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Fred Davidson was stifling in the unbearable heat that midsummer’s day in 2002. Temperatures in the corrugated steel warehouse late that evening hovered around 100 degrees. Weeks earlier, Davidson’s company, Energold Drilling, a global drilling solutions company that operates 270 rigs in 24 countries across the Americas, Africa and Asia, had imported several drill rigs into the country. The rigs were blanketed now in a fine layer of dust. For nine hours straight, the customs agent ticked off one problem after another with the rigs’ components, none of them actual regulatory infringements. It was a test of wills between the two men. “It was not a lot of money he wanted, but in no way were we going to set a precedent,” says Davidson, Energold’s president and CEO. He’s referring to the customs agent’s unspoken expectation of a payment to release the rigs to the operator. “If I was going to shed a few pounds of weight in that warehouse, he was going to shed a few pounds with me,” he says. Finally, the customs agent backed down and released the equipment. “I had sent a clear message that we would never solicit preferential treatment for a bribe,” Davidson says. It is now 42 years since the Foreign Corrupt Practices Act (FCPA) came into law in the U.S., yet bribery continues to be the “cost of doing business” in many countries worldwide, with the United Nations estimating that corruption eats up at least 5 percent of the world’s GDP, a shocking figure. Any CEO looking to do business in emerging markets is likely to run into it, so learning to navigate bribery is an essential skill in places like India, Mexico, Argentina, China, Russia, Vietnam and Serbia—all of which rank in the middle of the pack on the U.N.’s list of top offenders. “Some companies just pay [the bribe], figuring it’s the cost of doing business and they won’t get caught,” Davidson says. “But it’s a slippery slope.”

An Uneven Playing Field

One good reason to avoid making payoffs? The civil and criminal sanctions for anti-bribery violations are significant and sobering. The FCPA authorizes the U.S. Securities and Exchange Commission to bring civil enforcement actions against company officers, directors, employees and stockholders. If determined to have committed the violation, they must disgorge the ill-gotten gains, pay substantial civil penalties and may be imprisoned. In 2018, 16 companies paid a record $2.89 billion to resolve FCPA cases. Most recently, giant retailer Walmart settled an eight-year-long investigation by the Justice Department into charges that its overseas operations in China, Brazil, Mexico and India violated the FCPA. The department alleged that company personnel responsible for maintaining internal accounting controls were aware of compliance failures relating to improper payments made to government officials by third-party intermediaries representing Walmart in the countries. In some cases, the insufficient control failures, which helped Walmart open stores faster than it otherwise would have been able to, had been reported to senior company executives. In June, the company agreed to pay $282 million to settle civil and criminal charges.

‘Competitive Injustice’

As a result of this kind of high-profile prosecution, “we’ve seen significant reduction in bribery-related crimes by U.S. companies in the past dozen years,” says David Montero, author of the book Kickback, which provides an in-depth historical look at corporate corruption. “For roughly 30 years, FCPA criminalized commercial bribery overseas, but enforcement was laughable,” he says. “The Justice Department had one full-time prosecutor, literally the same guy from 1977 to 2005. No one gave the law much thought.” That’s no longer the case. While stricter anti-bribery oversight and enforcement resulted in fewer companies offering payments in a country for preferential treatment, they have not curtailed the practice of corrupt government individuals asking for one. The payments typically are billed as “surcharges” and “commissions” to help companies mask the real purpose in skirting the law. “Paying a bribe comes at a cost, but not paying a bribe also comes at a cost—in ‘lost’ contracts, slow licensing timeframes, and other unnecessary delays and bureaucratic roadblocks,” says Montero. “Further incentivizing a bribe is the knowledge that a competitor will pay one and get away with it.” He’s referring to companies in countries not signatory to the OECD’s Anti-Bribery Convention or bound by the FCPA and similar laws. Such companies, says Daniel Wagner, CEO of consultancy Country Risk Solutions, “not only are legally permitted to pay bribes, they’ll often receive a tax deduction for the amount paid, putting their competitors at a distinct advantage.” Among countries permitting tax deductions for bribes showed to be a necessary part of a transaction are Austria, Belgium, France and Germany. This preferential treatment is a “competitive injustice” to companies that refuse to pay bribes, says Jim Nelson, president and COO of Parr Instrument Company, a manufacturer and seller of chemical reactors and pressure vessels in 75 countries. “It hurts us financially and ticks me off personally when I find a competitor that’s not bound to the FCPA paying a bribe without a care in the world,” says Nelson. “Bribery is a continual problem,” says Jon R. Tabor, CEO of Allied Mineral Products, a manufacturer of monolithic refractory products for a myriad of industrial applications. The company has 12 plants in eight countries, including China, India, Russia, Chile and Brazil, and a sales presence in more than 100 countries. “We’ve been asked and refused to pay bribes in Russia, China, India and elsewhere,” Tabor says. “Once you start paying, you get a reputation for it—and it never stops.” Davidson agrees. “You pay just one person and the word gets out, and now you’re expected to pay everyone,” he says. “It’s like quicksand—you put your foot into it, and it gradually sucks you in.”

Human Nature

Why do companies risk their reputations in committing these crimes? They figure they’ll get away with it, says Montero. “In my research, I discovered that only about 20 percent of companies (that engage in bribery) ever get caught,” he says. “While the fines may look astronomical, they’re miniscule relative to the value of selling in an overseas market.” Still, fewer companies are taking the risk. “The fines are an impediment, but it’s really the risk of imprisonment and disbarment from a country (to procure business in the future) that are starting to make a positive difference,” says Patrick Moulette, head of the anti-corruption division of the OECD’s Directorate for Financial and Enterprise Affairs. Since the OECD Anti-Bribery Convention entered into force in 1999, 560 individuals and 184 business entities have received criminal sanctions for foreign bribery. At least 125 of these individuals were sentenced to prison, with 11 of them receiving five-year prison terms. At present, more than 155 criminal proceedings are underway against 146 individuals and nine business entities. Several of the defendants are CEOs. According to Montero, citing an OECD survey of 427 bribery cases adjudicated worldwide, in 41 percent of these cases, managers approved the bribery payment, and in 12 percent of the cases, the CEO was aware a payment would be made. A refusal to pay does not always mean a company will be blocked out of a foreign region. In countries like India, where it’s common for low-level customs agents to ask for small bribes to get goods off a dock, it simply stalls the proceedings. “It doesn’t mean you can’t transact business in the country; it just means it will take a bit longer,” says Bill Pollard, a partner at Deloitte Risk and Financial Advisory, who specializes in anti-bribery due diligence and post-bribery detection.

A World of Differences

Different industry sectors also confront different bribery scenarios. Corruption in the pharmaceutical industry, in which doctors abroad typically are bribed to offer patients certain drugs, is different than corruption in the oil and gas sector, where kickbacks to foreign governments to be permitted to operate in a region are a major compliance issue. While it is considered prudent to rely on third-party intermediaries in many foreign markets, companies must conduct extensive due diligence on the practices of these partners. If the third-party firm engages in bribes to obtain or retain business, the company it represents could be in violation of FCPA and other anti-bribery regulations. Ultimately, the value of the opportunity must be weighed against compliance risks. That’s what software solutions company BlackLine is doing. “There are countries where corruption is standard business practice that we will not do any business in—period,” says CEO Therese Tucker, whose company has sprouted offices in the UK, Australia, France, Germany, Singapore and Japan in the past six years. “Even if the country represents a significant market, it’s just not worth it to us.” At each of its offices, BlackLine hires local employees. To ensure they understand and appreciate the company’s strict compliance with FCPA and other anti-bribery regimes, Tucker has an external legal consultant draw up detailed, 60-page-plus employment contracts that include a Code of Conduct. Wagner from Country Risk Solutions advises all companies expanding globally to draft anti-bribery codes of conduct governing actions by their employees and third-party partners. Employees that fail to follow the code should be made liable for disciplinary actions, including termination of employment. Contracts with third parties in violation of the code should be terminated. In both cases, individuals should be reported to relevant authorities. “The code of conduct should be clear that local business practices are never a justification for paying a bribe,” says Wagner. Regrettably, blowing the whistle on a government employee who asks for a payment doesn’t necessarily curtail the practice. Davidson recalls being asked for a kickback by a customs agent. “I went over the person to his superior and told him what happened,” he says. “Two days later, I got a call from the same customs agent. He doubled the payment. That told me people up the chain were getting a percentage (of the bribe).”

Reducing Rogues

Even the most punitive code of conduct may not thwart the aims of rogue employees convinced they can conceal paid bribes as a legitimate expense. To ensure this is not the case at Energold Drilling, Davidson monitors their expenses “to the point where I’m all over them like a bad rash,” he says. “It’s one thing to take a client to lunch, but we will not tolerate lavish gifts or a paid weekend away at a luxury hotel.” Technology can be a means to discern suspect business expenses, says Deloitte’s Pollard. “A data scientist can develop an algorithm that mines the financial and accounting data looking for excessive travel, sales and marketing expenses in countries perceived to be corrupt,” he says. “By putting this information on a dashboard, CEOs and other senior executives are cognizant of the compliance risks to drive proactive responses.” CEOs must also set a clear tone at the top that bribery and other forms of corruption will not be tolerated. As BlackLine’s Tucker emphasizes, “Our reputation is more important than any single market or transaction.” Davidson concurs. “In business and in life, your reputation is everything,” he says. “Aside from the legal ramifications and ethical considerations, bribery is just bad business.”