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.

GSK, "Free Samples," and a New Business Model.

On April 16th, 2014 Hester Plumridge and Christopher M. Matthews, Wall Street Journal, reported that GlaxoSmithKline (GSK) is investigating claims that its employees bribed doctors "in Jordan and Lebanon by offering perks such as flexible travel arrangements and free samples that doctors could sell on..." (for the full article, link here).  GSK, as reported in the article, stated that the allegations "relate to a small number of individuals in these countries." In their press release of 16 April, 2014 "GSK Statement on Media Reports," (link here), GSK disclosed the number of violations, breaches, dismissals and warnings with respect to sales and marketing misconduct,  claiming "these numbers are very similar to those reported by other companies in our sector." Well, is that a good or bad statistic?

Nonetheless, what really caught my attention with respect to this article was the use of "free samples" as part of the "incentive scheme," as juxtaposed  to GSK's "rouge employee(s)" insinuation. While I am not an investigator, journalist nor compliance practitioner, I do have some experience when it comes to controlled samples (assuming these drugs are subject to some level of regulatory and customs control), and thus, I think there is an additional component to this issue.

From my perspective, it would be difficult, if not impossible, for a salesperson to transfer samples for re-sale, either through carrying such samples to the end user, which would require a carnet (see here for carnet information), or even by shipping them, without other individuals and departments knowing that these samples would never return to their point of origin. Furthermore, when shipping or carrying samples, there are numerous customs and regulatory declarations that the samples are either going to be returned, or that they are not subject to re-sale, or both. Thus, at minimum, we have what could be a serious disregard for customs and export declarations in this scheme. 

Again, assuming that given the business in which GSK operates, that they have strict shipping and accountability protocols, including internal and perhaps regulatory audit, that the "we didn't know" just does not square with this type of operation.  It requires too much internal and customs paperwork for such samples to simply "disappear" without  the knowledge of  support and/or management personnel.  Furthermore, one would think that Glaxo would have internal tracking protocols which would alert them when product simply "disappears." As someone who spent over a decade dealing with the issue of controlled samples and international shipments, there is, most likely, a logistical and/or managerial underbelly to this story, beyond the "its just a few." Expensive sample drugs, such as those referenced in the article,  just don't disappear without someone signing off on the expense. 

Maybe Its Part of a Greater Issue, Maybe....

One day later, as reported in Reuters (link here), GSK appeared to have broadened their reaction, given prior corruption issues in other countries, including China, declaring that they will commence to "build a new sales model designed to eliminate sharp marketing practices."  What caught my attention was the quote attributed to GSK Chief Medical Officer James Shannon when he stated  that "sometimes you have to step backwards to move forward.." and continued, "this is an entire rethink about our business practice." When I hear a C-Suite executive publicly stating that the company is looking at a total shift in the business model when it comes to their international business strategy,  I pay attention. 

Why? Because it means that management has accepted that a tinkering of the existing model, including a shifting of compliance and ethics priorities, will not suffice in addressing the issue of international corruption. Its too deep, and even if not "discovered," it remains too engrained in the operating mentality of the international sales, marketing and business development teams which operate in high-risk regions known for corruption.  Thus, it appears in this report, that GSK is no longer content with their problems being "similar to those reported in other companies."

So, What are the Alternative Models?

Coincidentally, while reading the current reporting on GSK, I had the benefit of getting a link on  the HBR Blog Network called "How GE and IBM are Playing Global Development to Win," by Jonathan Berman, as posted on April 16th, 2014 (link here). I read Mr. Berman's post, then immediately ordered his book Success in Africa: CEO Insights from a Continent on the Rise  (link here). In his post, Mr. Berman lays out what I consider to be no less than a total change in  international business modeling, whereby GE and IBM (as two examples) analyze countries not as customers but as business development partners.  It is a mutual investment of time and resources to identify the infrastructure challenges a country faces and then to examine the potential role that the corporation can play in meeting those challenges.

Mr. Berman describes compelling examples of how both GE and IBM used the "development to win" model in order to "spur economic development and create opportunities for their companies." Thus, it is not your traditional "sales cycle" approach to business development with the standard marketing SWOT analysis (strength, weaknesses, opportunities and threats); it is much deeper, as it engages the customer, and in this context we are speaking of state owned entities, as a partner,  not just a  recipient of products and/or services.  Futhermore, in my opinion, it also reduces the level of risk which impacts overseas compliance, bribery and corruption by taking a longer term and patient approach to international business development.

Long Term Vision and the Reduction of  Risk

Again, from my perspective, a longer term horizon with respect to the international sales cycle means less exposure to corruption risk. Why? In many countries and regions the sales cycle is unstable, subject to delays due to regime change, personnel turnover, funding delays and procurement instability. Much of the history of  FCPA enforcement relates to companies trying to "overcome" these instabilities. Thus, a long term vision, as stated by Mr. Berman, includes:

• An upfront "investment of money and time to understand the growth challenges" in the perspective country.

• "Senior management and board involvement." Adding that "companies playing development to win have CEOs traveling to the region 2-3 times per year, supported by engagement of the full management team." Accordingly, here we have the involvement of the C-Suite in the international business development process, stepping outside the normal organizational groupings of sales and marketing personnel.  

• A vision of earnings, investments and returns which are "long term" and "its common to invest for a decade or more before shareholders see material earnings."

As Mr. Berman concludes, "The companies playing development to win need the institutions and policies with which they are engaging to yield tangible results," which in the case of infrastructure investment in state entities, means providing the benefits of those projects to the citizenry. Thus, going back to the paradigm shift, if we think of transactions involving bribery and corruption as producing short term gains, where the immediate beneficiaries are the companies receiving the contracts and those receiving the bribes, this model takes that gain out of the equation. In the "playing to win" model, the vision is long-term, whereby both the corporation and the state both have a sustainable investment in one another, and results are delivered to their mutual constituencies in order bring long term value to all.  It is a positive definition of mutual dependence and both parties have a lot to lose if they don't deliver meaningful value.

In my view, this shift takes the entire debate on corruption and compliance, both in terms of ethics and programs, to a different level of engagement. I am looking forward to reading Success in Africa, CEO Insights, from a Continent on the Rise,  for deeper understanding.