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.

"Former Cisco Execs Allege Vast Kickback Scheme in Russia." The Red-Flags You Don't See.

In yesterday's Buzz Feed World, Adam Roston, Buzz Feed Staff, posted an article (link here) about allegations of bribery involving Cisco employees in Russia.  I believe this a must read for the FCPA compliance community, as the reporting details significant events surrounding foreign bribery.  Furthermore, it has a number of significant lessons for the compliance professional which I will try to frame  in the context of my own experience.

First, it shows how the consequences of foreign bribery are not symmetrical to sales volume. According to the article, Cisco sales in Russia, where the conduct occurred, "make up less then 2%" of Cicso's revenue. Against those sales  will come the consequences of the conduct, including legal and investigatory costs, business costs to unwind its in-country obligations, not to mention whatever fines (both individual and corporate) might be assessed. Of course, there is the cost of liberty, of which I am familiar, that some of these executives might face. Again, it is another example of how a small business segment gone wrong, can have a disproportional corporate cost  in terms of  dollars, reputation damage and perhaps, loss of liberty. 

There is a great deal in this article to demonstrate the obvious importance of compliance professionals who are on the constant watch for red-flags, such as after-sale rebates, designation of payments to tax-haven countries, not to mention the risk of doing business in a country with a "low integrity" reputation, all of which were present in this article. However, those are not the most troubling parts from my perspective.

"The Ostrich Defense Does Not Work."- Former DoJ Official. 

What should be highly concerning to the compliance professional is the part of the article when one of the former Cisco executives stated that when the time came to talk about the issues of where the money was going "I left the room," and when invited to remain, he said "I don't want to...."  If you refer back to my blog post "In Walks a Public Official" , this is exactly the type of behavior where  compliance professionals need to be concerned.  I ask: how many of your overseas sales personnel are "walking out of rooms," "pretending they didn't hear" or telling their agents to "stop talking" as they conduct business with third parties? You might think that it does not happen in your organization; that your sales team would instead immediately disclose the conduct to appropriate personnel and cease and desist with respect to the transaction. Right?

However, what if it is happening in the field and it is not being reported up? Perhaps now the challenge is to try to better understand how your compliance programs and corporate ethics are being  communicated down to the lowest levels of your overseas sales organization. Are your making a focused effort a to understand their challenges, and provide them with  compliance solutions that are both global and regional to help them manage and report risk in their territories?

How can I help my sales team?

You can start by taking a  walk over to the  HR Department and reviewing the compensation packages on all your overseas personnel working in "low integrity" regions to see how they are being compensated. Are people working in regions with a reputation for  corruption while having a majority of their compensation based on personal sales performance? If they are, you are building in an inherent conflict between compensation and compliance, whereby you are in fact incentivizing people to be an "ostrich."  Cicso is not unique, and I am obviously not judging this case, but what Mr. Roston described is a compliance professional's worse nightmare: Personnel in isolated, corrupt regions, looking the other way.  It is the red flag you don't see.

Again, I know its easy to say "not here," but in my experience, a major start to supporting an overseas sales and marketing team is with a compensation package that reflects the programs and ethics of an anti-bribery culture. A sales person in Germany, a highly developed mature market with a high integrity reputation should not be compensated on the same incentive plan as someone responsible for sales in  a region which has an undeveloped procurement process and ranks poorly on the corruption index.

In sum, if there is high level of individual financial upside in your sales  incentive plan along with a "low integrity" country index in that person's territory, the best compliance and ethics programs may in fact contain the "seeds to their own destruction" (a term used by George Kennan in his famous "X" article, "The Sources of Soviet Foreign Conduct." It seemed to me an appropriate quote given the territory). I know that the story of compliance and international sales does not end with a discussion of compensation, but based on my own experiences and observations its a good place start.