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 Risk: Compliance as "Bonus Prevention"

As part of my series on “Rationalizing Bribery,” I now turn to the issue of personal incentive compensation. As tweeted by Ben DiPietro, @BenDiPietro1, Wall Street Journal Reporter, during my interview at the Dow Jones Global Compliance Symposium (DJGCS) on April 23, 2014 “I knew (what) I was doing was wrong but rationalized the risk.”

I call attention to his tweet to make clear that in sharing my “rationalization process,” I am by no means attempting to justify or deflect responsibility from my own behaviors. Rather, I hope that by revealing my thinking as I confronted corruption in the sales field, that I might provide value to today’s compliance professionals, as they look to assist those who work in challenging markets where there is a high level of corruption risk.

Joel Schectman, Wall Street Journal Reporter, @joel_schectman, tweet from the DJGCS: “You’ve already lost when it’s a zero sum game between compliance and profit. Richard Bistrong…”

Lets start with the premise that behaviors in any organization are driven to some degree by compensation.  As Andrew Leigh states in Ethical Leadership (2013) “you increase the chances of desired behavior happening by rewarding it.”

The relationship between compensation and compliance becomes even more critical when an international salesperson is working in a “low integrity” territory. Simply stated, if a salesperson has a high percentage of total compensation based on individual sales performance in a “low integrity” territory, the message of compliance becomes distorted by economics.  That salesperson is being paid in a way that encourages him to view compliance and compensation as a zero sum game.  Such a person is being asked by his paycheck to ask himself “Does my sales manager want compliance or sales?” Corporate compliance and ethics are now compromised, as a sales person tallies his “deliverables” if he is ever confronted with risk or actual corruption in the field.

Ben DiPietro, @BenDiPietro1 tweet during DJGCS “Bistrong: how you compensate a sales person will impact how they view compliance.”

Again, by putting someone in a "low integrity" territory with a high percentage of compensation based on individual sales performance, a company is sending out mixed messages.  Personal sales incentives ask an employee to focus on the ends, or “wins”  while compliance focuses the employee on the means.  When the two messages speak to conflicting priorities, a salesperson will be left to wonder what management really wants.

Integrating this type of compensation into an environment of procurement instability (as discussed in my previous post), certainly creates the potential for a  “perfect storm,” of risk rationalization.

There will be no shortage of sales, marketing and business development employees, with lucrative incentive compensation packages, who are going to want to push the envelope on finding a way to deliver sales success over compliance to a sales manager.  In an unstable procurement environment, where purchases are sporadic, unpredictable, yet financially significant, a sales person knows that if he or she misses a major procurement, it may or may not come back in the sales and bonus cycle.

Thus, when confronted with a corrupt transaction, the sales person may think, “I have a lot on the line here personally, this purchase won’t happen again for another year, at least, so what does my sales manager want, compliance or sales?”  As in my prior post on Cisco In Russia, when the Cisco employee heard the talk among his agents turn to bribes, he was reported to have left the room, and when invited to stay, he said “I don’t want to.” He did not walk out to call his compliance officer, he walked out as to not witness anymore what he was already hearing. What drove that decision, compliance or performance? 

Donna Boheme, Principal of Compliance Strategists LLC, @DonnaCBoehme, Tweet at the DJGCS, “Bistrong #DJGCS: for intl sales people “#compliance is ‘bonus prevention”

According to Mr. Leigh, “badly chosen incentives can undermine ethical behavior and even encourage unethical practices.”Accordingly, when compliance and compensation are not aligned and the message of anti-bribery gets distorted through personal incentive pay packages, then the result could, in fact, be a decrease in desired "compliance" behaviors.

In a recent conversation I had with a Eurpoean compliance professional, I shared my concerns about the impact of individual incentive compensation in sales organizations, specifically regarding anti-bribery compliance. He said in many companies, the C-Suite message is compliance and anti-corruption, but the pay schedule only tells employees “to win.”  These companies leave it to the salesperson to figure out the priorities.  When company executives engage in such “double-speak,” saying one thing, but paying for another, there could be serious consequences for all involved.  

In this type of environment, it is extremely risky to allow your international sales, marketing and business development personnel to decide corporate, group and individual goals.

More to come, as the Perfect Storm grows.

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.