Doing Business Abroad: Illegal Payoffs Can Take a Toll

The cost to a company of paying bribes to win business goes far beyond the payment itself. The fallout from such payments include:

• Pushing the cost of doing business above market rates.
• Adding uncertainty about a company’s ability to continue operating in the market. If corruption is discovered, a business could be barred from bidding for future government contracts.
• Exposing an enterprise to extortion by the person who received the bribe, as well as others who may be aware of the corruption.

Bribery also brings the risk of criminal and civil charges, as well as severe penalties. For instance, under the Foreign Corrupt Practices Act, businesses can be fined as much as $2 million. Officers, directors, stockholders and employees can be fined as much as $100,000 and sentenced to up to five years in prison. Employers cannot pay fines for individuals.

In a civil case, companies and individuals acting for the business can be fined up to $10,000. The court can also impose an additional fine as high as $500,000, depending on the circumstances of the case.

The extreme costs of bribery are illustrated by one corruption case involving the German engineering conglomerate Siemens. The company admitted that it had made about 
$1.9 billion in questionable payments around the globe to win business. Siemens ultimately agreed in 2008 to pay an estimated $1.6 billion fine to settle bribery allegations made by several countries, including the United States.

In March of 2010, Daimler agreed to pay $1.85 million in fines and penalties to settle charges that it paid officials in more than 20 countries to secure lucrative contracts, which violated of federal bribery laws.

Another example: The Securities and Exchange Commission filed charges in 2009, alleging that during a three-year period, certain subsidiaries from AGCO Corporation made $5.9 million in kickback payments in connection with their agricultural equipment sales to Iraq. The kickbacks were characterized as “after sales service fees,” according to the SEC, “but no bona fide services were performed.”

AGCO’s equipment sales were made under the United Nations Oil for Food Program, which required the Iraqi government to purchase goods through a UN escrow account. However, the kickbacks from AGCO’s subsidiaries diverted funds out of the escrow account and into Iraqi-controlled accounts at Jordanian banks.

Once corruption takes root in a company, it is difficult to eradicate, In fact, Siemens replaced about half of its top 100 executives after determining it was the only way to bring about change and banish corruption at the organization.

The best move is to ensure it doesn’t start. Doing business overseas can be profitable without corruption. To help minimize the potential for illegal business practices at your company, consider the following:

Consult with your accountants before entering a new market. They can provide your business with information on the types of corruption that are most prevalent in the market and give you advice on how to avoid them.

Contact your attorney for help understanding the Foreign Corrupt Practices Act. The law applies to both public and private companies and is the primary tool the federal government uses to fight corruption by U.S. businesses. (See right-hand box for the basics of the law and an example of how the statute was applied in one bribery case.)

Write a clear and concise code of conduct for your business that includes anti-corruption provisions. Distribute the policy to every employee, supplier and contractor. Have them acknowledge that they have read and understood it. The best practice is to require them to take an annual, comprehensive test on the policy.

Focus on education. All training should include anti-corruption education. For example, when training managers who oversee foreign sales, hold extensive discussions on how to avoid corruption and to recognize its warning signs. Management should “trust but verify” if the company wins a seemingly unattainable contract in a foreign market.

Invest in oversight. Hiring your accountants to fight corruption sends a clear signal to employees, regulators and others that your business has a zero-tolerance policy on corruption. Oversight can be part of a regular audit and can include checking e-mails (without violating employees’ rights) and interviewing personnel, suppliers and contractors about their compliance with your company’s code of conduct. Auditors may also examine cash payments and look for such inconsistencies such as a vendor receiving $10,000 when past payments ranged between $1,000 and $3,000.

In the long term, the benefits of paying bribes can pale in comparison to the financial, legal and reputation costs a business can incur once corruption is exposed. With the right actions and proper guidance, your business can avoid these risks and still make a profit.