Benchmarking Bribery and Corruption: "Vet it and forget it."

On my own "must read" stack has been sitting the "2014 Anti-Bribery and Corruption Benchmarking Report, Untangling the Web of Risk and Compliance," ("ABC Report") by Kroll and Compliance Week.  While I have read a multitude of bribery and corruption enforcement summaries, mostly published by law and audit firms, this was my first read of a compliance benchmarking report. Interestingly enough, upon completion, I thought about whether sharing my own experience and perspective with respect to the findings could actually add any value or relevancy to what is already an impressive and extensive report. 

Accordingly, a disclaimer: When I think about the experience and expertise of Kroll and Compliance Week, along with the resources deployed to publish this report, I call attention to my own viewpoint as intersecting but a small part of the overall scope of their collaborative effort. Hence, when I reflect on the report’s findings, it is solely in the context of my own experience with third party intermediaries, as a subset of third party vendors, and anti-bribery compliance as a subset of corporate compliance. In other words, my personal familiarity only overlaps some of the many issues covered in the Benchmarking Report.

As the ABC Report states in the introduction "we hope you find the information here useful and that it can serve as a guidepost for your efforts to understand how corporate compliance works best in your company," Thus, I hope that by sharing my own limited perspective, that I might also add some value to that same understanding. Ok, as this is a post about compliance not caveats, lets review:

The report sets out to:

•       To provide compliance officers a "comprehensive view of the ABC  risks they have.”

•       To identify “the resources they have to fight them.”

•       And to demonstrate "how those resources are implemented into compliance programs.”

Two findings (among others) which were mentioned in the executive summary and which I will also focus upon are:

•       The challenge that  "third parties continue to vex compliance officers."

•       The dynamic that  "monitoring anti-corruption efforts on a continuing basis is weak."

"Taming Third Parties" as "the bane of anti-corruption programs." 

As the report states "taming third-party risks continues to be a major weakness for anti-corruption programs, and the problem may well be getting worse." Furthermore, there are a number of foundational hazards in third party assessments and on-boarding procedures that may amplify those difficulties.  A few of those challenges which I see as prevalent both before and during  the on-boarding process are:

• "It's not my law" syndrome. There is an attitude among some third parties whereby they do not consider themselves as signatories or responsible to anti-bribery laws and acts. Thus, such intermediaries will have an attitude of "the law does not apply to me," or worse, "it is legal here." Where that corrupt approach exists before a relationship is even formalized, there is great peril for all involved.  Those third parties which look at the vetting process with “corrupt intent” and which do not seriously undertake the legal obligations as put forth in investigatory and vetting processes, will simply do and say "whatever it takes" to get representation and corporate agreement finalized.   

In addition, where local data and in-country vetting resources which are in place may also be corrupt, surfacing the ill will of such third parties who talk a good game of “compliance” might be difficult, even with the best intentioned assessment protocols.  As Mr. Matteson Ellis states, in such areas, corruption “might be baked into the economic order.” *

• Collusion with an internal sponsor.  When an internal business sponsor, e.g. country manager, sales manager, etc., recommends an intermediary for onboarding, be additionally mindful of incentives, and the relationship between the sponsor and the intermediary. As Scott Killingsworth explains  “it is not just difficult, but impossible, to be truly objective about a decision when we have a significant interest in the outcome.”** In my experience, where companies do not look into the motives behind such internal endorsements, companies would be well advised to listen to Mel Glapion, Managing Director, Kroll,  and think about “sharpening the saw, and improving the processes and measuring that information that’s coming back to you.” 

Indeed, when you have an internal sponsor who recommends a third party for on boarding, and who has a personal financial incentive for "short term success," the risk of collusion between the sponsor and the intermediary during the vetting process dramatically increases. When that occurs, detection of corruption is severely hampered. In some cases, the company sponsor might actually "coach" the third party through the assessment process in order to insure the successful vetting of the intermediary. Such coaching might include the sponsor assisting in the completion of third party self-assessment paperwork and exams,  sharing confidential information about investigatory protocols, and overall interference in the onboarding process.

Due diligence and the life of a relationship

While the report points to a positive trend in terms of companies that are conducting due diligence on third parties, the contributors focus on an element of caution in that "compliance officers were more confident in their ability to vet third parties at the start of a relationship, and less confident in monitoring third parties once that on boarding examination had passed." In fact, the report shows the troubling statistic that "the numbers marched downward for monitoring compliance after a relationship starts (43.3 percent), auditing compliance of third parties (33.2 percent) and training third parties on anti-bribery and corruption procedures (30 percent). “ That is a trend fraught with great liability. Why?

• Impact of regime change.  As Mr. Glapion, states, "people give good, very positive political statements about what they're doing, but if you scratch a little bit harder, what you see is that the follow-through doesn't support it." Or, as stated in the title "vet it and forget it." While Mr. Glapion recommends a four-year review and audit cycle, I would add that in regions with low integrity reputations, and where there is a regime change, such an event should trigger an automatic re-vetting protocol.  

Governmental turnover in politically unstable countries can often result in a change in the relationship between third party representatives and government officials. As newly appointed public officials take their place in the Ministries and bureaucracies, prior corrupt relationships between intermediaries and their new “friends in power” now come to resurface. Such a change in regime can dramatically  increase  corruption risk, with the potential consequence that today's "clean" intermediary could become tomorrow's "corrupt" one, as this  renewed relationship now comes into play with respect to future business and transactions.

Mr. Ellis refers to the hazards of such  "touch points" with government officials and state-owned employees as where “the incentives to manipulate the process can be great.” Thus, bribery risk is not necessarily a constant in the life of a relationship with an intermediary.  In low integrity regions with “weak government institutions” (see Ellis), risk can change abruptly, with a well-vetted legitimate business relationship in the past turning into to corrupt one without warning, and worse, the corporation is left unaware of this newfound exposure.

For an entity which "vets and forgets" this is a dynamic which can occur when the assessment process is not repeated after regime change or at least on a regular interval, as the ABC Report recommends.  In my experience, the higher the risk, as measured by the regional or country corruption index, as well as the market  (in terms of exposure to public officials), the greater the need for repeat due-diligence reviews through either event triggers or articulated time intervals. Fact patterns are often not enough to serve as future indicators, as changes of regime or ruling party can have a significant impact on corruption risk.

As Mr. Glapion recommends, corporations would be well advised to incorporate a process which commands, lets "go and audit some of the companies that either we reviewed three years ago or have been third parties of ours for a long period of time." It is like those commercial disclaimers on well performing mutual funds as "past performance is not indicative of future trends." In addition, as the report indicates, there is no symmetry between bribe and consequence, and investment in compliance over the long term "pales in comparison to regulatory fines that can hit hundreds of millions should a bribery offense go undiscovered."

In conclusion, as the ABC Report states, “without that fundamental effort to figure out what risks a company faces, building an effective compliance program to address those risks becomes more difficult.” Hopefully, I added some value to that effort by focusing on the reality that some intermediaries don’t take anti-bribery and corruption laws seriously, that they might collude with internal sponsors to circumvent  vetting processes, and that regime change can have a significant impact upon where an intermediary might “sit” on the continuum of corruption. How to deal with these potential gaps I leave to the experts, and would naturally welcome  and invite comment.

* “Regional Flavor: Crosscutting Corruption Issues in Latin America” chapter eight: How to Pay A Bribe 2014 (Wrage, Alexandra Addison). Mr. Ellis is Special Counsel, Miller & Chevalier.

** Killingsworth’s complete paper, ‘C’ Is for Crucible: Behavioral Ethics, Culture, and the Board’s Role in C-Suite Compliance, is available as a free download at http://ssrn.com/abstract=2271840.  Scott Killingsworth is a Partner, Bryan Cave.

Is Anti-Corruption a Business or Legal Issue?

Used with permission from Mak Yuen Teen

On June 5, 2014,  Philippe Montigny, President of Ethic Intelligence (www.ethic-intelligence.com) asks exactly that question in an editorial (here).  My own perspective of compliance remains much along the lines of those such as Mr. Montigny and that of Professor Mak Yuen Teen (National University of Singapore), whose article I discussed in a recent post (here).

On June 4th 2014, I addressed an internal audit and investigatory group at a global hedge fund, where I discussed my experience through international sales, cooperation, and sentencing. I concluded my presentation by sharing my thoughts on current compliance challenges and asked the attendees for feedback relative to my own journey and their  professional challenges. What I found interesting is that many of the questions from the audience during the presentation addressed a number of the issues which are now starting to rise in the compliance debate, including "what is the role of corporate strategy and compensation when trying to drive compliance policies and procedures to the front line of the business?"

These questions were encouraging, as I am starting to see a gradual shift in the debate from the specifics of compliance, including "tone at the top," "third party management,"  and "how to organize a compliance department," (among others) all of which have a fundamental and valid place in the compliance discussion, to one of looking at business strategy as the primary foundation of compliance. Lately, we see in the news companies such as GSK and Citibank which are edging the discourse away from the "rogue employee," model or as Professor Mak calls it, "plausible deniability" towards one where business strategy itself is coming under scrutiny, sometimes from regulators, sometimes from shareholders, and often,  both.

In any case, while the details of a compliance program are not to be ignored, if the business strategy itself supports contradictory messages to the field between the "means" of compliance and the "ends" of winning above all else, then as Mr. Montigny concludes, compliance programs will "continue to be perceived by employees and other stakeholders as providing window dressing only."

Or, as I recently asked Donna Boheme @donnacboheme on a tweet, "when does the paradigm shift with respect to the "rouge employee" concept." Her response "when #boards stop accepting #lame excuses +demand accountability from management." Sometimes the limitations of a tweet  make the points of a message so much more relevant!

Bribery, Business Strategy and Plausible Deniability

Can business strategy in itself be a red-flag of corporate corruption?

In one word,  yes, and I discuss how in a recent guest blog (May 19, 2014) in Ethic Intelligence's "Experts Corner." 

I ask, if strategy is pulled back at the C-Suite, does it expose an executive message of strict anti-bribery compliance, while the economics of the sales forecast and corresponding personal incentive packages speak to a "win over everything else" mentality?

A gap in the debate

As I shared in the Q and A, I am concerned about the lack of discussion with respect to the corruption risk that front line international sales and marketing personnel face. Specifically, I draw attention to how corporate business strategy can directly contradict, through sales growth plans and incentive compensation packages, the messages of anti-bribery compliance. Such a situation leaves the sales force to decide "what does management really want, compliance or sales?"  While in past  writings I have discussed "compliance as bonus prevention" in the context of  incentive compensation, in the Q and A with Ethic Intelligence, I discuss the role of business strategy as a stand alone red-flag, of which compensation is a sub-set.

I am not alone

While I might have thought I was alone in expressing this concern, I recently came across an article by Professor Mak Yuen Teen, published in the Singapore Business Times on May 21, 2014, but also on his blog Governance for Stakeholders, titled "Plausible deniability and graft by MNCs." By way of background, Professor Mak is an Associate Professor of Accounting at the NUS Business School, Singapore. For his full (and impressive) CV, see here.

In his article, Professor Mak first calls attention to  the recent reports of GSK bribery in China, and GSK's public reaction as calling the conduct "outside of our processes and controls..." (The Guardian, July 22, 2013). However, Professor Mak goes onto demonstrate the  reporting relationship between Mark Reilly, former head of GSK China (and subsequently charged by Chinese officials), and his supervisor, Abbas Hussain, President of Europe, Emerging Markets and Asia Pacific, who is part of the "corporate executive team of GSK." As Professor Mak states, with this relationship "direct involvement in the scandal has moved up the chain of command of GSK." However, notwithstanding the discussion and relevancy of  the "rouge employee" GSK script, there is a far more interesting element to Professor Mak's writing as relating to corporate strategy.

"Did you wake up from a 10-year nap?"

Professor Mak references an on-line comment to the GSK allegations as above, and asks "whether he (GSK CEO Andrew Witty) and the board ought to have at least asked some probing questions when GSK China was reporting strong sales growth over the years proceeding the scandal." And that is where compliance gets separated from the reality of international sales growth.  Clearly, GSK executives were aware of two basic facts:

• There was a robust anti-bribery program in place at GSK, as referenced in  public statements. Professor Mak makes reference to a 29 page anti-corruption document, and Tom Fox discusses the GSK Corporate Integrity Agreement (here).

• There was high sales growth in China. 

Therefore, was it in fact what I have called a "zero-sum" game of compliance and sales?  Could those two factors have co-existed?  In other words, and I don't think is unique at all to GSK, "was it a case of don't ask, don't tell," at the C-Suite, as Professor Mak remarks. When the regional sales numbers were reported into management was it all "high fives," or did someone ask "hey, how did you get there?" I would ask the same of those who read this, who have been in those rooms, when the sales figures are shared.  What is the message?

Professor Mak focuses on complex multinational corporations (MNCs), where corporate executives are separated from the front line of sales by a deep and wide organizational chart. He asks, "should only executives such as Reilly take the fall while senior management and the board escape accountability..." and "can they really claim that they did not know what was going on...?"  I completely agree with Professor Mak, in that it is a long way from the C-Suite, where compliance programs commence, to the front line of international sales and marketing; however, does that distance justify the escape from accountability in not challenging the "reporting of strong growth in markets well known for corruption."

Professor Mak thinks not, and makes a compelling case, which is reflective of my own view.  I repeat his conclusion in  its entirety and in bold (just to make sure you get the message):

"It is time for senior management and boards of MNCs to stop hiding behind business conduct codes and anti-corruption and compliance programs, and a "plausible deniability" defense, and address more fundamental questions about the benefits and costs of doing business in highly corrupt countries, their business practices, and how they reward, retain and promote their employees." From my perspective, it would appear that the "default" for compliance and sales growth in low integrity countries, remains "zero-sum."

Maybe it is time that GSK listen to its own Chief Medical Officer James Shannon whom I referenced in a prior post, when he stated (in an interview with Reuters) that "sometimes you have to step backwards to move forward.." and that it is time for "an entire rethink about our business practice."

The Esquenazi Appeal: A Sales Perspective

 

I use the picture above as a symbol to ask a question: If one of these individuals represents an "instrumentality" as defined and affirmed by the FCPA and Federal Appeals Court (respectively), and the other does not, should it make a difference to an anti-bribery program?  The basis for this post is  the Federal Appeals Court ruling in case of Mr. Esquenazi (and Rodriguez), where, as Michael Volkov summarized, "most importantly, and as predicted, the Eleventh Circuit upheld the Department of Justice’s interpretation of the term “instrumentality” in the definition of a foreign official to include state-owned enterprises owned or controlled by foreign governments. "

Before elaborating, a few points, and my first goes to the families of Mr. Esquenazi and Mr. Rodriguez. Having spent time in the Federal Prison System, on the personal side, I take no pleasure or comfort in supporting their incarceration, even if understand the Appeals Court ruling.  Second, my response here is entirely devoid of any legal interpretation or debate. I am not an attorney, this blog is not in any way designed to suggest or provide legal opinion, so my discussion of the Esquenazi Appeal is only from my perspective as a former international sales executive. 

So, here is where I get lost in the "fog" of the debate; I have read numerous posts,  opinions, charts, comparatives, etc, on the various FCPA blogs about the ruling, and no doubt, from a legal perspective, these posts are well thought out and provide significant legal value to compliance practitioners. However, with that said, I have yet to see any discussion from the viewpoint of those on the "front line" of international sales, and how this ruling might (or might not) provide additional direction in how they contend with corruption risk in the performance of their overseas responsibilities.

Was it ok to bribe "non-instrumentalities" before the ruling?

Is the legal analysis somehow meant to imply that training and compliance programs need to now be re-engineered, as if perhaps beforehand it was acceptable to bribe people who fell outside of the definition of "instrumentality"?  Obviously not, but again, from a sales and marketing perspective, specifically with respect to how training and compliance are organized and implemented, what difference should this ruling make?  I can certainly see in the areas of "gifts, travel, entertainment, charitable contributions, and other things of value" as set forth in the Department of Justice Resource Guide, that the shoring up of this "line in the sand" will be helpful in guiding those in the field who have probably requested prior guidance about such definition. However, beyond those "travel and entertainment issues" how would this ruling change or modify compliance guidance to an international sales or marketing team?

A bribe by any other name....

A bribe is a bribe, it should not be condoned or sanctioned,  foreign official or no foreign official. Isn't the primary compliance and ethics message amplified and disseminated as "we don't bribe."  Thus, I can't see any responsible compliance executive now having to "change their tone" due to the ruling, as that would imply there were allowances for "non-instrumentality" bribes beforehand, and again, I don't see that as having been in place.  Nonetheless, this type of conversation as to "who is and who isn't" could be misleading to an overseas sales team.

Such a prolonged discussion of "instrumentality" might lead an overseas team to interpret a "hidden meaning" behind dividing customers into "public" and "non-public" entities, concluding that while bribing one group is illegal, perhaps the other is permissible, even if unethical. I don't think that would be the intention of compliance personnel,  so why make it an area of focus? I realize its a complicated issue, as it conflates ethics and legality, so again, why make the differentiation and elevate the potential for misinterpretation?

I think Michael Volkov comes closest in touching this issue in his post (see here) when he states "in the end, the appeal strengthened the government's hand and left little room for doubt-the FCPA applies with full force to entities that are controlled by foreign governments." Plain and simple. So, from a compliance and training perspective, my take away is "move on," as there has been no dilution to the FCPA and to the importance of business strategy, training and incentives as part of an anti-bribery ethic. In other words, the Appeals ruling provides no "ground cover" for corrupt behavior, and for those in the field who thought there was "wriggle room," take note. 

Rationalizing Bribery: Corruption Has No Witness.

This is part three of my four part series on how I "Rationalized Bribery."  It addresses the reality that there are usually no witnesses to overseas discussions involving an actual or potentially corrupt transaction.

As tweeted by Ben DiPietro, Wall Street Journal Reporter,  @BenDiPietro1 during my interview with Wall Street Journal Reporter Chris Matthews at the April 23, 2014 Dow Jones Global Compliance Symposium (DJGCS):

"bistrong: usually no witnesses when sales person deals with third party vendors and talk turns to bribes."

For the most part, front line sales, marketing and business development personnel travel alone to their overseas territories.  Agent meetings (maybe including a public official) also usually occur without anyone else present. 

You Get Close, You Get Comfortable

Adding to "lack of witnesses" dynamic is the relationship which develops between an overseas employee and in country intermediaries.

The tradition and cultures of many countries leads to a great deal of social interaction outside of work hours.  My own relationships with agents developed and grew over the course of ten years.  We had obligatory evening meals, often in the home of an agent.  Over time, I even took vacations with agents and their families.  Some agents insisted I not stay in a hotel, but as a guest in their home. We became friends and as these relationships grew so did the level of comfort in the conversations.

During the course of my sales travels, casual discussions led (on a number of occasions) to the agents explaining to me, in barely masked language, that they were paying bribes to win contracts.  One of the first times this happened to me, I was on vacation with an agent I had known for years.  I had no reason to suspect he was corrupt, but on this vacation, he explained to me how he was "paying tolls" to win contracts.  

As I shared at the Dow Jones Symposium, the agent had presented me with a dilemma.  I have won contracts with this agent in the past.  I am hoping to secure future contracts.  And now he tells me about paying bribes (I didn't need to clarification as to the "wink and nod" language).

For Compliance Professionals, this is a simple "call home" moment.  Withdraw from all transactions with this agent, and inform Legal and Compliance.  Simple, right?  Not necessarily for sales or marketing employees, as the thought process can be far more complicated.  This is where the rationalization process can take hold and dictate decision-making.

For a sales, country manager, or marketing person, it is more than just walking away from a transaction, it means walking away from the entire third party relationship.  For these employees, there are not just short term financial consequences, but also the loss of all future deals, sometimes with regional implications.

As an example, see my post on Cisco and Russia (see post), where once the Cisco employee allegedly heard talk among agents about paying bribes, he was reported to have walked out of the room, not to report the conversation or undo the deal, but just to maintain deniability.

Add in Procurement Instability and Financial Incentives to Create the Perfect Storm.


As Ben DiPietro @BenDiPietro  tweeted during the DJGCS:

"bistrong: to pay a bribe or sever a relationship is more complicated decision than compliance people think."

In other words, when the employee hears talk of corruption, he or she might rationalize going forward due to vague language and lack of witnesses.  Add in procurement instability (see prior post) and incentive compensation (see prior post) to create a Perfect Storm for a bad decision – "I am not going to see this tender come back for quite some time.  If I lose it, a large part of my forecast and bonus projection will be gone, so why make trouble?"

As Maryam Hussain states in Corporate Fraud, The Human Factor, "it is often the case that a narrowly defined objective – an ever growing sales target to achieve bonus, a consistent progression of earnings per share to maintain an upward trending share price – takes precedence over everything else and can lead to employees stepping over the line to achieve the goals that have been set." Furthermore, the impact of not having a witness to these events can have an tremendous impact on that "stepping over the line" moment. 

As I have shared before, if the C-Suite preaches compliance but the sales incentive package awards "winning the sale" above all else, how will that employee determine whether management wants compliance or sales?  

Private conversations between agents and corporate personnel are not the red-flags that get picked up in an audit or routine review. These red-flags are only seen and heard by the international sales, marketing and business development teams.

I invite comment to how training and compliance programs address such scenarios.  Up Next: One more element to complete the "Perfect Storm of Rationalization."

Rationalizing Bribery: A Perfect Storm from the Field of International Sales.

On April 23, 2014 I was interviewed by Chris Matthews, Wall Street Journal Reporter, at the Dow Jones Global Compliance Symposium, in a keynote interview entitled "Informing on Bribery." The session started by discussing elements of my cooperation with US law enforcement, including my disclosures to the Department of Justice and FBI concerning overseas corruption in which I had participated, as well as witnessed, during my career in international sales.  These initial disclosures, made during my proffer sessions at the Department of Justice, ultimately commenced my two and half years of covert cooperation with US and UK law enforcement. I addressed how the FBI witnessed, during my cooperation, the "wink and nod" language of foreign bribery, as confirmed by my first consensually monitored conversation in July of 2007.

Mr. Matthews then turned the questioning towards "what was I thinking" as I encountered corruption in my overseas work. My initial response to his question was that it was a "perfect storm of rationalizing risk," which I broke down into four elements:

1. International procurement instability.

2. Personal incentive compensation.

3. Lack of witnesses.

4. Illusion of no-victims.

Over the next week, I will post on each one of these factors, which all contributed to my "rationalization" of bribery as I encountered it during my international sales experience. To be clear, I make these observations in no way to "justify" my behavior, or even to "explain it away." To the contrary, my goal here is to open the window with respect to my thinking and how I rationalized overseas corruption. My hope is that by sharing my experience, compliance professionals and practitioners might better understand the forces facing international executives, and to better assist them with the  tools and training to help them manage the risk they face, especially the front line personnel, who are, in my experience, the most exposed to foreign corruption in their work. As Wall Street Journal Reporter, Ben DiPietro, tweeted during the interview "I knew (what) I was doing was wrong but I rationalized my risk." Well, here's how:

International Procurement Instability. Winner Take All or Win Big-Lose Big.

Having spent about half my career (the first half) as a VP responsible for US law enforcement and US military sales, I could easily describe that procurement environment as stable. As I shared with Mr. Matthews, take a fifty mile radius around Washington DC and consider all of the surrounding federal, state and local agencies, each one of which has a procurement department(s). These procurement agencies all purchase goods and services on a regular basis. It does not matter if there is a change in departmental leadership, a new President, a new Mayor, etc, the purchases continue. If a procurement official goes on vacation, takes leave, retires, etc, there is someone to take his or her place in the bureaucracy. In addition, the frequency of purchases ranges from long sales cycles (as in large military contracts), to smaller, high-frequency purchases. For a sales person, this is a stable environment and one which can easily be modeled into a sales forecast. If a sale is lost to a competitor, there will be another agency to go after, or that same agency will be buying again in the near future.

Contrast that environment to overseas procurement, regardless of product or services. In many countries, including EU and NATO members, the Ministries at the national level procure goods and services for the entire country, from the federal to local level in a single integrated contract. Thus, in those countries, the contracting entity is concentrated in a specific national Ministry, be it Health, Finance, Interior, Defense, etc.  In addition, those contracts, which cover the purchases for the entire country, often have renewal and escalation clauses which reduce the probability that they will be offered again for public tender in the near future. In my experience, it was common for a Ministry of Defense or Interior to award a contract and to use renewal clauses over the course of three or four years.

So, How Does that Impact an International Sales Executive?

It means that in a territory there will be a small number of tenders for the products/services that he or she sells, and that those tenders will be significant in value. In addition, if the sales person "loses" the tender to the competition, it means that in terms of the identified market segment, there will be no more business opportunities, perhaps, for years to come.  Thus, for the sales person, and for the company, in most overseas countries, it is "win big or lose big" for sales to state controlled entities.

Is That All?

No. Moving outside the NATO and EU community, procurement instability gets dramatically magnified. In addition to the infrequency of tenders and their large financial scope, there is also the unpredictable and unstable nature of the procurement process as a stand alone issue. Such instability, which can stall, delay, indefinitely postpone, or even cancel a procurement, can be attributable to the following issues which I have encountered the most:

• Regime Change  and Personnel Turnover. I list this bullet point first as it is probably the most common reason for procurement delay or cancellation. In many countries, a change in regime can cause a cancellation and re-bid of all outstanding tenders in the State Ministries. In addition, where there is not cancellation, many of the tenders, even those awarded, will be indefinitely delayed, as existing procurement personnel are often replaced. Such turnover in procurement staffing due to regime change is common. In extreme cases, the funding for all outstanding procurements is cancelled, and the entire tender and sales process starts from the beginning. 

I recalled a transaction in my interview where I had sales responsibility for a  procurement which was funded and licensed, yet delayed for over a year, due to regime change. The change in leadership had caused a significant turnover of personnel in the Ministry, and one of the people who needed to sign the final release of the purchase order was no longer employed  and had to be replaced. One year for a single signature: how can you account for that kind of instability in a sales forecast? 

• Logistics. In many countries, even after a purchase order is funded, signed and issued there can be indefinite delays due to licenses (if regulatory agencies are involved) and/or the arrangement and costs of logistics, including warehousing, shipping and forwarding.  I was involved in a transaction where the purchase order was executed, funded and secured, but there was a negotiation over which party would pay and arrange for the transportation costs once the goods had arrived in port, including storage fees. That negotiation lasted almost six months, mostly driven by the end user (who was a public official). Again, circumstances beyond the control of an international sales person, but one which makes for instability in the planning and forecasting process, both on the personal (as in bonus compensation) and corporate level.

What Does This Have to do with Rationalization of Bribery?

A lot. This is the procurement environment in which overseas sales, marketing and business development people operate. Infrequent but large volume tenders, delays subject to regime change, personnel turnover and logistics, all of which make the entire sales process extremely unstable. If we are talking about sales personnel with high personal performance sales goals as part of their incentive compensation (the next part of this storm), creates tremendous pressure, as it becomes difficult to predict and achieve performance goals.  In other words, the sales person starts to think, "if I miss this sale, I doubt I will see this opportunity again any time soon,  and even if I do win  it, I don't know when it will actually be booked and shipped. A miss here will destroy both my forecast and bonus."

If we are talking about a public company environment, the challenge gets dramatically magnified, as sales and expense forecasting, which are usually on a rolling and quarterly basis, are a part of corporate life. Nonetheless, how can you forecast for a "win all-lose all" tender? How can you predict when an order will get shipped and billed when it is subject to all kinds of delays due to regime change, personnel turnover, etc? All this makes for vulnerability if a corrupt offer is presented. Accordingly, this backdrop of procurement instability is a major part of the "rationalization process," even if mostly an unseen one.

More to come.

"Why Transformation Efforts Fail," Final Lessons.

David Stulb, Global Leader for Ernst & Young, Investigation & Dispute Services, in introducing Maryam Hussain's recent book Corporate Fraud, the Human Factor, (link here for more info) states that "aggressive prosecution of bribery and corruption is increasing the risk of operating in many new markets. Yet these are the same markets which are critical to business growth and establishing a sustainable supply chain."  I think of that potential  tension between overseas business growth and corruption when concluding my thoughts on John Kotter's work on corporate transformation, which in the context of this discussion, includes transforming a corporate culture to embrace a true anti-bribery ethic and program. As in prior posts, I continue to focus on the relationship between compensation and compliance as part of that transformation process.

John Kotter, Konosuke Matsushita Professor of Leadership, Emeritus, Harvard Business School, in “Leading Change, Why Transformation Efforts Fail,” (HBR, January 2007) discusses why companies seeking to change the way they operate in a new “more challenging market environment” often encounter internal institutional resistance from “those in the trenches of the business,” and why “leading change is both absolutely essential and difficult.” Today I will conclude my discussion of his work  as relating to my own experiences, and to bring the reader through Kotter's thinking  so that others may consider how to “avoid the common pitfalls.” For those who are interested in learning more, including the details of eight unique steps to transformation, here is a link to the work.

If transformation includes the creation and sustenance of a true anti-bribery culture and program, then incentive compensation for a sales and marketing organization needs to be aligned with desired behaviors to insure that compliance and compensation do not become a zero-sum game. As Kotter states "sometimes compensation or performance-appraisal systems make people choose between the new vision and their own self interest." Hence, as in my prior post where I reference the MIT Sloan Management Review article called "Combining Purpose with Profits", if the C-Suite is proclaiming the "pro-social" goals an anti-bribery effort while delivering a financial message as articulated through a lucrative sales compensation plan to "bring home" the financial goals of sales over compliance, then the best FCPA compliance program will be diluted, or worse, discarded by the time it reaches the overseas sales and marketing organizations.

Kotter concludes that "change sticks when it becomes "the way we do things around here," when it seeps into the bloodstream of the corporate body," and he adds that "until new behaviors are rooted in social norms and shared values, they are subject to degradation as soon as pressure for change has been removed." From my perspective, compensation needs to be a part of that "bloodstream" to insure that incentives align with desired behaviors.  While I was struggling to describe what that transformation might look like, I refer to Andrew Leigh's book Ethical Leadership, Creating and Sustaining an Ethical Business Culture,  (see here for more information) where with permission of the Ethics Resource Center, he illustrates a chart (referencing Prudential Financial, Inc.) called "making the right choices." The chart lists Four Ethical Filters for Decision Making and  I have taken the liberty to put them in a general context, as follows:

1. Policies: Is a decision consistent with policies, procedures and guidelines.

2. Legal: Is the decision legal?

3. Universal: Does the decision conform to company values? Does it benefit stakeholders, internal and external?

4. Self: Does the decision "satisfy my own personal definition of right, good and fair? Can I be proud of this decision or action?"

If a company has implemented a "transformational" anti-bribery program and ethic then individual and organizational decisions throughout the sales and marketing organizations, no matter how far from the "C-Suite" will always be "yes" to the above, and where there is uncertainty, the employee will feel secure in calling upon corporate resources "available to provide... guidance to make sound ethical decisions." I think the above four criteria provide a solid foundational definition as to  how transformation results in a "bloodstream" anti-bribery culture.

I was recently watching a video from the  2013 Dow Jones Compliance Symposium, moderated by Nick Elliott,  Editor, Risk and Compliance Journal, Wall Street Journal, (link here), where Peter Y. Solmssen, General Counsel, Siemens AG, was talking about a project manager who was working in Thailand, who stated that when he is working on a deal, his response to a corrupt event is not "compliance won't let me do that," but that "I don't do that." In my opinion, and the history of change at Siemens has been well reported, that is is what I would characterise as  true transformation.

"How to Bribe" by Transparency International. A Review and Recommendation for Organizational Value.

I recently had an opportunity to read Transparency International’s (UK) paper “How to Bribe, A Typology of Bribe-Paying and How to Stop It,” (link here) written with the support of Pinset Masons and www.TheBriberyact.com (January, 2014). The authors state that the purpose of the publication is to “illustrate how bribes are paid in practice, based on legal cases and realistic experiences.” They go on to describe why they took the time and effort to compile 46 pages of bribery scenarios: “to help individuals and companies anticipate, recognize, avoid and resist bribery.”  The authors, based on my experience, accomplish both goals.  First, in the description of “how bribes are paid,” they use both broad and specific examples to surface a wide and relevant variety of bribery scenarios. Second, for each group of bribery activity they have a concluding segment which includes guidance on how to “look out for red flags and fact patterns” designed to assist the reader in the early detection of bribery.   In my judgment, the authors’ call-to-action is succinctly and accurately identified in their own reference to this work as “a source book for training, avoidance and for designing adequate procedures to prevent bribery.”

I would like to call attention to a number of interesting and relevant chapters, and then make a recommendation as to exactly which groups I think would benefit from this exhaustive and impressive paper.  In one of the early chapters, I focused on a recommendation under “Know How to Deal with a Bribe,” which advocated that a company “ensure that any staff who withdraw from a business opportunity because they refuse to pay a bribe know they will have the support of their line managers and senior managers.” I have referenced this corporate maxim in my repeated discussion about how it only takes one manager or senior executive in a company to be out of message alignment, in order to distort, or worst case, discard, the entire anti-bribery culture of an organization.   Line employees need to know that they work in a culture which rewards compliant behavior, financially and otherwise, regardless of the short-term financial consequences of “walking away” from suspect transactions. 

In Section 2.1 “Bribery Through Associates: Middlemen,” the authors call attention to five variations, of which I view the second presents as presenting a great challenge to individuals and organizations which are trying to vet and screen their third parties (e.g. agents). This category is identified as “intermediaries providing both legitimate business services and a bribery service.” In this case, a third party might have good references, solid credentials, and a record of success based on legitimate services, while masking the bribery component under the smoke screen of financial achievement. From my perspective, this is a very challenging and relevant real-world issue.  An agent like this can be attractive to a company or line sales person looking for an in-country business partner, and to complicate matters, the component of the intermediaries “bribery service” in some regions, might go from one extreme to another depending on regime change. Thus, the snapshot of an investigation or vetting process might find that entity as “legitimate” at one point in time, and then after a regime change, where the agent now has "connections in place," the opposite might be true. I would be interested to hear from compliance and investigatory professionals as to how they account for this type of scenario.

Speaking of third parties, in the same chapter under “guidance,” the authors talk about the importance of communicating “to all agents and intermediaries the company’s anti-corruption standards as well as international regulations and ensure that they are contractually obliged to abide by these standards.” I think that this is invaluable, but often ignored advice.  The communication of anti-bribery ethics and programs, even at the introductory state of a third party relationship, makes the message loud and clear: either you are on “our program,” or find another partner.  In my opinion, this is critical preventative messaging which can help companies avoid great financial and reputational damage later on in the relationship.

These are but a few examples, where I call attention to the value of the work in both detailing the diversity of bribery activities, while offering valuable recommendations to help with early detection. So, when I had completed reading the paper, I asked who would benefit from this work?  I came up with two distinct, yet dramatically different groups:

1. Small to Medium sized businesses looking to grow overseas. In a recent K&L Gates paper entitled “DOJ and SEC Representatives Tackle Pressing Anti-Corruption Issues in 2014,” (link here) there was a discussion of how the DOJ and SEC recognized that “small companies may have little money to build state-of-the-art compliance programs, but that these companies still need to find ways to manage their corruption risk profiles.”  For such a company, new to the international marketplace, this work is a great starting point for understanding the potential scenarios, risks, and possible methods of detection which can operate in overseas sales. While such a company might still need to bring in external compliance support, or to increase their internal “bench strength” to shore up an anti-bribery program, it all starts with an understanding of “what’s out there.” This work, which describes real-world and easy to understand examples,  all of which can shape a corrupt transaction, is of significant value to a novice individual or corporation looking to expand internationally. 

2. On the opposite end of the corporate spectrum, I would recommend this as “required reading” to any Board of Directors who sit with companies that have to manage international risk.  I specifically recommend it to the Board Members who do not sit on the audit, governance or risk committees of the Board. Why?  It will give these Board members insights and possible challenges to raise to Board members who do sit on those committees, spurring  “what about this”, “and how do we deal with that” type of questioning - of which there is a 46 page menu from which to choose! Again, for a Board member with limited international exposure and experience, this paper will provide information and examples to draw from in order to challenge those charged with governance, and to engage the full board and management on a critical discussion, as to how the company is coping with bribery and corruption risk in its compliance programs. 

I hope that this review provides some insight, based on my own perspective, as to how this work can be best utilized in the field. While I have linked the paper in my introduction, TI has graciously requested a 25GBP contribution in order to support future writings and I was more than happy to comply.

Why Transformation Efforts Fail: Lesson 3.

As introduced last week, John Kotter, Konosuke Matsushita Professor of Leadership, Emeritus, Harvard Business School, in “Leading Change, Why Transformation Efforts Fail,” (HBR, January 2007) discusses why companies seeking to change the way they operate in a new “more challenging market environment” often encounter internal institutional resistance from “those in the trenches of the business,” and why “leading change is both absolutely essential and difficult.” Today I will continue to follow Kotter’s outline by focusing on his third “common error”  as  relating to my own experiences, and to bring the reader through Kotter's thinking  so that  others may “avoid the common pitfalls.” For those who are interested in learning more, including the details of eight unique steps to transformation, here is a link to the work.

Lesson 3: "Lacking a Vision."

First, the simple question, of which there have been many answers in academic and corporate discussions-: "what is vision?" Kotter defines it as "a picture of the future that is relatively easy to communicate and appeals to customers, stockholders, and employees" with the additional, and critical caveat that vision "helps to clarify the direction in which an organization needs to move." So, what happens when vision is not clear or well articulated in the process of transformation? As Kotter explains, the process "can easily dissolve into a list of confusing and incompatible projects that can take the organization in the wrong direction, or no direction at all."

In the context of a company looking at corporate transformation when it comes to FCPA compliance and ethics, this "vision thing" is more than just lip service to a "sound bite." To the sales person sitting and traveling in an overseas territory, far away from the home office, if that vision is not amplified at the start, it can become diluted, distorted, and at worst, ignored,  through each level of the org chart, as it gets communicated "downward."  All it takes is one person in the communication process, maybe a sales manager, a business development executive, or perhaps even a divisional leader, to say to that person in the field, "don't worry about that stuff, just focus on selling," and all that transformational  effort at the corporate level melts away and never  touches the person(s) most likely to come into contact with foreign bribery: the overseas sales and marketing team.  I once heard a Global (yes, Global) VP of Sales at a large multi-national company refer to his compliance department, after a major FCPA training conference, as the "business prevention department." So, for the sales team working in that organization, looking for direction, operating in remote territories, what did the corporate vision mean to them?  Back to my "kidney stone" management analogy. Its going to hurt during the process, but "hang tough" through the pain, and it will be back to normal soon enough.

So, in my experience, while I agree with Kotter that vision needs to be clear and well articulated, it also needs the "lesson 2" mandate of a powerful and broad guiding coalition to insure that it is heard as loud in remote foreign capitals where the sales team operates, as it is in board rooms of the home office. Thoughts?

Why Transformation Efforts Fail: Lesson 2.

As introduced yesterday, John Kotter, Konosuke Matsushita Professor of Leadership, Emeritus, Harvard Business School, in “Leading Change, Why Transformation Efforts Fail,” (HBR, January 2007) discusses why companies seeking to change the way they operate in a new “more challenging market environment” often encounter internal institutional resistance from “those in the trenches of the business,” and why “leading change is both absolutely essential and difficult.” Today I will continue to follow Kotter’s outline by focusing on his second “common error” as to bring the reader through his thinking  and “avoid the common pitfalls.” For those who are interested in learning more, including the details of eight unique steps to transformation, here is a link to the work.

Lesson 2: "Not Creating a Powerful Enough Guiding Coalition."

In my own experience, I think this is perhaps one of most deadly of the transformational sins, as it often only takes one person who is out of  alignment in the coalition of change, to impact how change is perceived by those in an organization, especially by those "lower in the org chart." Kotter recommends bringing in personnel from the organization who are not at the C-Suite level in the reform process as such efforts where the current system is failing “generally demands activity outside of formal boundaries, expectations and protocol.” Kotter spends a great deal of time discussing the necessity of a powerful “guiding coalition” as to not “underestimate the difficulties of producing change.” He adds that "if the existing hierarchy were working well, there would be no need for a major transformation."

Taking this lesson to the sales field in the context of FCPA, again, I  bring up the oft used sales perception that management needs to pick either "compliance or sales," as a dangerous zero sum game in the goal of driving an anti-bribery culture and program.  By bringing  sales leadership into the transformational process, which I have yet to either hear about or experience (and I invite comment with examples), the C-Suite demonstrates that they "hear the voice of sales" in the process, and that both global and regional concerns will be addressed and valued by corporate leadership in the implementation of change. Furthermore, I agree with Kotter in that it does not have to be the VP of sales or a high level executive. More appropriate, it might be a regional sales manager in a territory which ranks low on the integrity index, as that person would be able to represent some of the most challenging issues in encountering foreign bribery to management as part of a transformational effort in rolling out an anti-bribery culture and program.

I once worked with someone who had a career in the military (as an Officer) and he told me a story that really had an impact on my thinking, and I think it is relevant to today's post. He shared with me how he was implementing a major initiative which required a great deal of work among his direct (non-commissioned Officer) reports, if it was to succeed. He told me how he got them all into a room and made everyone cover up their insignia, himself included, to discuss the program.  He then solicited  their opinions of his initiative, and asked for open and honest feedback, explaining that for the discussion, rank did not exist. He shared with me that he got incredible insights from the field, made some adjustments based on those comments, and had great results. Just ponder that for a minute, that as an Officer he did not need to either bring others into his thinking, nor solicit feedback, but as he shared with me, once his reports knew that they were "part of the team" they worked double hard and double-time to make it a success. That's what I call a powerful coalition!