Compliance Surprises in Cuba's Closed Economy Reply

All things come to an end, eventually, even John F. Kennedy’s ban on U.S. trade with Cuba. Sensing impending change, we headed to Havana in March to see how bribery works there, as compared to in Russia or India or Mexico. We were startled at how little evidence of commercial bribery we found.

Billboards everywhere exhorted citizens to “defend the revolution”: Patria o Muerte! Fatherland or Death! The government seemed to count on slogans more than salaries to motivate the workers. Everyone works for the State and the salaries the state pays range from US$16 to US$20 per month, whether you earn it by pumping gas or by transplanting hearts. The government ensures that salaries are equal, even if they are not adequate. No one can live on such wages, and no one, not even the government, pretends that they can. Even with free health care and education and subsidized rations of rice, beans, eggs and cooking oil, no one makes ends meet on US$20 per month (One heart surgeon decorates cakes on the weekends).

The government knows that its citizens supplement the income it provides and for the most part looks the other way while they do. Pilferage (though not bribe-seeking) seemed practically universal. Those whose jobs give them access to a car siphon gas to sell on the side. Those whose jobs take them to an office take offi ce supplies to distribute. Bartenders save the good rum to trade and serve drinks that are thin and watery. Waiters grab food to barter and blatantly pad the checks they present to foreigners.

What does this mean for employers? Well, in Cuba, the state is the employer, so constant low-grade pilferage of goods to sell on the Black Market is just another way to redistribute the wealth. Cubans we spoke to didn’t seem to consider this stealing exactly, because, well, everything belongs to everyone, right? People in Cuba shrug a lot and turn up their hands.

Foreign businesses have another way to reward their employees. These companies have to pay their employees’ US$20 per month wages directly to the state, but they are permitted to pay a “top up” directly to the employees. This is called a “gratifi cation.” This isn’t legal in Cuba; in fact it is a violation of the stated national value of egalitarianism. But the Cuban government looks the other way until tax time, then requires employees to declare their “gratifi cations” and be taxed, so the state benefi ts in hard currency. One company pays the offi cial rate of US$20/month and an unofficial “top up” of US$2000/month.

A foreign business ready to pay “gratifications” should have no trouble hiring, but the government makes the hiring process difficult. A company can find someone and then ask the government employment agency to vet and approve them, but they will wait a long time. Alternatively, they can ask the government employment agency to send over two or three people to choose from. Reject all three and they will wait a long time for another candidate. One employer that got itself crosswise with the government has waited several years to fill 35 open spots. A company that attempts to dismiss someone will wait, yes, a very long time for a replacement.

For Cuba’s highly educated population, there is little cost to losing a job; the government will assign another. Jobs in industries with scarce portable goods bring opportunities for “slippage” of inventory. Soap is rationed in Cuba and very scarce; working in a soap factory is a plum job. A chance of travel abroad is attractive, although such travel rarely materializes. The approval process is long by design. In a recent speech, Raul Castro announced that international travel for business would be cut dramatically.

Companies enjoying any success in Cuba have partnered with savvy locals who guide them through the dense, opaque bureaucracy. Such companies must convince the government that they are there for the long haul. They cultivate relationships and, invariably, they sponsor charity cigar auctions or kids’ “go-kart” rallies. But, by all reports from many sources, they don’t pay bribes.

This was surprising. Robert Klitgaard says that a centralized government with a great deal of discretion and a low level of accountability will be a playground for bribe seekers. We went to Cuba expecting rampant bribery, but we didn’t find it.

We did hear about widespread, low-level, non-threatening demands from policemen and officials, but they sounded more wistful than threatening: “I haven’t had a cup of coffee yet today…” one policeman said. Some people pay and others decline. Declining seems to bring no consequences. Middle level employees of state-owned joint ventures had reputations that were a little worse. As for bribery higher up the chain, we heard it was rare.

The party, it seems, really does pay homage to “revolutionary consciousness.” Schoolchildren sing “We will be like Ché,” and apparently one cannot “be like Ché” and demand bribes. Moreover, the party believes that corruption toppled the Soviet Union, so it is reported to move swiftly and severely against bribe takers. The Cuban Penal Code stiffens the penalties as one climbs the hierarchy of government officials, something we haven’t seen elsewhere.

We spoke to a European businessman with responsibility for Latin America and asked him how Cuba compares to other countries for transparency. He quickly placed it above Mexico, all the countries of Central America and Venezuela. Then he added Ecuador, then Brazil and Argentina, then Chile, South America’s transparent golden child. Slowly, and with apparent surprise, he declared it “among the best in the region.” But he added that he didn’t quite understand why.

Near the end of the trip, I asked a Cuban businessman what would happen if U.S. sanctions were lifted and U.S. companies started arriving with money to spread around. “Oh no, tell them not to do that. That won’t help at all. But they’ll need the money. Patience is the key, and patience can be very expensive.”

This article was originally published by Alexandra Wrage in Ethisphere magazine in Q1 2009.

Looking back Reply

At a conference in Paris in 2003, Peter Clark, then the Deputy Chief of the US Department of Justice’s Fraud Section, was challenged by a Nigerian gentleman.   The exchange was reported in the Financial Times.  The issue was the politicization of anti-bribery cases and the gentleman boomed, “if you think anyone in Africa believes the US government will ever go after Halliburton for bribery, you are sorely mistaken”.   Mr. Clark stood and boomed back:  “if you think for a moment that we would shy away from a case for political reasons, you are sorely mistaken.”

The US investigation that followed resulted in penalties of $579 million assessed against Halliburton and the TSKJ joint venture earlier this year.   When Mr. Clark was challenged in Paris, the audience seemed to respond with a collective “we’ll see”.   And now we have seen.  Since then, we’ve also seen the Al Yamamah file closed in the UK and we’ve heard rumors of other European governments killing investigations before they began.  In light of that, it’s worth recalling this exchange and the success that the US Department of Justice has had at pursuing companies, independent of any political pressures.

Mooncakes May Mean Jail Time in Hong Kong Reply

We have written before about these troublesome cookies, which aren’t always quite as benign as they seem. A longstanding tradition around the Autumn Festival, we have found them priced in the hundreds of dollars with exotic fillings and, in one case, offered in elaborate packaging with engraved bars of gold on either side. Now, it seems, the Hong Kong authorities have mooncakes on their radar. Yuet Ming Tham, in DLA Piper’s Asia Regulatory & Litigation practice group in Hong Kong provides this update.

“In Hong Kong, a March court case caused sleepless nights for many a compliance officer in the territory, when Hong Kong’s powerful anti-graft agency, the Independent Commission Against Corruption, charged a construction company director for giving mooncakes to a police-station.

Every September and October, the Mid-Autumn Festival is celebrated by millions of Chinese people across Asia and in the weeks leading up to the Festival, thousands upon thousands of mooncakes, a pastry synonymous with the festival, are presented as customary gifts to business associates. In this case, the company director was sentenced to two months’ imprisonment for bribery, after he pleaded guilty to presenting 15 boxes of mooncakes to officers of a traffic-police team. It made no difference that the police officers promptly returned the 15 boxes uneatened the next day.

In Hong Kong, it is an offence to offer any benefit to an employee of the government or a public body where there are “dealings of any kind”, even if the dealings are not ongoing, but only anticipated. In this case, the moon cakes were presented eleven days before the Mid-Autumn Festival to the traffic team from which the company director had obtained a series of roadwork approvals. The Hong Kong court rejected the defendant’s plea that he had not realised it was an offence and that what he did was part of Chinese custom.

The anti-bribery provision in question is a draconian one. Unlike the FCPA, there is no need for the prosecution to show any corrupt intent on the part of the defendant. This provision presumes corrupt intent if: (a) there are dealings and (b) a benefit or gift is presented. The only way to escape conviction is for the defendant to show that there was lawful authority or a reasonable excuse, (for example, if the government employee happened to be the defendant’s good friend of many years preceding any “dealings”, mooncakes have always been exchanged and a reasonable number of moon cakes was given). This provision applies where a benefit and gift is offered not just to a government employee, but also to any employee of a public body such as Ocean Park, a famous local tourist attraction, or the Hong Kong Tourism Board. Finally, there is no minimum value involved, so that offering a piece of mooncake would have been as much an offence as 100 boxes of mooncakes. Harsh as it sounds, similar statutory presumptions can be found in the anti-bribery statutes of Singapore and Malaysia.

The irony of the case is that lunches, dinners and drinks (and entertainment provided during these meals) are exempt from the Hong Kong anti-bribery provisions. So, technically, if our hapless company director had instead of presenting the mooncakes as gifts, taken public servants out to a fabulous meal where they could have eaten all the mooncakes they desired in one sitting, this may have been alright.

This case is a good example of how corporations need to be aware of not just the FCPA, but also the pitfalls that come with not paying enough attention to local laws. Of course, an argument can be made that Hong Kong does not recognise the concept of corporate liability, unlike the FCPA. However, it would be a brave compliance or legal officer who would be willing to allow employees to violate such a law in Hong Kong, and not worry that there may be FCPA implications somehow for the company, whether under the FCPA’s antibribery provisions or the accounting provisions.”

TRACE Benchmarking Survey: Facilitation Payments Reply

In the recent TRACE benchmarking survey on facilitating payments, more than 45 percent of respondents said that if such payments were prohibited everywhere, their jobs would be easier, and another 48 percent said such a prohibition would not affect their jobs at all. Fewer than 7 percent of those responding said their jobs would be more difficult if facilitation payments were banned. Our finding that 93 percent of respondents’ jobs would be easier or unaffected if facilitation payments were banned confirms the growing recognition worldwide that what grease payments tend to facilitate is more demands and, in many cases, they make doing business even more difficult.

Seventy-six percent of respondents stated that they believe it is possible to do business successfully without making facilitation payments if there is sufficient management support and careful planning.  Buttressing this, 71% believe the employees of their company either never, or only rarely, make facilitation payments, regardless of whether facilitation payments are permitted under their corporate policies.  When respondents were asked to gauge the level of risk facilitation payments pose to a company with respect to books and records violations or violations of other internal accounting controls, 58% assess such risk level as medium to high.   Asked to assess how likely their company is to face a governmental investigation or prosecution related to facilitation payments, just over half believe they are moderately or highly likely to face such an investigation in the country where they are headquartered, and 40% believe they are likely to be investigated or prosecuted in the country where the payment is made. 

To see the full report, please visit the TRACE website.