The Bribery Gap

Regulators have been intensifying their scrutiny of corporate bribery infractions lately. In the last half of 2004, for example:

• Bristol-Myers Squibb Co. revealed that the Securities and Exchange Commission has launched an investigation into some of the company's German units for possible violations of the Foreign Corrupt Practices Act (FCPA).
• Three former Lucent Corp. employees, including a former CEO, received SEC Wells notices stemming from the alleged bribing of Saudi Arabia's former telecommunications minister with cash and gifts worth up to $21 million.
• Halliburton Corp., embroiled in investigations by both the Department of Justice and the SEC, disclosed that it may have bribed Nigerian officials to secure favorable tax treatment for a liquefied-natural-gas facility.
• The SEC hit the U.S. unit of Zurich-based ABB Ltd. with a $16.4 million judgment reflecting information on bribery and related accounting improprieties that were uncovered in due diligence prior to a divestiture.

From the corporate perspective, of course, Sarbanes-Oxley raises the stakes for violating the FCPA. With CEOs and CFOs now personally signing off on company financials, those executives are likely to be warier than ever of letting a bribe slide through, or letting their guard down in matters of compliance or disclosure.

Corporate directors, who are responsible for monitoring internal audits, are also worried. Sarbanes-Oxley "has increased our company's efforts dramatically to document our processes and internal controls on a companywide basis," says Warren Malmquist, director of audit services at Coors Brewing Co. in Golden, Colorado. When it is auditing company subsidiaries, his department expends "considerable effort" testing the validity of payments made by foreign subsidiaries, he adds, noting that the brewer has never had an FCPA violation. Meanwhile, the USA Patriot Act, which lists bribery of foreign officials as a possible component in money-laundering cases related to the funding of terrorism, allows separate penalties to be assessed for both the payoffs and the money-laundering schemes.

Avoiding the Shadows
Conducting business globally, of course, exposes U.S. companies to all sorts of payoff minefields that don't exist at home. The Corruption Perceptions Index, based on bribery data and surveys conducted by Berlin-based Transparency International, a nongovernment organization dedicated to fighting bribery, finds signs of "rampant corruption" in no fewer than 60 countries. (Bangladesh and Haiti are the worst of that group, and Russia and several other former Soviet republics are included.)

Non-U.S. companies face far fewer constraints when dealing in this shadowy business world. While the 35 signatories of the Organization of Economic Cooperation and Development's 1997 convention made it a crime to bribe foreign officials, "there has been little enforcement of new laws by national governments, other than by the United States," Fritz Heimann, chairman of the U.S. branch of Transparency International, writes on its Website. "There is insufficient awareness in the business community that foreign bribery has become a crime, and relatively few non-U.S. companies have adopted anti-bribery compliance programs."

And that bribery gap has been costly for American companies. During the 12 months ending last April 30, according to a U.S. Commerce Department report, competition for 47 contracts worth $18 billion may have been affected by bribes that foreign firms paid to foreign officials. Because U.S. companies wouldn't participate in the tainted deals, the department estimates, at least 8 of those contracts, worth $3 billion, were lost to them.

Since 1977, the FCPA has barred all issuers of U.S.-traded equities from bribing foreign government officials to acquire or retain business. But while the act makes it illegal for U.S.-listed companies and employees to take part in bribes or to create slush funds for payoffs, some authorities suggest that until a few years ago companies weren't in the habit of informing regulators when they unearthed corruption in their overseas units.

"Traditionally, under general U.S. criminal law," says Kathryn Atkinson, a partner in the Washington, D.C., law firm Miller & Chevalier, "the concept was that you don't have to turn yourself in on a potential crime." Thus, companies finding evidence of potential bribes paid investigated them and imposed disciplinary and remedial measures, but didn't disclose incidents to authorities or shareholders. SEC policy and Sarbanes-Oxley rules, however, now call for disclosure of both the incidents and the steps a company takes to address them.

Accounting for Bribes
Corporate views about reporting abuses began to change in October 2001, though, when the SEC settled an enforcement action involving a subsidiary of Shawnee Mission, Kansas-based Seaboard Corp. — an action that had nothing to do with bribery.

The commission alleged that Gisela de Leon-Meredith, while controller of Seaboard's Chestnut Hill Farms unit, caused inaccuracies in the books and covered up her actions. The SEC merely slapped the ex-controller (who neither admitted nor denied guilt) with a cease-and-desist order, and took no action against the company. In a statement at the time, though, the commission said that Seaboard's cooperation — specifically in sharing details of its internal investigation, not invoking attorney-client privilege, and promptly notifying the commission of restatement plans — had won it lenient treatment.

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