Risk & Compliance

The Real Price of Payoffs, According to E&Y

Even though more companies are being caught using bribery to gain business, the illicit practice appears to be increasing — as is the cost of being...
Alan RappeportMay 19, 2008

Corporate corruption is growing globally despite international efforts to curb the palm-greasing practices of companies, according to a new survey by Ernst & Young.

In recent years regulators have cracked down hard on illicit practices such as bribery, drawing on tougher legislation and using better enforcement techniques. Yet the survey of nearly 1,200 finance executives from big companies in 33 countries finds that the behavior persists without sign of letup. In fact, 23 percent of those queried said their organization had been asked to pay a bribe in exchange for keeping or winning business during the last two years. And 18 percent said they lost business because a competitor was willing to pony up bribe money.

“Despite the best efforts of some governments, non-governmental organizations and law enforcement agencies, the risk of bribery and corruption remains prevalent,” said John Smart, head of fraud investigation and dispute services in the UK for E&Y.

The apparent rise of bribery cases comes as companies are increasingly working across borders and dealing with cultures where payoffs are common, and sometimes expected. The heightened awareness of the issue makes it hard to say whether bribery is becoming more prevalent or if greater resistance is bringing attention to the problem.

Earlier this year, for example, Siemens overhauled its executive team after members of management were ousted after the company was exposed making $1.9 billion in suspicious payments that may have been bribes to win contracts. Those payments are now part of an investigation ranging from the U.S. to Europe to China, and the German conglomerate has already had to pay more than $300 million in fines.

Such catches are the result of beefier enforcement. The U.S. Department of Justice has been staffing up with more lawyers to prosecute increasing violations of the Foreign Corrupt Practices Act (FCPA), which tries to rein in bribery. The number of FCPA cases filed jumped to 38 last year, after traditionally averaging about 10 per year. More than a third of those polled in the E&Y survey felt that corrupt business practices were getting worse.

“Executives in some companies today may still believe that paying bribes is good business,” according to E&Y’s David Stulb. “But the risk of such action has certainly increased markedly in recent years.”

Despite these risks the survey surprisingly found a lack of awareness of the FCPA, which has been around for more than 30 years. Just a third said they had some knowledge of the act, while 58 percent of senior in-house counsel said they were not familiar with it.

One force that might awaken companies to the dark side of bribery is the experience of more-righteous competitors that know the law. Particularly those that lose out. James Maton and Joshua Gardner of the law firm Edwards Angell Palmer & Dodge, note in a recent letter to clients that companies winning government contracts through bribes paid to foreign officials are now contending more with private lawsuits from their competitors.

Maton and Gardner point to the costly settlement paid out by the Compass Group, the world’s largest catering firm, after allegedly bribing United Nations officials to secure contracts to offer food rations to peacekeepers. Two rival firms claimed they lost business from the bad bidding and Compass eventually settled for $74 million.

Regulators ultimately hope that steep penalties will make bribery too pricey a proposition. According to E&Y, since 2007 the top 10 FCPA prosecutions resulted in direct costs alone for companies totaling $175 million.