it 4

1.2 Complacency in the City of London 12 2.1 The PECC contract 53 5.1 Factors in corporate exposure to bribery 92 7.1 Risky routine business activities 135 8.1 Principles of corporate response 155 8.2 Components of an ethical culture 161

12.1 How law enforcement strategy has conceptualized corporate competence 220

Table

6.1 The six highest-risk sectors by proportion of overall international enforcement activity, 1977 to 2010

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123

PREFACE

A TIME TO ACT ON CORRUPTION

Bribery and corruption are topics that are resonating ever more loudly with business managers and their advisers. The noise surrounding the publica­tion, passing, and finally implementation of the UK Bribery Act testifies to concern, interest, and fear in the ranks of business. The elephant in the room is trumpeting. Companies can no longer sit back from this most pressing of debates.

In the run-up to the delayed publication of the final guidance, a most fascinating debate took place between those who were anxious that the law would be draconian and would curtail the giving of every form of enter­tainment, and on the other, those advocating a strong law that ensured the United Kingdom dealt with concerns expressed by the OECD about the country's compliance with the OECD Convention and with international obligations.

Members of the second group also got wind of the government's plan to exempt companies whose only link with the United Kingdom was a stock exchange listing, arguing that it made a distinction for investors between foreign companies with business in the United Kingdom, which were covered by the Act, and those who did not have such business, and there­fore were not. Did it produce a two-tier listed community, they enquired? This group were opposed to any watering-down or diminution of the Act's powers. They lost that particular argument.

Those fearing a draconian implementation of the Act were clearly in the majority. They raised many canards about the way the Act would impact on relationships and the perks they could offer clients. The world got to know about the extent business was done at Wimbledon between sets or at the Grand Prix after the chequered flag. Kenneth Clarke, the justice secretary. appeared to sympathize with their concern, and said, in his introduction to the "Guidance notes" for the Bribery Act, "Rest assured, no one wants to stop firms getting to know their clients by taking them to events like Wimbledon or the Grand Prix. "1 Others got exercised about the giving and receiving of champagne, or a first class flight.

But at the same time as the British, and to an extent global, business community were discussing excitedly the impact of the new law on their hospitality budgets, news was filtering through about the "Arab Spring,"

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PREFACE

the refreshing upsurge in democratic activity in Tunisia, Egypt, Yemen, Bahrain, Syria, and then Libya. The remarkable expression of rebel­lion from the street was in part targeted at the privileges enjoyed by the unelected presidents and leaders. We started to learn about the extent of their fortunes, pillaged over the decades from their people at home, and now deposited in bank accounts in tax havens.

The overseas wealth of Ben Ali (of Tunisia), Mubarak (of Egypt), Ghaddafy (of Libya), the Assads (of Syria), and others has been scrutinized. These investigations take two forms. First, governments want to know who provided that wealth and how. Second, they want to know how the wealth left the countries and where it went. Countries want answers to the first question to understand better the business practices of the dictators, as well as those who supplied the wealth. They want answers to the second, better to track the wealth, and also to understand the extent of due dili­gence and anti-money laundering regimes of international banks. Once they have obtained both sets of information, the chances of retrieving and returning the wealth to the countries of its origin are enhanced.

On the first score, namely the way the wealth was obtained, countries' law enforcement departments need to look at the structure and politics of the regimes. Power and corruption are umbilically linked. The powerful person has the ability to influence the giving of contracts, and thus is most likely to be in a position to demand a bribe. The company that wants to receive a contract and lacks scruple will throw hospitality at the powerful person. The risk to the person who accepts the corrupt payment varies from regime to regime, from country to country. In this book, we look at countries' different systems of transparency and different systems of business mores. Companies active in countries where the risk of corruption is high face a greater task in exerting due diligence and carrying out auditing procedures.

Countries with dictatorships, whether the dictators are overweening families or overweening parties, are most prone to corruption. As Lord Acton, the great nineteenth-century historian, aptly commented, "Power tends to corrupt and absolute power corrupts absolutely. "2 Individuals or families that stay in power for a long time build up coteries that rely on the patronage of their leaders. Even if the country had a system requiring transparency and accountability when the individual came to power (and most did not), the loyal coterie (around the dictator) will override these systems to protect their sources of patronage and wealth. Family members are typically leading members of many of today's corrupt regimes. This is the context for the inclusion of "politically exposed persons" in anti-money-laundering legislation and directives.

It is no less pertinent to the context of bribery, and in particular to company systems for assessing corruption risk, and anti-bribery regimes. Companies that have signed a contract with a regime subsequently found to be corrupt may seek to review contractual arrangements if the regime is toppled.

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PREFACE

The message we hope readers will take from this book is that the price for engaging with corrupt regimes, or corrupt individuals, is rising. It is clear that governments are pushing companies to scrutinize their anti-bribery systems. They are ratcheting up the offences (and consequent penalties) to which they are liable, should they be found to flout the law. They are spreading the responsibility more widely for monitoring processes (so directors who should have known what was going on are now vulnerable to prosecution). In short, the company itself is in the firing line if it is complicit in the bribe. The price of a failure to implement systems can be an unlimited fine.

However, criminal penalties resulting from a conviction may be only the least of the corporate's problems. For example, lawyers say that the cost of an internal investigation of a corruption allegation can easily cost as much as the fine. More than that, prosecutors are likely to require the corporate to appoint and pay for a monitor. This will be an external law firm that supervises the implementation of the anti-corruption processes. Substantial costs are likely to be incurred as this will need to be in place for a number of years.

The damage to the company will go much further than merely the financial burden. A conviction for corruption will poison its reputation. This in turn will cause a loss of morale amongst employees and other stakeholders, while shareholders will sell the stock.

There will also be implications for the board's ability to pursue its long­term strategy. The merest allegation of corruption can scupper the best­crafted deal and introduce uncertainty into all future plans. So claims that Rupert Murdoch's News International paid bribes to the Metropolitan Police (coupled with widespread allegations of phone hacking) forced the company on July 13, 2011, to withdraw its bid for the 61 percent of British Sky Broadcasting that it did not already own.

Debarment from international contracts and finance is a further risk to a company found to be engaged in corrupt behaviour. The World Bank, for example, debars firms and individuals from World Bank financed contracts if they have been sanctioned under its fraud and corruption policy. The institution has a publicly available list of companies that have been debarred.

Law enforcement will argue that the new law, even if not widely imple­mented, will add additional risk to those that participate in a corrupt relationship. The more anti-bribery legislation that is enacted, the more the risk of law enforcement's involvement, the more complex schemes will need to become, and this will push up the monetary price of a bribe. In short, the marketplace will chip away at the incidence of bribery.

But there is a wider message for readers of this book. This is that corrup­tion undermines the global marketplace, and in due course weakens the way business is done for all its players. Those who give or receive corrupt

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PREFACE

payments make a short-term gain, but undermine their long-term pros­pects. By the same token, those who refuse to pay a bribe (and the numbers are growing) will take a short-term loss. The company that does not give or receive bribes should send out a message that it is being a good corporate citizen, that it is committed to principles of transparency and accountability.

The less the bribery, the greater the promise of a fairer marketplace for companies, of more distribution of wealth to the poor in countries where dictators have become corrupt, and of greater faith in the legitimacy of the business community, in an era of cynicism and greed. If this book strengthens that message, and those who adhere and practice it, it will have attained its goal.

xvi

Nick Kochan and Robin Goodyear London, July 13, 2011

ACKNOWLEDGMENTS

We would like to express our considerable gratitude to a large number of researchers and writers who made this book possible. In many ways this is a communal effort, where many people pulled together to maximize the range of research, of knowledge, and of information.

We would like to express our gratitude to Richard Alderman, the director of the UK Serious Fraud Office, for agreeing to write a Foreword to the book, and to Vivian Robinson, the SFO's expert adviser on the UK Bribery Act, who gave of his time and knowledge unstintingly.

The City of London Police and their Overseas Anti-Corruption Unit have been immensely helpful over the last year. We are also grateful for the assistance provided by the Metropolitan Police's Proceeds of Corruption Unit.

The following people gave their time and assistance with particular chap­ters and topics. In no particular order of contribution or merit, we would like to thank: Lawrence Joffe, for his work on the BAE and al Yamamah affair; Gregory Husisian, of Foley and Lardner, LLP; Sam Hilton, for work on the US Foreign Corrupt Practices Act and corporate responses; Portia Roelofs for her work on Nigerian corruption; Barry Vitou, for his work on director liability under the UK Bribery Act, and his firm Pinsent Masons, for their charts; Helen Parry, for her work on bribery and corruption cases under UK and US law; Alan Doig for assisting with footnotes and textual accuracy; Stephanie Orme, for her work on the origins of anti-bribery and corruption legislation in the UK. We would further like to thank Lewis Lyons, for his sterling work in editing and organizing the book under severe time pressures, James Harrington for his work on the voluminous notes, and Thomas Brooks for his comments.

We would further like to thank Stephen Rutt of Palgrave Macmillan for his support of the project. Miriam Kochan compiled the index, and we are immensely grateful.

A number of people have spoken to us on condition of anonymity. We are grateful to them.

Nick Kochan and Robin Goodyear

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FOREWORD

The fight against corruption is an absorbing topic for the many of us who care about this subject both personally and professionally. It is a story that has heroes, villains, and victims.

The victims are the many people in countries who suffer as a result of corruption. We see many examples of this in our work in the Serious Fraud Office. We see people (often the poorest members of society) dying or suffering serious illness because of corrupt deals struck by business with powerful members of those countries. We see damage to the infrastructure of countries, and we see damage to the environment. We see countries, which are rich in the quality of their natural resources and the talents of their citizens, that are held back by a culture of corruption that favors the few and causes great damage to the many.

We see villains as well. These are individuals and companies that do business with corrupt politicians and officials in jurisdictions knowing or not caring what the results will be for the people of those countries. They try to defend what they are doing by talking about the need to do busi­ness and the impossibility of doing business in these countries without using bribery. Unfortunately for them, the public reaction, whether in the countries where the bribery takes place or in their own home countries, is very different. The public are rightly intolerant of corporates and indi­viduals who cause damage to victims and their societies through the use of corruption.

And, of course, there are heroes. There are many that I admire very greatly. One of the privileges of my role in the Serious Fraud Office is that I meet them from time to time. These heroes include the individuals (whether journalists, members of non-governmental organisations, private citizens, or others) in the countries that suffer from corruption who work at bringing to light corrupt activities and exposing what has happened. They do this at very great risk to themselves and to their families. I have come across cases where individuals have been killed because of their work.

Another group I would class as heroes consists of those individuals who work in enforcement authorities in these countries and who try to ensure that the rule of law is respected and that those who receive bribes are

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FOREWORD

convicted and punished. Again, I know of cases where the regime in power has attempted to deal with a courageous law enforcement official through assassination.

All of the people I have mentioned are true heroes in my eyes and are worthy of very great respect from all of us.

What we also need to reflect on and welcome are the very important changes in our own societies that make the public much less tolerant of behaviour of this nature. This has been one of the most significant developments in this area. It is clear to me that there is great public hostility to corrupt activities. What I have also found interesting in my own work in the Serious Fraud Office is that this view is frequently shared by many in corporate organisations. They are working hard (often in very difficult and challenging circumstances) to create long-term value for their organisations and for society. Corruption can destroy their organisations just as much as it can eventually destroy societies. The individuals in companies I talk to see anti corruption as being an ethical issue that is important to them personally as well as to the organisation's ethical culture. Our best corporates do not always share with the public all that they are doing in combating corruption, but I believe they have a good story to tell.

I see corruption and the attack on corruption as being linked to many other fundamental issues. Corruption destroys the rule of law and demo­cratic institutions. It is no coincidence that those countries with systemic corruption have no respect for the rule of law, do not respect the indepen­dence of the judges and the enforcement authorities, and do not observe democratic accountability. It is also no coincidence that this results in the impoverishment of the citizens of those countries.

Corruption also destroys the ability of ethical corporates and individuals to compete for business on level terms. Corporates have a choice between engaging ethically or not engaging at all. My view is that citizens of these societies will benefit from investment by good ethical companies. A system that favors those who use corruption will discourage those who want to do ethical business in that country, with the result that citizens of that country will be the poorer.

I am looking forward very much to the further opportunities to combat corruption that have been given to us by the UK's Bribery Act 2010. This Act came into force on July 1, 2011. Important guidance by the UK's Ministry of Justice has been published together with guidance from our Director of Public Prosecutions and by me.

The Bribery Act modernizes the UK's outdated law on corruption. It creates a new and very important offense at the corporate level of failing to prevent bribery with a defense of adequate procedures. And the Act also widens our jurisdiction in respect of foreign companies.

I want to see the SFO use the Bribery Act to the full in order to support

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our good ethical companies and to ensure a competitive market place for them. The Bribery Act gives us the tools for this and I look forward to using them.

XX

Richard Alderman Director, UK Serious Fraud Office