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.

The Illusion of No Victims: The Final Component of “Rationalizing Bribery.”

As Andy Spalding, Assistant Professor at the University of Richmond School of Law and Senior Editor of the FCPA Blog stated in a recent guest post on The Global Anticorruption Blog, “Most of us would agree that overseas bribery is not a victimless crime.”  Professor Spalding adds “the principal victims of overseas bribery are the citizens of those countries…whose governments have been corrupted.” Indeed, there has been a great deal of writing about the impact of bribery on issues such as governance, standards of living, and even violence, as recently reported with respect to a gangland style murder of a former public official in Trinidad and Tobago.

In a June 24th 2014 interview with the Wall Street Journal, Alexandra Wrage, President of Trace International, stated, “in fact, bribery is a precondition for terrorism. You see tainted pharmaceutical products getting onto foreign markets because of bribery. You see all sorts of problems that are much larger than the business community but that affect the business community because you all have employees working overseas.” Andrew Feinstein, author of The Shadow World, shares some of the horrors that corruption has brought down upon ordinary citizens in his book, and I asked him to reflect more about his thoughts on the victims of corruption, irrespective of market sector.  Mr. Feinstein responded:

“My view is that bribery and corruption affects myriad victims. First, in the purchasing countries taxpayers have to pay for the cost of the bribes that are often simply added to the price tag. For people on the economic edge, money is spent on items where the bribes are biggest (weapons, grandiose building projects, etc.) at the expense of dire socio-economic needs or benefits. In addition, the practise of governance and the rule of law is undermined to both enable, as well as to hide, bribery and corruption. This corrosion of democracy and good governance impacts citizens in both buying and selling countries.”

Is thinking at the front line level so elevated?

So, I ask, to an international businessperson or team, operating at the front line of overseas commerce, is the thinking as broad or as attentive as Professor Spalding, Ms. Wrage and Mr. Feinstein would argue? Relating to my own experience, as the final post on “rationalizing bribery” and the perfect storm, I would state not. Unfortunately, for those operating on the front lines of international business, especially in high risk areas, the thinking is more of “who is being hurt?” as opposed to “who am I hurting,” by engaging in corrupt behavior and transactions. As the title states, it is only an illusion, but at the front line of international business, bribery often appears to be entirely victimless.

In fact, there may be cases, where due to the bribe, the end user pays less money for the product, as inside information passed corruptly allows a vendor to lower the price of the goods or services to secure a contract. In such cases, the businessperson might rationalize the corrupt behavior as a “win-win.” He or she secures the contract on behalf of the company, management is pleased with the completion of the sale, and the end user ends up saving money.  Again, while it is only an illusion, from the field perspective, this view will often prevail above the broader considerations of local standards of living, regime violence and good governance.

I consider this an under reported but dangerous component of the rationalization process, as an international businessperson might see bribery through a distorted view of somehow providing value to both the company and the country.

A Presentation to Compliance Professionals: Rationalization Not Justification

On Thursday June 12, 2014, I was asked by Mike Kenealy (FCPA Integrity COO) & Craig Chadwick (Global Secure Summit) to address a group of Compliance Professionals from the financial sector in NYC. In my presentation, I shared my experiences from the field of international sales, including encountering foreign bribery, cooperation, and finally, my perspective on current compliance challenges. A group of the attendees remained after the presentation, where we discussed the challenges of  aligning strategy, compensation & compliance, so that they all speak to the same message of anti-bribery compliance.  That discussion was in the context of how and why compliance efforts fail at the field, especially in the environment of a public company, where profit and sales growth over the short and long term are critical for return on investment and shareholder value. 

I was very much impressed as to the questions asked by the attendees who remained. Clearly, they understood the challenges that their international front line business groups face, and they were very much focused on "what can we do to help."  Furthermore, as the conversation progressed, they acknowledged how incentives and sales forecasts could actually contradict or distort the messages of compliance and ethics, especially from the perspective of those operating in high risk international  environments.  We talked about the importance of listening to those in the field and how, as I shared, "the more disturbing those conversations might be, the better they are progressing."  They clearly grasped how front line international business people are the most important element in executing an anti-bribery and corruption program, and how it is the responsibility of compliance professionals to give them the tools of success. 

Rationalization is not justification

I could see from the feedback that I have received since the presentation, that there was indeed value to the practitioners in hearing a voice from the field of international sales, as I spent a great deal of time explaining my own perfect storm of "rationalizing bribery." There was more than one question asked, as to "what were you thinking," and I believe that the components of my "rationalization" model helped to break that down in a way which was understandable, relevant and engaging. There was also a great deal of discourse on my discussion of corrupt third parties and how it is often difficult to detect their "circle of lies" when it comes to investigations and vetting. 

But, as I shared at the start of my presentation, almost as a preamble, rationalization is not justification. I knew what I was doing was wrong,  and accepted responsibility  for my conduct, including the loss of liberty.  Now, the question remains, does that experience bring value to other individuals and organizations in their own  compliance challenges? Based on the dialog after the presentation, it certainly did on June 12th, and if it continues to  helps others, I remain open to future opportunities.

Thank you again to FCPA Integrity and GSS for the invitation.

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."

The Esquenazi Appeal: A Sales Perspective

 

I use the picture above as a symbol to ask a question: If one of these individuals represents an "instrumentality" as defined and affirmed by the FCPA and Federal Appeals Court (respectively), and the other does not, should it make a difference to an anti-bribery program?  The basis for this post is  the Federal Appeals Court ruling in case of Mr. Esquenazi (and Rodriguez), where, as Michael Volkov summarized, "most importantly, and as predicted, the Eleventh Circuit upheld the Department of Justice’s interpretation of the term “instrumentality” in the definition of a foreign official to include state-owned enterprises owned or controlled by foreign governments. "

Before elaborating, a few points, and my first goes to the families of Mr. Esquenazi and Mr. Rodriguez. Having spent time in the Federal Prison System, on the personal side, I take no pleasure or comfort in supporting their incarceration, even if understand the Appeals Court ruling.  Second, my response here is entirely devoid of any legal interpretation or debate. I am not an attorney, this blog is not in any way designed to suggest or provide legal opinion, so my discussion of the Esquenazi Appeal is only from my perspective as a former international sales executive. 

So, here is where I get lost in the "fog" of the debate; I have read numerous posts,  opinions, charts, comparatives, etc, on the various FCPA blogs about the ruling, and no doubt, from a legal perspective, these posts are well thought out and provide significant legal value to compliance practitioners. However, with that said, I have yet to see any discussion from the viewpoint of those on the "front line" of international sales, and how this ruling might (or might not) provide additional direction in how they contend with corruption risk in the performance of their overseas responsibilities.

Was it ok to bribe "non-instrumentalities" before the ruling?

Is the legal analysis somehow meant to imply that training and compliance programs need to now be re-engineered, as if perhaps beforehand it was acceptable to bribe people who fell outside of the definition of "instrumentality"?  Obviously not, but again, from a sales and marketing perspective, specifically with respect to how training and compliance are organized and implemented, what difference should this ruling make?  I can certainly see in the areas of "gifts, travel, entertainment, charitable contributions, and other things of value" as set forth in the Department of Justice Resource Guide, that the shoring up of this "line in the sand" will be helpful in guiding those in the field who have probably requested prior guidance about such definition. However, beyond those "travel and entertainment issues" how would this ruling change or modify compliance guidance to an international sales or marketing team?

A bribe by any other name....

A bribe is a bribe, it should not be condoned or sanctioned,  foreign official or no foreign official. Isn't the primary compliance and ethics message amplified and disseminated as "we don't bribe."  Thus, I can't see any responsible compliance executive now having to "change their tone" due to the ruling, as that would imply there were allowances for "non-instrumentality" bribes beforehand, and again, I don't see that as having been in place.  Nonetheless, this type of conversation as to "who is and who isn't" could be misleading to an overseas sales team.

Such a prolonged discussion of "instrumentality" might lead an overseas team to interpret a "hidden meaning" behind dividing customers into "public" and "non-public" entities, concluding that while bribing one group is illegal, perhaps the other is permissible, even if unethical. I don't think that would be the intention of compliance personnel,  so why make it an area of focus? I realize its a complicated issue, as it conflates ethics and legality, so again, why make the differentiation and elevate the potential for misinterpretation?

I think Michael Volkov comes closest in touching this issue in his post (see here) when he states "in the end, the appeal strengthened the government's hand and left little room for doubt-the FCPA applies with full force to entities that are controlled by foreign governments." Plain and simple. So, from a compliance and training perspective, my take away is "move on," as there has been no dilution to the FCPA and to the importance of business strategy, training and incentives as part of an anti-bribery ethic. In other words, the Appeals ruling provides no "ground cover" for corrupt behavior, and for those in the field who thought there was "wriggle room," take note. 

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."