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.

In Walks a Public Official: A Compliance Challenge

For the compliance practitioners and professionals, I have put together different elements from my experience in overseas sales into a single scenario, for your review, thoughts and comments, which I invite and welcome. The following event did not occur as a single integrated scenario. But there are common threads from different places and different times, to demonstrate how a sales individual or organization might encounter a situation which demands the focus of a compliance professional, either internal or external. 

A Night Out

The story starts without controversy. A dinner between a line salesperson, US citizen, (not an executive, but someone who has a small international sales territory) and his third party intermediary (agent) at an overseas location. The two are on friendly terms, have been together professionally and personally over the course of five years, and have successfully worked together on small to medium sized tenders for a national purchasing entity. As far as the sales person is  concerned, the prior successes were based solely on the strength of the technical proposals and competitive pricing submitted to win those tenders. The following morning both the salesperson and the agent will attend the public opening of a significant tender for a national purchasing entity, on which they have been working together for a year.  The technical and pricing package was just submitted hours before they sat down to dine, as the deadline for submission was close of business that day.

In Walks a Public Official 

About half-way through dinner a gentleman walks in and joins the two. He is introduced  as a member of the Technical Evaluation Committee (falling clearly within the FCPA definition of Public Official). While it was clear that the agent expected the public official's arrival, it came as a surprise to the salesperson. As to the public official,  bids which do not pass his scrutiny the next day will be eliminated. While the conversation between the agent and the public official is in the foreign language, the salesperson notices that the tenders for the competition are now out on the table.  During his visit,  the sales person witnesses an extended conversation (again, in a foreign language) between the agent and the public official, and they are reviewing, page by page, the tenders of the competition. The salesperson is not asked to participate in the conversation, nor does he volunteer  and within an hour the public official makes his exit.

Now what?

After the public official departs the agent simply says something to the effect that  "he is with me." The sales representative does not ask any questions. He realizes that the competitors bids are not yet public information, and understands that  access to that level of non-public documentation did not come for free to the agent. 

To the compliance professionals and practitioners, here are the common threads of this scenario, through my own perspective:

1. An event happens which was not  shared prior with the salesperson. While the agent expected the arrival of the public official, he did not disclose it to the salesperson until the official's arrival at dinner. 

2. There is no visible exchange of cash, or monetary equivalent.

3. The exchange which was witnessed by the US citizen is in another language or in broken English.

4. The agent refers to the relationship between himself and the foreign official in language which is meant to be vague, give cover, or, in simpler terms "a wink and a nod."  The agent makes no mention of a bribe, using that terminology, to the representative. 

5. The sales representative now has to make a decision in a hurry, given the time differences between his current location (GMT+2), and the location of his company's offices (EST).

To the Compliance Professional, what would you advise the sales representative to do?  

As background, the tender opens the following day, the sales representative has this sale in his forecast, has spent the better part of a year working on this transaction, and before that dinner, expected that his firm would win the tender based on the strength of his company's proposal and competitive pricing. He has had a successful experience in this country, without any evidence, discussion or reference of bribery, real or potential.  Also, he is close to the agent, and has worked with him successfully in the past on other tenders, and is still working together on future ones. If he walks away from tomorrow's tender he faces a deficit in his sales forecast, reduction in quarterly bonus, and will end up having to sever the relationship with this highly successful agent, who will certainly go to the competition. That is what this line sales person is thinking as he retires to his hotel room. This is the environment under which overseas sales personnel often have to operate. 

The tender opens at 9:00 the following morning.  It is now midnight local time, 5:00 pm EST? What does that sales person do?

 I invite and welcome your comments, thoughts and guest blogs on this subject.