Beware the free lunch!
| by Richard Willsher 13 Jul 2005 Topic: Business |
|
|
When does taking a prospective client for a lunchtime treat cross the line to outright bribery? Richard Willsher ponders the concept of hospitality corruption On 1 March this year, California based Titan Corporation, a major provider of information and communications products and services in the defence and intelligence sector, agreed to a settlement of US$28.5m to settle corruption charges brought against it by the US Securities and Exchange Commission (SEC). This is the largest fine ever to be paid under the Foreign Corrupt Practices Act (FCPA), a 1977 piece of legislation which has now been given considerable force due to the compliance requirements of the 2002 Sarbanes-Oxley Act. The Titan case is the strongest evidence to date that, in the US at least, bribery and corruption used to win contracts are no longer acceptable practices. The message that the SEC and the US Department of Justice are delivering is that businesses will suffer serious consequences if they engage in them. But surely this is a far cry from a little pleasant entertainment with a potential client, to schmooze and smooth the path towards a successful contract? The question is where does a little run-of-the-mill corporate hospitality become buying business in an immoral and unacceptable fashion? In the UK the answer is becoming clearer, according to Daren Allen, a partner at London based law firm DLA Piper Rudnick Gray Cary. “Hospitality and ‘facilitation’ payments are difficult to police,” he explains, “but the key is whether it amounts to a financial inducement designed to gain unfair advantage.” He adds that the UK now has a raft of anti-bribery legislation, including the Prevention of Corruption Act 1906, the Prevention of Corruption Act 1916 and the Public Bodies Corrupt Practices Act 1989. These outlaw making bribes to public officials and other classes of individual. Furthermore, a section of the Anti-Terrorism Crime and Security Act 2001, brought in following 9/11, enables the courts to take action against UK nationals involved in bribery and corruption abroad. Allen’s conclusion is that UK companies are becoming more aware of their obligations under the law, and of the reputational risks they run if they fall foul of them. However, as yet, no British companies have been prosecuted and fined in the way that corporations in the US have been. Indeed, the Organisation for Economic Co-operation and Development has been somewhat critical of the effectiveness of the UK legislation. In its Report on the Application of [its] Anti-Bribery Convention it summarised its views on the UK’s efforts by saying that their examiners “share the widely-held view that the current substantive law on foreign bribery in the UK is characterised by complexity and uncertainty…” The message seemed to be “must try harder”. The big difference in the US, where there are now more actions pending against US corporations than during all of the 30 years since the FPCA legislation was passed added together, has been made by Sarbanes-Oxley. “It has had an enormous impact,” says Alexandra Wrage of Washington based Trace International Inc, a non-profit making membership association which carries out anti-bribery and due diligence training. “The series of certifications that are now required from companies mean that they are not prepared to turn a blind eye when the hospitality bill of an overseas office shoots up 300%. There is now a requirement on company officers and their professional advisers for disclosure of anything that they see that may be untoward… The risks of prosecution have increased and the penalties have gone up.” She also notes that in the Titan case, as in others, the substantial penalties imposed sprang from a voluntary disclosure not from an attempt to conceal their wrongdoing. Another significant impact of the Titan case is that, as a result of its failures, a proposed acquisition of the company by Lockheed Martin was shelved. And it was in fact Lockheed Martin which discovered some of the FCPA issues with Titan in the course of its pre-merger due diligence which it was obliged to disclose. Moreover, it also emerged that Titan itself had in fact inherited some of these issues when it acquired a business called Datron World Communications into which it had failed to carry out adequate FCPA due diligence. The tentacles of the combined FCPA/Sarbanes-Oxley legislation reach deeply into a business, and the consequences are far more disastrous for it than just having to pay a fine. So the moral to this is that companies in the US, and indeed elsewhere, now have to establish clear guidelines and policies to deal with issues of bribery and corruption and which circumscribe company hospitality behaviour unequivocally. Financial services business, The Prudential Group, is one company that has done this. As part of its policy it says: “The Group prohibits: the offering, the giving, the solicitation or the acceptance of any bribe, whether cash or other inducement to or from any person or company, wherever they are situated and whether they are a public official or body or private person or company by any individual employee, agent or other person or body acting on the Group’s behalf in order to gain any commercial, contractual or regulatory advantage for the Group in a way which is unethical or in order to gain any personal advantage, pecuniary or otherwise, for the individual or anyone connected with the individual.” By way of further clarification, it adds: “This policy is not meant to prohibit the following practices, provided they are customary in a particular market, are proportionate and are properly recorded:
“Inevitably,” it says, “decisions as to what is acceptable may not always be easy.” So, when in doubt, employees are obliged to request guidance from senior management or compliance staff. Prudential is by no means the only example of a company that has established clear policy guidelines. Indeed, such is the reputational risk associated with bad practice or failure to address the issue, that businesses are realising that a policy of this sort is something they cannot afford to be without. There is now a number of organisations which are offering help and guidance on best practice, notably the UK’s Chartered Institute of Personnel and Development, the Institute of Business Ethics and the Swiss-based World Economic Forum, which has established its “Partnering Against Corruption Initiative (PACI) Principles”. Law firms are also keen to work in this field. The eventual upshot will inevitably be that levels of corruption around the world will decrease, at least as far as international companies bidding for government contracts are concerned. The business risks are simply too great to be worth running. Whether local practices will change in countries where bribery and corruption by Western standards are commonplace is questionable. That seems likely to take much longer to fix, but worldwide legislation, particularly that affecting money laundering, will also restrict activities such as spiriting funds into offshore numbered accounts. The overall picture is one of a legislative noose slowly choking the practice of giving financial inducements to gain unfair advantages in business dealings, but one question remains: is there such a thing as a free lunch? Most of us might well instinctively answer “no” to this one. Richard Willsher is a financial and business writer with a background in investment banking. | |