Growing Attention To Corruption Forces Companies To Deal With Sensitive Issue

Nov. 9, 1998
New attention has come to a problem familiar to the petroleum industry and as old as business itself: corruption. The spotlight might unsettle some oil and gas companies accustomed to working outside home territory. They know from long experience what it means when a passport control official announces that a foreigner's papers aren't in order. They know how an expensive project can stall while someone at a crucial permitting step awaits a holiday gift-or more.
Bob Tippee
Managing Editor-Economics and Exploration
New attention has come to a problem familiar to the petroleum industry and as old as business itself: corruption.

The spotlight might unsettle some oil and gas companies accustomed to working outside home territory. They know from long experience what it means when a passport control official announces that a foreigner's papers aren't in order. They know how an expensive project can stall while someone at a crucial permitting step awaits a holiday gift-or more.

And many of them prefer not to talk about this varied set of shady practices and expectations, which they may see as an inescapable dimension of working abroad. Indeed, companies based in the U.S. can find themselves subject to criminal investigation if suspected of involvement in the bribery of foreign officials.

Yet traditional silence on the subject of corruption is breaking down. Globalization of business has shined spotlights on the problems that corruption creates for companies, economies, and cultures. And some of the largest oil and gas companies have begun to address the subject head-on.

Royal Dutch/Shell Group, for example, discloses its own infractions. This year's Shell Report, an adjunct to financial reports, cites 23 cases in 1997 in which Shell workers were found to have solicited or accepted bribes.

"In all cases," the report says, "the financial value involved was small, but in some cases the consequences could have resulted in high costs to the company. All cases were investigated, and the lessons learned were circulated internally to improve the systems.

"Every case resulted in termination of employment."

British Petroleum Co. plc, which like Shell aggressively reports and frankly comments on the social and environmental ramifications of its activities, makes 10,000 employees sign an annual declaration that their units have not participated in corruption. Shell has a similar requirement.

In fact, many companies have had anticorruption policies for many years. The policies just didn't receive much notice until a recent surge in anticorruption activity by government groups and unofficial coalitions.

Inevitably, the attention will thicken skin around a heretofore tender subject. And, as in all such cases, companies that have taken stances on corruption before being forced to do so by publicity or official action have an advantage over those that have not.

The advantage isn't just political.

"A well-founded reputation for scrupulous dealing," declares Exxon Corp.'s anticorruption policy, "is itself a priceless company asset."

What's happening

A new report by Control Risks Group Ltd. (CRG), London, attributes the rising scrutiny of corruption to improved communications, to increased understanding of how corruption hurts economies and undermines aid and development initiatives, and to multilateral efforts to address the problem.

Among the multilateral initiatives is an antibribery convention signed last December by 28 members of the Organisation for Economic Cooperation and Development plus five other countries-Argentina, Brazil, Bulgaria, Chile, and the Slovak Republic. The convention calls on countries to pass legislation comparable to the U.S. Foreign Corrupt Practices Act of 1977 (FCPA), which outlaws bribery of foreign officials.

OECD's anticorruption effort began in 1994 with a recommendation to members to resist bribery of foreign officials in international business transactions. The group reaffirmed and revised the recommendation in May 1997 and agreed that an international convention would speed legislation outlawing bribery. In 1996, the OECD Council recommended that members not already doing so disallow tax deductions for bribes to foreign officials.

Other government groups have taken steps to combat bribery of government officials. The preamble to OECD's convention notes action of this type by the United Nations, World Bank, International Monetary Fund, World Trade Organization, Organization of American States, Council of Europe, and European Union.

The developments represent a shift in international attitudes toward corruption. As the CRG report notes, when the U.S. in 1989 proposed that the OECD adopt anticorruption measures, at least one member responded by characterizing the FCPA as a "quaint act of American puritanism." Indeed, a 1997 CRG survey reveals lingering differences of perception on opposite sides of the Atlantic about key corruption questions (Table 1 [91,304 bytes]).

Communication about corruption has improved partly because of technology such as the internet and also because of deliberate efforts to encourage discussion of the subject.

One such effort is that of a nonprofit group called Transparency International. Founded in 1993 and based in Berlin, TI describes itself as a nongovernmental organization aimed at building coalitions to fight corruption.

Its mission statement asserts, "Corruption is one of the greatest challenges of the contemporary world. It undermines good government, fundamentally distorts public policy, leads to the misallocation of resources, harms the private sector and private sector development, and particularly hurts the poor."

Peter Eigen, a lawyer with experience as a World Bank manager of programs in Africa and Latin America, serves as TI's chairman. The group has an advisory council chaired by Olusegun Obasanjo, former Nigerian head of state, and including former U.S. President Jimmy Carter and a number of other former and current national leaders.

With OECD asking members to pass antibribery legislation, other government groups acting to combat corruption, and TI working toward related goals through 60 national chapters, corruption has become a subject difficult to avoid. The discussion has begun.

The challenge to ethically minded managers is to turn the discussion into practical help for the people most likely to find themselves having to choose between principled behavior and commercial opportunity.

The TI index

It helps to know where corruption is most prevalent. In September, TI updated a gauge it calls the Corruption Perceptions Index (CPI).

This year's index ranks 85 countries on the basis of perceptions about corruption from 12 surveys of expert and general public views about the extent of corruption (Table 2 [145,991 bytes]). Countries in the ranking each received coverage in at least three such surveys.

"The 1998 CPI is a wake-up call to political leaders and to the public at large to confront the abundant corruption that pervades so many countries," Eigen, the TI chairman, said in a statement accompanying release of the index.

"Directly confronting corruption must be a top priority for most national governments and the international organizations concerned with development, economic growth, and human progress."

TI assigns each country a CPI of 1-10: the higher the score the least prevalent corruption is seen to be.

Eigen noted that developing countries aren't alone at the bottom of the CPI rating and urged industrialized countries to "clean up their own houses and...forthrightly act to prevent their corporations from paying bribes around the world." He called on governments to quickly enact legislation as suggested by the OECD antibribery convention.

Johann Graf Lambsdorff of GÖttingen University in Germany, an advisor to TI on compilation of the CPI, stressed that the index is based on perceptions. He also pointed out that the bottom-ranking country on the TI list, Cameroon, is not necessarily the world's worst for corruption since the study excluded many countries for lack of reliable data.

Company policies

Other than laws such as the FCPA and those passed in line with the OECD convention, no overarching guidelines exist to help companies deal with corruption.

But many companies have internal anticorruption policies.

The new CRG report, "Corruption and Integrity: Best business practice in an imperfect world," says 96% of U.S. companies responding to its survey had written statements prohibiting corrupt practices. Of European respondents, 70% had such statements.

The report says that codes of practice can sometimes serve as points of legal defense as well as statements of policy. And the ability to cite written policies can help executives refuse requests for bribes.

But guidelines vary. CRG cites these "key elements" and makes the related suggestions:

  • Principles. Guidelines should stress the importance of complying with the law but emphasize the arguments for best business practice. Legal compliance shouldn't be the sole objective. "A key underlying principle is transparency," subject to normal confidentiality, the report says. Corruption is less likely where operations are transparent and subject to regular audit.
  • Letters of representation. Mandated declarations of compliance with anticorruption policies, such as those at BP and Shell, ensure that managers pay attention to their companies' guidelines.
  • Conflicts of interest. Guidelines should clearly set boundaries of potential conflicts, which arise most frequently where individuals fill two roles.
  • Agents and consultants. Some companies, including Shell, avoid the use of local intermediaries for help in finding business and in navigating through unfamiliar political and cultural practices. Other companies consider them necessary. Problems arise when agents come to be seen as vehicles for corruption. Companies should manage their relationships with agents carefully and give special attention to how and how much they pay for the service. Bribes paid by agents acting on their own initiative can make unknowing client companies culpable under FCPA. Agents promised even small percentages of prospective multimillion-dollar projects might have the incentive and wherewithal to pay bribes.
  • Partner companies. Local partners can help international companies in much the same way as do agents and consultants. But they can lead to the same problems if they become vehicles of corruption. Shell and some other companies require joint venture partners to agree to abide by their business principles, including refusal to pay bribes.
  • Facilitation payments (Table 3 [82,988 bytes]). Some companies prohibit facilitation payments; others permit minor payments of this type under certain conditions. BHP, for example, allows facilitation payments if: the purpose is to speed routine official service to which the company is entitled and not to distort decision-making; there is no reasonable alternative; the business consequence of not making the payment would be serious; the type of payment and amount are customary and sanctioned in the country; the payment wouldn't expose the company to legal action under any applicable law or regulation; management knows of the payment; and the payment is accounted for clearly and accurately.
  • Gifts and other benefits. The important issue in determining the appropriateness of gifts is whether acceptance places the receiver under any kind of actual or implied commercial obligation. Some companies set value limits on gifts. Some permit acceptance of gifts or favors if they can be consumed in a day.
  • Political contributions. The main principles for both political parties seeking funds and companies asked to pay them should be transparency and conformity with the law. Many large companies simply refuse to make payments to political parties.
  • "Red flags." Guidelines can describe signs that a proposed transaction might violate legal or ethical standards and encourage employees encountering such signs to seek advice or withdraw.
  • The "newspaper test.

    " In doubtful cases, ask this question: If the details of your proposed transaction were reported tomorrow in the national press, would you or your employer have reason to feel embarrassed? "If the answer is 'yes' or 'perhaps,'" the CRG report says, "the proposed transaction may have entered an area of doubtful moral probity and is therefore unacceptable."

  • Sources of guidance. Company guidelines should include details of where employees should turn in case of doubt.

Conditions for corruption

The CRG report advises companies to understand the conditions that give rise to corruption and, when planning investments in a country, to study the politics, bureaucratic and economic sectors, and influence of organized crime.

Corruption exists in some form in every country, CRG notes. But it flourishes where officials or other individuals have great discretionary authority, where there is little or no accountability, and where businesses or other "givers" are prepared to pay.

Effective checks and balances on political leaders represent the "best long-term guarantees against corruption," CRG says. These include regular, free elections; an independent judiciary and other state institutions; and a flourishing civil society that includes an independent press and active nongovernmental organizations.

Companies can reduce the risk of corruption by seeking high-level political support but must do so in transparent and nonpartisan ways. The need to remain nonpartisan makes political contributions a difficult issue in industrialized and developing countries alike. Where a single political party wields control for long periods, corruption can become common; other factors, such as an active press, can suppress illicit activity in these cases.

Bureaucrats sometimes represent greater threats of corruption to business than politicians do, although they eventually need support from the latter. Companies can often avoid corruption with "patient persistence" backed by higher authority, CRG notes.

Corruption tends to thrive where official salaries fall below sustenance levels and induce bureaucrats to demand facilitation payments. But salary increases won't stop corruption unless backed by supervision and incentives for honesty.

Commercial operations attractive to corruption, CRG says, include those involving major expenditures, such as oil and gas projects; high degrees of confidentiality; intense competition; and tight deadlines.

When assessing the social acceptability of corruption within a country, the key issues for a company are a concept of wider social good as distinct from family or clan interests and whether the state is seen as benevolent or hostile. Where clan interests supersede governments, companies seen as benevolent insiders have reduced vulnerability to corruption.

Organized criminal groups raise chances for corruption, especially when they enter mainstream commercial activities directly or through investment. The threat, CRG says, increases the importance of careful due diligence of countries and companies.

Due diligence

When considering investment in a new country, the report says, companies should seek answers to these questions:
  • Are rules governing investment and licensing decisions clearly defined, or do officials enjoy a high degree of discretion?
  • Does the legal and judicial system work effectively?
  • Is there a free press that reports on actual or suspected corruption?
  • Is the industry in which companies are involved particularly exposed to corruption?
  • Who are the key decision-makers, and do they have reputations for personal integrity?
CRG advises a company entering a country where it hasn't worked before-"at the earliest stage of a new project"-to establish communication with people of influence, such as government officials, journalists, and community leaders. The company should explain the purpose of its project, problems to be addressed, and benefits. Such careful preparation pays off in a crisis.

"Emergencies do not allow time for the patient building up of relationships," the CRG report says. "Less-honest companies may be tempted to pay bribes to secure instant results. Companies which have already established a reputation as good citizens should not need to do so."

Companies can operate honestly in corrupt environments if they follow strict guidelines and have honest employees and joint venture partners. For partners, due diligence again becomes an important issue.

CRG recommends that inquiries about potential partners cover the professional record and integrity of key company officers, identities of main shareholders, and possible links with senior politicians and organized crime groups.

In general, the group asserts that corruption has joined two other sensitive issues that have forced themselves to the forefront of business attention.

"As an earlier [1997] Control Risks report showed, there is 'no hiding place' for companies accused of environmental destruction or involvement in human rights abuses," says its new report.

"The same now applies to companies accused of corruption."

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