Slush funds distributed via travel agencies to pay for sightseeing trips abroad. Shopping bags stuffed with bank notes handed over in parking lots. Those were just two of the ways that IBM of the US greased the palms of government officials in Asia during a number of years, according to the Securities and Exchange Commission.
In March, the computer multinational paid a $10m fine to settle civil charges brought by America’s markets watchdog of violating the Foreign Corrupt Practices Act in its efforts to secure state purchases of its hardware in China and South Korea.
IBM is hardly unique. Just six weeks earlier, the Department of Justice said Maxwell Technologies, a California maker of energy storage products, paid almost $15m to settle both criminal and civil charges of giving bribes to win sales of its electric utility infrastructure to Chinese state-owned enterprises by inflating contract prices to cover the cost.
Among many other instances involving well-known companies, in 2009 Alcatel-Lucent of France settled with US regulators who found that factory visits and training trips laid on by the telecommunications group for another set of Beijing’s bureaucrats mostly involved time spent at Disneyworld and Universal Studios or in Las Vegas.
US authorities are investigating possible violations of the FCPA with greater intensity than ever before, bringing more cases, announcing more settlements and receiving more in fines. The DoJ and SEC together brought 74 cases last year, up from 12 just five years earlier, according to Weil, Gotshal & Manges, a New York law firm. That is partly because western companies are venturing more into countries where governments control swaths of the economy. “It is all part of globalisation,” says one regulator. “When you operate in emerging markets, it is difficult to navigate from a compliance perspective.”
Another reason, however, is that investigations have proved lucrative for stretched federal coffers – as former regulators freely admit. The business pays well. In three years, the proceeds to the Treasury from settlements totalled $3bn, according to research from White & Case. That is a big selling point when agencies seek congressional approval for bigger budgets. Moreover, in the wake of the global financial crisis and of frauds such as those conducted by Bernard Madoff, regulators are under pressure to show they have teeth. FCPA cases are powerful demonstration tools.
As a result, the issue is becoming increasingly troublesome for those doing business abroad, from the largest multinational to the smallest investment boutique. Even a seemingly innocuous outing for customers or suppliers can raise questions.
While US companies maintain that the strict rules unfairly handicap them, foreign groups complain of the extraterritorial reach of US regulators. Indeed, five of the six largest settlements under the act have been with companies headquartered outside the US, according to Baker & McKenzie. Siemens paid the largest combined penalty and disgorgement sums ever, a total of $1.6bn in the US and Germany in connection with charges of making improper payments to officials in Argentina, Bangladesh, Iraq and elsewhere to win contracts.
Other governments are emulating the US. The UK’s anti-bribery law took effect on July 1. The Organisation for Economic Co-operation and Development has several bribery initiatives, though in its 2011 survey, Transparency International noted that among OECD nations, only seven had active enforcement while 21 had little or no enforcement; the remaining nine made moderate efforts.
Not only in developing countries can activities give rise to concern. The scandal over the News of the World, the British Sunday title closed this month by Rupert Murdoch’s News Corp, has raised questions about potential violations of the FCPA, while “the London Olympics has set off quite a buzz in the FCPA community”, says Brian Whisler, a partner in Baker & McKenzie’s Washington office. “If a big US company flies a client to the Olympic Games, might it be deemed to be creating an unfair business advantage? Now, you have to ask these questions.”
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For most of the years since 1977, when the FCPA was introduced following disclosures of improper payments made to Japanese politicians by Lockheed, the US aircraft maker, the law was no big deal. Its significance started to show itself only lately, both in terms of cases brought and the chilling effect it has exercised. The DoJ established a dedicated unit in 2009, as did the SEC the following year. Each has dozens of staff operating in Washington and in offices outside the capital.
Steve Tyrrell, who headed the DoJ’s fraud section and is now in private practice at Weil, Gotshal & Manges in Washington, says: “It was an area where the section could distinguish itself.” Regulatory activities have snowballed partly because “it is a shrewd business model”, says Charles Monteith of White & Case in London. “Companies come in with their head on a platter. Regulators have it down to a fine art.”
The economics of so-called industry sweeps are especially sweet. Those are when regulators send out letters to the general counsels of big companies in a sector, asking for detailed information about how they operate. Some see that as outsourcing the investigation to the targets themselves.
These investigations often focus on sales practices. “It can be a kind of fishing expedition where one tip leads to others,” says one Washington-based lawyer. As groups often fear that convictions may put them out of business, they are usually eager to settle rather than dispute charges in a public trial where, all too often, the facts are not exactly attractive. Some even self-report in the hope of clemency.
Regulators estimate that $1,000bn is paid in bribes each year, in what one describes as a “soup of illegality”. Settlement payments of $3bn in the past three years are by that measure still only a drop in the bucket, and enforcement cases and settlements touch only a small fraction of the total activity. But that number is growing.
“If a business depends on bribery, then it doesn’t have a sustainable business model,” says one regulator. “It’s not good for shareholders.”
Critics say there is a huge grey area and, given the potential number of cases, inevitably a degree of arbitrary decision-making in selecting targets. Sceptics add that many practices have to be seen in a cultural context of gift-giving as part of building a relationship. But regulators have scant sympathy for such views. “We don’t pursue cases on the legal grey line,” says one regulator. “Hundreds of millions of dollars are involved in cases that are nowhere close to the line.”
Another reason companies are quick to settle is that lack of knowledge is not an adequate defence. If a drug producer hires third-party distributors who bribe hospital officials to put their medicines on the shelves, that company is still vulnerable to action, on the theory that it failed to maintain adequate internal controls. “That’s where the problems usually are,” says Mark Lehmkuhler, a partner at Davis Polk & Wardwell in Hong Kong. “Companies that decide to do this sort of thing often push out the dirty work to third parties, which increases the due diligence exponentially.”
The rules have two prongs: first, violations involving bribery itself; and second, records, books and internal control violations, which are far easier to prove. A false entry in financial reporting, say by over-invoicing to disguise an improper payment, makes a company and all its directors vulnerable if it files reports in the US, has senior people resident in the country or is listed on a US exchange.
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As these investigations gather momentum, investment firms as well as industrial companies are becoming more careful. “Clients are walking away from deals specifically out of concerns with anti-corruption due diligence,” says Asheesh Goel, a lawyer with Ropes & Gray. “If things can’t be cleared, they just walk.”
For example, one US private equity firm dropped out of the auction for a Beijing voltage regulator company being sold by Affinity Partners of Hong Kong because it did not have the time to establish that all the payments to officials of state-owned companies were legitimate, a lawyer familiar with the matter says. The company was ultimately sold to a European investor for $600m.
Many businesses have changed practices once considered routine. For example, Morgan Stanley now donates money to the favourite charity of winners of its golf outings for clients, rather than giving gifts.
Sometimes, the FCPA has become a means of settling scores. For example, when Blackstone and Warburg Pincus were invested in Kosmos, a Dallas-based oil explorer operating mainly in west Africa, one Ghanaian official contacted the DoJ to report violations of the law. The company produced sheaves of documents, spent a great deal on investigating the charges and then struggled to convince the regulators that they were being duped. Unusually, it received a letter establishing that no wrongdoing had been established. “The FCPA is being used and abused by both sides,” says one investor in Kosmos.
Such tips may become even more common. Provisions in America’s new Dodd-Frank legislation on financial reform encourage whistleblowers to go to regulators rather than through internal reporting lines. They can collect 10-30 per cent of funds disgorged as a result of their information.
The changed approach to bribery has been rapid. As recently as 15 years ago, business people in some European countries were able to deduct bribes from their tax bills. Ten years ago, World Bank officials would make arcane distinctions between concepts such as “adaptive corruption” and “dysfunctional corruption” that to their audience seemed to border on rationalisation.
Corruption today is seen as much less acceptable. However, whether in the long run measures such as the FCPA will make much difference in putting an end to its worst forms, rather than more minor transgressions, remains a question. In any event, the investigations have meanwhile become big business not only for regulators but lawyers too. Large law firms have also been enthusiastically boosting the staff and other resources they dedicate to the act’s strictures.