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."

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.

"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.