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Protecting against bribery and corruption when exporting to foreign markets

If you’re going to expand your business and become an exporter, you’d better learn to manage bribery and corruption risk in foreign markets. This expert advice will help you protect your business if the regulator comes knocking.

The bribery and corruption landscape is changing – the legislation is getting tougher, the prosecutions more frequent and the penalties more severe. Australian exporters who continue to deny that bribery and corruption may impact them are leaving their businesses exposed. The payment of bribes to secure contracts in foreign markets has not been regarded as an acceptable way to do business and governments around the world are responding.

The changing regulatory landscape

In 1997, the Organisation for Economic Co-operation and Development (OECD) Anti-Bribery Convention, a global anti-corruption initiative, criminalised foreign bribery in countries that represent over 75 percent of world exports. The OECD Convention was borne out of the principle that “bribery of foreign government officials in international business transactions poses a serious threat to the export industry; it undermines economic development and distorts international competition”. Since 1997, we have seen legislation and regulators driving change.

The last two years have seen sweeping changes with the launch of the UK Bribery Act (2010), tougher penalties and sanctions under the Australian Criminal Code and an increase in the USA’s Foreign Corrupt Practices Act (FCPA) prosecutions. In addition, in November 2011 a discussion paper was launched by Brendan O’Connor (the Minister for Justice) proposing the removal of the facilitation payments defence from Australia’s bribery laws.

Recent Australian enforcement activity

We have also seen an unprecedented level of investigation in our own backyard.

  1. July 2010:  The Australian Federal Police (AFP) charged two Reserve Bank of Australia subsidiaries (Securency International and Note Printing Australia) over alleged bribes paid to public officials in Indonesia, Malaysia and Vietnam. Why were the bribes allegedly paid? The allegations relate to the payment of bribes to secure polymer banknote contracts in the regions.
  2. March 2012:  The AFP launched an investigation into two former employees of Tenix Contracting (a major defence contractor) over claims that bribes were paid to government officials in the Philippines, Indonesia and other parts of Asia. Why were the bribes allegedly paid?  The allegations relate to the payment of bribes to win shipbuilding and other military contracts in Asia.
  3. March 2012:  Leightons Holdings self-reported to the AFP allegations that one of its subsidiaries had allegedly paid bribes to an official within Iraq’s largest state-owned oil company. Why were the bribes allegedly paid?  The allegations relate to the payment of bribes to secure contracts in Southern Iraq.

The new reality is this – the legislation has global reach, the regulators are going to be relentless in prosecuting matters and in the case of the UK Bribery Act the financial penalties have no limit and actions can be brought against those who fail to adequately manage the risk. Australian exporters must respond and that starts with identifying the risks and proactively managing them, at times in countries where corruption is considered more likely to occur.In each case bribes have allegedly been paid by individuals acting on behalf of reputable entities in order to secure contracts in overseas markets. So what are exporters to do? Working with foreign agents to secure contracts is often required to set up and grow an export business. Relying on local knowledge is key to securing contracts, and the making of such payments is “just how business gets done” in certain countries, isn’t it?

Key legislative requirements

From an Australian export perspective, there are three key pieces of legislation exporters should familiarise themselves with: the Australian Criminal Code Act (Cth), the US FCPA and the recently enacted UK Bribery Act (2010). The extra-territorial reach of both the FCPA and the UK Bribery Act means that Australian companies could be captured not only by our own legislation, but by US and UK laws and the local laws governing the country (or counties) where they operate. Exporters that are of the view that ‘it couldn’t happen to us’ may want to rethink their position.

Case Study – FCPA in action

What happened?

  • Panalpina World Transport (Holding) Ltd (“PWT”) was headquartered in Switzerland and provided freight and logistic services for customers within the oil and gas industry.
  • PWT operated in countries including Nigeria, Angola, Azerbaijan, Brazil, Russia and Kazakhstan.
  • Between 2002 and 2007 PWT’s subsidiaries and affiliates engaged in improper payments and bribes to foreign officials.

How it happened?

  • Payments were made on behalf of PWT customers (as defined in the FCPA) in order to avoid the customs process, reduce tariffs payable and avoid the assessment of proper duties,  avoid penalties for items that had been improperly exported and to secure logistics contracts from overseas government entities.  In many instances PWT’s customers knew of the bribes.
  • The bribes were paid to officials in order to cause officials to overlook insufficient, incorrect or false documents and in certain instances to circumvent local laws all together.

Why it happened?

  • PWT had an inadequate compliance structure to deal with such issues
  • A culture (within PWT and in some cases their customers) that tolerated/encouraged such behaviours as a means of ‘getting things done’ quickly and efficiently
  • The establishment of subsidiaries all around the world, acting as agents for PWT led to wide spread systemic corruption issues

Outcomes

  • PWT as well as 5 oil and gas companies (customers of PWT) have been the subject of investigations under the FCPA, the Department of Justice and the US Securities and Exchange Commission.
  • The companies agreed to pay over US$156million in criminal penalties.
  • Each company is required to implement and adhere to a set of enhanced corporate compliance and reporting obligations.
  • The Nigerian operations of PWT were shut down and numerous senior executives (in various countries) lost their positions.

What is the risk for exporters?

All Australian exporters face significant challenges in setting up business in overseas markets – unfamiliar legislation, diverse cultures, different local business customs, and foreign languages can all present significant barriers to securing contracts – as a result Australian businesses are often heavily reliant on local partners or agents to guide them through the process and this is often when problems can arise. Without appropriate safeguards Australian exporters can be left vulnerable by relying on the advice and services of their local agents, JV partners or third party contractors.

The new UK Bribery Act (2010) prescribes that not only are there severe penalties for bribes being made but organisations can also be penalised for not doing enough to manage the risk. The legislation makes reference to organisations needing to ensure ‘adequate procedures’ are in place to mitigate the risk. So what can you do as an exporter? Listed below are the 11 must-do’s that exporters need to put on their to do list to manage the risk and protect their business if or when the regulator comes knocking.

The 11 must do’s

  1. Understand the legislation and how it applies to your business – obtain legal advice if necessary.
  2. Top level Commitment – a commitment that begins at the board level and makes its clear your business has “zero tolerance” when it comes to the payment of bribes or corrupt behaviour.
  3. Ensure you have strong and well communicated policies in place; policies that all employees, suppliers, contractors, agents and JV partners are aware of and understand.
  4. Identify the key risk areas in your export supply chain and prioritise these on the basis of perceived likelihood or risk.
  5. Conduct background checks on all organisations and individuals that you deal withsuppliers, contractors, agents and JV partners.
  6. Obtain a legal review of all contracts and agreements before signing.
  7. Ensure your business has strong financial controls and robust contract management procedures – if something appears too good to be true, it probably is.
  8. Ensure milestones of contracts are met and attend relevant meetings with suppliers, contractors, agents and JV partners.
  9. Ensure independent quality audits of suppliers, contractors, agents and JV partners premises are scheduled and completed.
  10. Provide ongoing training and management of staff sent overseas to secure contracts, employ personnel or engage in negotiations on your behalf.
  11. Establish a system for reporting suspicious behaviour.

Where to from here?

One thing is certain, combating bribery and corruption should be at the forefront of all Australian exporters’ minds.  The risks are real and the consequences can be devastating. Foreign bribery distorts competitive markets; undermines good governance and it has the potential to put Australia’s reputation as an exporter at risk.   Australian exporters who understand and proactively manage the risk will go a long way in protecting themselves and the markets into which they export. Getting it right can have benefits that extend far beyond just ticking the right boxes to satisfy a regulator; the future of your export business can depend on it.

Avoiding the unwanted investigative costs and reputational damage caused by a bribery and corruption scandal through proper risk management processes is well worth the investment. But should the unthinkable happen, knowing who to turn to and how to manage the issue can be just as important. Having safeguarded your business from the risks, you and your advisers will be in a much better position to deal with what ensues.