It is the $1000bn industry that is not mentioned at university careers fairs, it involves millions of dollars being transferred into fake bank accounts and shell companies around the world – and prosecuting authorities are spending equal sums of money fighting it: welcome to the world of bribery and corruption.

Paying a bribe, scratching Shakespeare’s "itching palm", has long been considered a false economy, increasing the cost of an otherwise legitimate contract by as much as 20%, experts estimate. In recent years, aggressive enforcement measures and new legislation are jointly intensifying efforts to combat corruption; as a result, investors and commercial organisations, regardless of their areas of operation, are exposed to new risks of prosecution, heavy fines, reputational damage and even imprisonment of personnel. The ‘get out of jail’ cards lie in robust anti-corruption procedures and incisive, if expensive, corporate intelligence.


High-profile prosecutions

The past five years or so have witnessed the largest, most high-profile and most financially punitive bribery prosecutions to date in the US, Europe and China. The US has been leading the crusade. According to Transparency International, the organisation that campaigns against corruption, the US has concluded 168 cases and all but a few of these have been instigated in the past five or so years. This is despite the fact that US anti-corruption legislation was introduced as long ago as 1977 – and that there are at least 100 cases open currently.

In 2009 and 2010 there have been some massive corruption settlements in the US. The oil company Halliburton paid a settlement of more than $500m for bribes taken during a joint venture to build a liquefied natural gas facility in Nigeria. The US also carried out major prosecutions against two German businesses, with the car maker Daimler paying $185m for giving $56m of bribes to foreign public officials in 22 countries, and Siemens paying $800m. Germany on its own account had pursued Siemens for illegal payments and in 2008 the engineering and technology company paid fines there of €400m in addition to its fines in the US. This year, Germany sentenced two former Siemens managers for alleged bribery, and the country still has 24 live corruption investigations, one of which involves allegations that former employees of US company Hewlett Packard paid bribes to secure a distribution contract for its computers. 

Tighter legislation

In addition to these very public scandals, there is new legislation and guidance coming from diverse jurisdictions ranging from Spain (which reformed antiquated penal laws in June 2010) to Russia, which boosted its anti-corruption credentials by introducing new laws last year. Then, of course, there is the UK’s Bribery Act, due to come into force in April 2011, which is considered the high watermark of anti-corruption law and pushes the legal boundaries further. For instance, it increases the scope of what is considered ‘bribery’ to include certain types of facilitation payments (a licence required by a local official for transporting goods is a good example), which have previously been considered borderline.

The new UK act also underpins the extra-territorial reach of this type of legislation. A company need only have a "close connection with the UK" for it to be within the Bribery Act’s jurisdiction. This has huge implications for those involved in FDI, who may consider that operations in far-flung places will not attract the interest of the UK authorities. The other important new risk area is that a company may be liable if it has failed to prevent bribery by any "associated persons". This means that liability could stretch out to a company’s joint-venture partners, agents in the field, intermediaries or distributors.

As a result of both new legislation and new policing, putting in place anti-corruption measures is fast becoming a priority for companies. In March 2009, the International Corporate Governance Network (ICGN), which represents more than 500 institutional investors with $10,000bn of assets under management, issued a zero-tolerance statement on corruption. George Dallas, a member of ICGN and director of corporate governance at F&C Investments, a global asset management company, says: “When F&C is looking at long-term investments, our belief is that not having anti-corruption procedures in place today is a business risk that we do not think companies should take. Given the changing legislation and the aggressive extra-territorial scope, we are anticipating a greater number of possible offences and more intense levels of enforcement.”

Companies' response

With all this pressure from governments and shareholders alike, how are companies responding when making investment decisions? Under the UK Bribery Act, the main defence for companies is to have "adequate procedures" in place to prevent it. There is currently consultation on what this means, but broadly speaking it involves getting one's own house in order with a board-level message that corruption is unacceptable, with policies and penalties to back this up, employee training and benchmarking exercises against best practice.

But because the new anti-corruption legislation reaches beyond the confines of a commercial organisation’s own four walls to anyone associated with it, a corporation must also consider the practices of almost any entity with which it does business and in which it invests. Clearly, this means heavy inspection during any merger-and-acquisition (M&A) transaction. Sam Eastwood, who heads the business ethics and anti-corruption group at Norton Rose, an international legal firm, says: “In any M&A due diligence these days, a significant part of that process will relate to investigating compliance with anti-corruption and bribery legislation.”

The new laws also mean ensuring that any agents or intermediaries a company uses are properly vetted. Indeed, there are now a number of third-party providers that will do the vetting on a company’s behalf. Trace International, a non-governmental organisation providing anti-corruption compliance solutions, has a membership boasting 160 multinational corporations. That membership has, according to its president, Alexandra Wrage, “doubled every year for the past few years” as the enforcement culture has developed. Trace International's TRACEcheck service reports back on intermediaries, providing ownership information, media searches and business references. This could uncover bribes that would not be picked up in an audit. One example Ms Wrage gives is where an agent has secured a contract for a construction venture with an official in return for that official’s son securing one of the places on a corporate-sponsored scholarship programme to a US university. 

Similarly, PricewaterhouseCoopers (PwC) provides what it calls "corporate intelligence" on agents, partners and intermediaries. David Jansen, a principal at PwC, has been carrying out this sort of work for more than 10 years. He says: “Our clients need to understand what they are buying or buying into. We look at the local media and pick up local knowledge on what a company or person is doing to investigate whether payments are bona fide. One company’s accounts recently showed that it was donating money to a charity. When we investigated this charity, we discovered that it was owned by the president’s wife. If we can’t account for someone’s wealth, then we get suspicious. If we can’t understand something, we’ll advise walking away from [the deal]. If there is any report that is ambiguous, companies will not take the risk.”

Many investors would endorse the PwC approach. F&C's Mr Dallas says: “We encourage [the companies we invest in] to look at their own supply chains and to consider all their activities to ensure that they too accord with high standards of anti-corruption.” Similarly, under some of the new legislation such as the [UK] Bribery Act, if a company is involved in a joint venture but does not have a controlling stake, the fact that it does not have overall control will not protect it from liability for bribery within the joint venture. Mr Eastwood at Norton Rose says: “The expectation is that, in such a case, you should demonstrably try to understand what is going on and try to influence it. If you don’t like it or can’t influence it, then, the argument goes, you should pull out: a difficult, and potentially very expensive, call.”  

Growing awareness

It is no great surprise that the level of interest from companies protecting themselves with anti-corruption procedures closely mirrors those operating and investing in sectors and regions where enforcement has been most vociferous. As the prosecuting authorities bare their teeth, companies in vulnerable sectors such as oil, gas or construction or in high-risk regions such as west Africa are seeing for themselves from very close quarters what such cases can do to an entity even before any fines are imposed.

Companies are now aware that if they suspect bribes are being taken or paid within one of their associated companies, they may have to shut that business down while they investigate the extent of the problem. Businesses are more conscious than in the past of the repercussions of an investigation, not only in terms of fines and penalties, but also in terms of management distraction (what Ms Wrage calls “business derailment”) and damage to internal morale.  

Self-policing of corruption is what governments want most – and this is what they are beginning to get.