Discounting Corruption
Enforcement is another matter, simply because it's difficult for authorities, much less shareholders, to determine that such payments are being made. Yet in Indonesia, as elsewhere, pervasive corruption has led to bad deals that the market, in effect, is starting to police. "There is a reason kickbacks and bribes have been paid; it's to sweeten the deal because it may not be as attractive as it appears on paper," says Stephen Vickers, a managing director with Kroll Associates (Asia) Ltd., a corporate-intelligence firm in Hong Kong.
Freeport's experience may again be instructive. Around the time it entered into a joint venture with the Suharto family in 1997, Freeport was also awarded the rights to help develop what appeared to be a huge gold deposit discovered by Bre-X Minerals Ltd., a Canadian mining concern, in Busang, on the island of Borneo.
But due diligence uncovered a massive hoax — at a cost of $2 million to the company. Since that embarrassment and the Indonesian economic crisis, Freeport's shares have traded at a huge discount to other mining companies, despite the fact that its lowest-cost copper mine and largest gold deposits have made it one of the world's most profitable mining companies. Barrick Gold, a Canadian company that Freeport beat out for the Bre-X mine, is trading at 13 times cash flow, while Freeport trades at only 3.5 times.
What's a Bribe Anyway?
A U.S. law against foreign bribery has few teeth. It remains difficult to prove that U.S. companies are breaking the law prohibiting bribery of foreign officials. "Joint ventures are a very gray and difficult area," says Frank Vogl, vice chairman of Transparency International, an anticorruption lobbying group. "When the Foreign Corrupt Practices Act [FCPA] was written, the focus was very much on trade and international procurement. Today, there needs to be far more focus on investment, and the game there may be somewhat different."
The U.S. Justice Department's deputy chief of enforcement, Peter Clark, admits that joint ventures present "complications" for law enforcement officials.
The issue often boils down to whether or not the U.S. partner knew, or should have known, about any illegal activity undertaken by its partner.
"The key thing is, what is your state of knowledge?" explains Fritz Heimann, Transparency International's U.S. chairman. If the U.S. partner actively participates in the management of the joint venture, it is difficult to claim that it didn't know its foreign partner was paying bribes, he says. "If you're on the board of directors, you have a duty to find out what's going on in the country. But if you have an investment relationship and have a foreign partner running the business, that's a different situation."
In any case, chances of prosecution are slim. In the FCPA's two decades of existence, the Justice Department has prosecuted only two dozen cases. Clark says there have been a half dozen or more cases that could not be prosecuted under the act because of restrictions on the use of evidence gathered overseas. In return for help in gathering evidence, says Clark, the United States often agrees to foreign governments' demands that it use the information only to prosecute crimes they also are pursuing. Even in the best situations, an investigation takes three times as long as a domestic case because of the hurdles in the way of evidence gathering.
Tim Dickinson, partner in the Washington, D.C., law firm of Dickinson Landmeier LLP, says the Justice Department won't bring a case to court unless it has a "smoking gun." That's especially hard to find in a corruption case. For diversified global companies, a joint venture in a small Asian company represents such a tiny fraction of its operations that the details needn't be publicly disclosed under U.S. securities laws or accounting rules.
Whistleblowers within the company or competitors that believe a company is being treated preferentially are usually the best means by which corrupt practices are brought to the attention of the government. For example, the SEC's case against Triton Energy was brought to light during a contract dispute with a Canadian company and through a wrongful termination suit by a disgruntled employee. But, typically, an investigation can't go too far without the foreign government's cooperation. "If they are involved in a bribe, they're not going to [help], and that's the end of it," says Dickinson.
Most corruption and bribery cases are settled long before they reach court, with a consent decree and a fine, and often with no public disclosure. "You never hear about them," adds Dickinson, who represents corporations in negotiations with the Justice Department. Clark would not discuss specific cases or even say how many are under investigation. But Dickinson estimates the department has at least 25 to 50 that are active. And he expects that number to double after the OECD convention leads to antibribery statutes in member countries.
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