Corruption & Procurement: Bribery "Thrives in the Dark."

In the July 31, 2014 edition of the Jakarta Post there was a featured article “Smith & Wesson bribery scandal involves National 
Police officers,” which reported that  “the Indonesian Corruption Watch (ICW) has called for an investigation into an alleged attempt by US gun-maker Smith & Wesson to bribe officials at the National Police.” Such civil group investigations into the “demand” side of bribery is very relevant to a recent paper by
 Transparency International (TI) called  “Curbing Corruption in Public Procurement, A Practical Guide.” The TI paper, as stated in the on-line brief, “provides government officials, businesses and civil society with a practical introduction to the risks of corruption in public procurement.”

In addition, the report “outlines key principles and minimum standards which, when respected, can protect public contracting from corruption.” In my experience and opinion, the Guide goes well beyond that scope, and is an incredibly reflective representation of corruption risks that are prevalent in international public procurement. Thus, I hope that my comments, where I reflect on my encounters with such corruption, might lend additional value to this already compelling work through the elevation of real world examples and perspectives.

As the report states in the introduction “few government activities create greater temptations or offer more opportunities for corruption than public sector corruption,” and the OECD estimates that “corruption amounts to between 20 per cent and 25 percent of the procurement budget.” Thus, procurement corruption is a problem and dynamic that exists both on paper and in reality, and as the OECD points out, on a massive scale.  While the TI paper does an excellent job of breaking down public procurement into four chronological stages, what I found resonating was the description of how there is a continuum of corruption in terms of level and scale. The report speaks of corruption by “low and mid-level public officials” (see prior post on TI paper “Countering Small Bribes”) and “corrupt acts committed at a high level of government.” 

The guide also calls attention to subtle forms of corruption that are used to “manipulate budget allocations and project selection, even before the contracting process begins.” Indeed, as the report calls out, such activities occur “through the manipulation of eligibility criteria in the tender documents, or having technical specifications that are biased and without merit.” That description reminded me of a tender in the Middle East whereby the delivery period as stated in the specification was prohibitively short, as getting the necessary regulatory licenses after award would actually burn through through the entire delivery period.  It was a requirement to which adherence would be impossible, or so I thought.

Hello I must be going

I travelled to the Middle East to meet with the procurement chief (this was a substantial tender) and to see if this requirement could be changed as to allow for a reasonable delivery period “after regulatory licenses” were secured. In non-procurement speak, I was asking for a delivery period that would be fair to all bidders, as no vendor could control how long it would take to get a license.  Well, as I sat there professing the need for a modification, I noticed that on the chief’s desk was the approved and signed license for the competitor, who was also the incumbent supplier. To get that license, the competitor needed the end-user signature (being the person to whom I was speaking), and that would have occurred three to four month prior. Thus, needing no translator, and understanding what I was facing, I finished my coffee, thanked the procurement official for his time, and departed.

That is but one example of a public tender where one entity knew via corruption that it was going to receive an award, and the procurement authority used a restrictive delivery period as called forth in the tender document, to guarantee the result. It takes two to corrupt, and I hope this example demonstrates how both the supply and demand side work together to get a desired outcome, as the Guide states “even before the contracting process begins.” While I don’t know if a bribe was paid in my Middle East example, does it really matter, as the process itself was corrupted?

 Small Island, big purchase

The report talks of the “Financial Impact” of corruption, as “burdening a government with financial obligations for purchases or investments that are oversized, not needed or not economically justified.”  This is a very real and serious issue, and I have seen numerous examples of needless and wasteful purchases, some of which were designed to facilitate corrupt transactions (sometimes it was just disorganization and the output of inefficient procurement processes and personnel).  Either way, such procurements do not facilitate the public good through the acquisition of products and services that are needed by governments and hence, serve the well being of the citizenry.  I recall one story of a small island nation with an outgoing leader who started a buying binge prior to his departure from office. During that time period, there was a large procurement of  defense product, far beyond what the tiny island could have needed for domestic security, and I remember asking the sales manager, "what are they going to do with all that stuff?"

I didn’t really need an answer, I knew this was wrong,  and my question was rhetorical as part of my own rationalization process.  It was certainly clear to me that the purpose of that procurement had nothing to do with domestic security and it was nothing but an unnecessary purchase with corrupt intent under the “umbrella” of public safety.  A very telling example, and as the report states, these are funds that “could be used to provide or improve essential amenities and services” as opposed to facilitating corruption for personal financial benefit.

Principles                                                                                                               

The paper sets out a number of principles that “minimize corruption risk” in the procurement process, and a number of them resonated with me in the context of my own experience but the one that caught my attention was professionalism.  As the report states, “where procurement officials are poorly paid, badly trained or lacking a viable career path the risk of corruption increases.” Here we have a dangerous dynamic from the perspective of trying to change corrupt procurement environments. As Mr. Matteson Ellis states “when low-level government officials are not paid enough, they sometimes rationalize seeking rent by other means.”*

Making their Pension

Where you add regime change, which brings in a new group of procurement officials, it is a recipe for procurement corruption on a number of levels. After these new procurement officials get seated, they may aggressively seek bribes knowing their employment might be of limited term due to the next changeover (as with their predecessors).  I remember one such instance, post regime change, where an intermediary shared how there was going to be a series of procurements, as new officials knew that they only had a few years “to make their pension.” Accordingly, in such regions where you have low paid officials, high turnover due to regime change, and a lack of training, I see few solutions to this corruption spiral.  As described by Mr. Ellis, in such regions with weak state institutions,  “bribe requests might be baked into the economic order.”

Like the sales person on the front line of international business who may be looking at a pay check that speaks to “win above all else,” for the procurement official who sees nothing but opportunity to supplement what might be a meager state pay-check, both sides now look at corruption as win-win.  Small bribe or big bribe, this is a dangerous dance for all involved.

Corruption in the Dark

As the report states, “corruption thrives in the dark,” and “lack of information on governmental activity and decision making can easily hide corrupt manipulation of decisions in a procurement process.” So what can be done? Well, until governments seek to address the issues of training, compensation and turnover with respect to procurement organizations and personnel, perhaps the part of the TI Paper called “Checklist for Government Officials,”  (page 21, 3.2.) should be reviewed. This is a critical section which was designed to highlight red-flags “about the integrity of the process,” and which might also be a suitable guide for multinationals. In other words, where those inherent procurement red-flags exist within a region, country, or ministry, perhaps the corporation is well advised to “stay-away” until those built-in institutional perils are addressed and changed.

Accordingly, we are left with organizations such as Transparency International and those like the Indonesian Corruption Watch, who are not going to let the issue of bribery remain solely with the regulators at the individual and corporate level. In my experience, corruption risk needs to be addressed through a continued focus on international public procurements, as this is where the “demand” side of corruption exists. My complements to TI for publishing the Guide on Procurement; I found it surprisingly reflective of the realities “on the ground” of international business.  

* in How to Pay a Bribe  “Regional Flavor: Crosscutting Corruption Issues in Latin America,” which makes a very relevant companion guide to the TI piece.

“Countering Small Bribes.” A Personal Perspective on the Guidance by Transparency International

First, whenever I read a paper, book or guidance about “how to pay a bribe,” or  “how to avoid a bribe,” etc., it is always with some degree of skepticism. I often wonder how an organization or person can have a perspective on how bribery works in the field without actually interviewing or “walking the walk” with those on the front line who are facing risk and corruption. Thus, I ask, does “Countering Small Bribes” by Transparency International (TI, Lead Author, Peter Wilkinson), accurately reflect the “real world” dynamics around small bribes as they impact organizations and individuals? 

In a word: “Yes.”  In two words “Incredibly accurate.”

As the paper states in the introduction, “paying small bribes feeds a climate of corruption, which creates an unstable operating environment for companies.” On an organizational level, that is entirely accurate, and as I share my views, I will attempt to supplement the TI work with how small bribes impact the thinking of those in the field. Accordingly, I hope to use this post as an attempt to carry the TI guidance to a more personal level, and I will utilize the TI paper as a functional and illustrative guide to my own experience and perspective. I hope that by bringing a personal view to the guidance,  I can somehow (humbly) enhance its value to other organizations, teams, and individuals who encounter this unfortunate dynamic in their own work on the front lines of international business.

Why even bother to pay a small bribe? It’s all about the “pinch-points.”

From the field perspective, there is a distorted view of small bribes relative to risk and reward. Why? Because as the TI paper well states, small bribes are often paid at “times of operational vulnerability” to eliminate potential “pinch-points” in a transaction.   Thus, when a front line business person considers the risk of getting caught in small bribe activity, relative to the reward of eliminating potential “pinch points” to completing a transaction, the thinking may not be as complicated as one might project.

 If the compliance community has a hard time contemplating why a front line businessperson would take such a large risk (civil, criminal, reputational) for a small bribe, lets first go to the TI definition of why a small bribe would even be paid all:

• “To obtain performance or to speed up a function to which the payer has legal entitlement.”

• "To induce an official or employee to perform a function improperly such as a falsification of records.”

• "To give improper preferential treatment.”

All of the above usually fall under the latter part of a transactional cycle. In other words, these are all events which are needed to complete a transaction as opposed to securing one. As the TI paper describes quite well “a bribe demander will use explicit or implied threats of delay, inconvenience, business cost or some other undesirable outcome.”   These are all articulated “pinch points” which occur downstream in the chronology of a transaction. So, how is it that a sole foreign official can wield such leverage and potential damage?

Procurement structures which foster bribery

In my experience, the only way a bribe demander can leverage operational vulnerability to secure a small bribe is if the local procurement structures and protocols allow for such discretionary authority. In some countries, those procedures are actually inherent in the procurement process, and make for an atmosphere of endemic corruption risk.

As an example, there was one country where once the ordered product was released for shipment, the supplier would receive 95% payment on an irrevocable letter of credit, paid into the suppliers bank, upon presentation of shipping documents at the point of origin (asleep yet?).  In the world of international commerce, this is as financially secure as it gets. But wait, the other 5% would be paid upon inspection at the end-user (destination) warehouse. Here are additional elements:

• If the product does not pass inspection, the vendor may be banned for a period of five years.

• If the product does not pass inspection, the supplier is responsible for having the entire shipment re-boarded and returned to the point of origin. That is the logistical and financial responsibility of the supplier.

• If the product does not pass inspection and the order needs to be remanufactured, there is a delay clause of 1.5% per month penalty until the goods are returned, remanufactured, reshipped, an inspected again.

• If the inspection takes too long to complete, (there are no timelines in the procurement regulations, it is totally at the discretion of the end user) the letter of credit may expire, and the goods are now financially unsecured.

·    But most significantly, the vendor is neither present nor informed in advance, as to when the goods are to be inspected, so there is no guarantee whatsoever that the inspection will be in line with accepted industry norms, e.g. ISO standards,  or with qualified and experienced personnel.

The risks here multiply like a chain reaction. What do you think goes through the mind of someone at the front line in this territory when a small bribe is demanded to “remove the pinch-point” by getting the goods inspected expeditiously and the payment released? Also, lets add that whatever incentive compensation the employee has based on this transaction is certain to be withheld until final payment has been secured. While TI has sound policy and governance recommendations as to how industry can counter these dynamics, my purpose here is to elevate how real they are at the field level.

In this type of environment, as TI states “small bribes are often systemic…” and “demands are made at times of vulnerability” as the government “functions have engrained cultures of demanding small bribes for routine actions.”  In my experience, it is corruption leverage at its worst. Also, as TI adds, and with incredible accuracy, in such environments “bribe demanders can create or heighten vulnerability by inventing bureaucracy.” Indeed, it can get to the point where in the field you start to think “I don’t know what is official and what is not,” so, the solution of “what does it take to make all this go away” starts to win out over more compliant and social thinking.

 What is the psychological impact of small bribes to those on the front line of business?

“You get used to it.”

As a compliance professional recently shared with me when talking about the impact of small bribes, “when people get used to day-in, day-out events as minor, in terms of corruption, and that thinking becomes commonplace, especially in regions where local laws are not enforced, and local culture does not find it objectionable, that is now a very large problem.” And that is my personal narrative to the TI paper. While impact of small bribes is substantial to an organization, to those on the front lines, it is a dangerous and perilous gateway to tolerating greater corruption.

Thus, I agree with TI, that eliminating the tolerance for small bribes, for international personnel, is going to go a long way to close the gate to risk on a larger basis, as it eliminates a potential source of confusion as to “what does management really want?” As the TI guidance asks, “do the small bribes link to or pave the way for other corruption or risk?” Inasmuch it fosters a thinking of “this is the way it is done,” it is indeed a dangerous path to greater risk and a no-tolerance policy is going to help to mitigate that thinking.

But what are the solutions? Are there any which are realistic at the field level?

Yes, and the most important solution is the one where TI guides organizations “not penalize employees who refuse to pay bribes” and that organizations should be  “prepared to accept any resultant costs or delays.” In some cases, that might mean withdrawing from the business opportunity and officially registering concern with the supervisory authorities.

I would also add to the TI section on “communication and training” that a regional dynamic needs to be incorporated into any training program, tailored to the territory where the individual or group is working. Especially in the case of small bribes, the local culture will often have an impact on not only how the bribe is demanded, but on the disguised language that might be used to deliver the request, and finally, even to the person who might be demanding the bribe on the behalf of someone else.

While too complicated for a larger treatment in this essay, I would simply emphasize that training should not be a one size fits all model. It is critical that training be programmed to the peculiarities of each region. Also, as TI recommends, talk to people at the field level and find out more about what risk issues they are confronting in their work. Your own employees are your best source of information when it comes to encountering risk. As the TI paper asks in its Principle 4, Checklist “are local teams used to contribute to design the programs to counter small bribes?” Indeed, bringing a front line team into the design process, breeds “buy in” and “ownership” from those who are ultimately responsible for policy execution.

As I have previously shared, corporations may have to be willing to take a step backwards in business forecasts and sales growth plans, including withdrawing from some market sectors, to take a step forward in eliminating small bribery risk. Indeed, in some situations it might be the only responsible and possible solution. As the TI paper states “a radical solution may be to withdraw operations from an area, market or country.”

In perhaps my only disagreement with the TI paper, my view is that it might not be so radical.

"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.