The backhander backlash
Some multinationals could be caught out as more governments begin clamping down on corporate corruption.
A growing crackdown on corruption around the world has resulted in a number of multinational companies being prosecuted. Yet many companies still do not take the threat seriously enough.
The US and UK have for several years taken a hard line on corporate bribery, but now other countries that have long been plagued by corruption are making efforts to stamp it out. Recent bribery probes in Brazil, Argentina, Pakistan, Spain, South Africa, Saudi Arabia and Malaysia have triggered a groundswell of popular outrage that have toppled politicians and business tycoons. China’s President Xi and India’s Prime Minister Narendra Modi have both waged high-profile anti-graft campaigns, while Jair Bolosonaro swept to victory in Brazil’s recent presidential election on the back of a populist anti-corruption campaign.
The steady rise in corruption cases in recent years reflects investigators’ growing expertise in following the money and a new political will.
The steady rise in corruption cases in recent years reflects investigators’ growing expertise in following the money and a new political will. “Of the around 160 Foreign Corrupt Practices Act (FCPA) investigations since 2012, 37 have been in Brazil – 28 of which are still open – and 23 in China. That points to a very recent awakening of anti-corruption sentiment,” says Ed Whitworth, D&O Underwriter for Hiscox London Market.
This sea change in attitudes has meant bribery is no longer an unavoidable hazard of doing business in some countries. “We’ve seen how quickly public and political sentiment in countries can turn against a perceived culture of corruption. Multinational companies are often centre stage when that happens. ‘Everybody was doing it’ isn’t a good enough justification, especially as public opinion is far less willing to overlook corporate misbehaviour since the financial crash,” says Whitworth.
In today’s internet age, it can be easier to identify acts of corruption by following electronic paper trails tracing the sources of payments.
In today’s internet age, it can be easier to identify acts of corruption by following electronic paper trails tracing the sources of payments. There are anti-money laundering and anti-corruption controls, and even if those are circumvented, hactivists and whistleblowers can expose politicians’ alleged shady financial dealings. The Paradise Papers is a prime example of this, in which over 13 million documents detailing the complex investments of the world’s rich and famous were leaked to the press.
Multinationals are under increasing scrutiny and investigations in one country often trigger probes in others. The US Department of Justice and Securities and Exchange Commission used evidence uncovered by Brazilian investigators to launch their own case into Brazilian-based Petrobras, which is also listed on the New York Stock Exchange.
Petrobras starkly illustrates the huge fallout that can result from a corruption scandal. The state-run oil giant’s deep embroilment in the Lava Jato case, exposing widespread payment of kickbacks in return for awarding contracts to companies, has so far cost it over $850 million in fines, nearly $3 billion in compensation to investors and around $250 billion in lost market value.
The risk for companies can in fact be greater in countries where they do the least amount of business, as they will often use local agents in distant places to sell their wares.
Smaller companies can be pushed to the brink of extinction by such revelations. A UK judge agreed in 2016 to not name a company that struck a deal with the Serious Fraud Office over bribery allegations, as it was already operating on an “economic knife edge” and the bad publicity could well push it under.
For businesses that export globally the risk of being alleged to have paid bribes increases dramatically. In comparison to accounting fraud where the risk is centred on a small group of senior employees with high-level authorisation, corruption investigations can arise from any country which goods have travelled through or any contractor or third party that has been connected at any point along the journey.
The risk for companies can in fact be greater in countries where they do the least amount of business, as they will often use local agents in distant places to sell their wares. These freelance fixers often work on commission, so the temptation exists for them to bend the rules to get a sale. In about a third of the FCPA investigations around the world since 2014, it was local sales agents working on behalf of companies who are alleged to have paid bribes, according to Hiscox research. “Company bosses may be completely in the dark about what’s going on in a far-flung outpost until a whistleblower comes forward,” says Whitworth.
Incentive to come clean
Prosecutors in the US and UK have made it clear they will be more lenient on companies that give themselves up rather than wait to be caught. Companies that cooperate fully are incentivised with a lower fine and the avoidance of a lengthy and potentially reputation-shredding court case.
The ability to negotiate plea bargains with companies gives prosecutors a powerful weapon. “They can bring more bribery charges because they don’t necessarily have to go to trial, so the burden of proof needed for a settlement would be lower than in a court of law,” says Whitworth.
Prosecutors in the US and UK have made it clear they will be more lenient on companies that give themselves up rather than wait to be caught.
Of the four deferred prosecution agreements (DPAs) secured so far by the Serious Fraud Office, three were for bribery: Standard Bank in 2015, Company ‘XYZ’ in 2016 and Rolls Royce in 2017.
But despite the growing pressure on companies to be squeaky clean, for many CEOs and chairmen, an accounting scandal like the one currently engulfing Patisserie Valerie, or which rocked Tesco in 2014, is the prioritised concern. But that complacency could come back to haunt them. “Corruption allegations should now be viewed with the same level of concern in executive offices and boardroom, because they are just as much of a threat to a company’s balance sheet and reputation,” says Whitworth.