Not Much Bang for Bribery Bucks Reply

Red_deer_stag_2009_denmarkA study recently published by Professors Raghavendra Rau of Cambridge University, and Aris Stouraitis and Yan Leung Cheung of Hong Kong Baptist University, debunks the myth (still apparently held by some anti-corruption skeptics) that bribes are good for business.

The research analyzed 166 documented incidents of bribery over a 36 year period, through an examination of profits gained when contracts connected with the incidents were awarded.   On the one hand, the data showed that bribes resulted in about USD 7 of benefit for every dollar paid, and thus did result in lucrative contracts being conferred.  On the other hand, the benefit derived from the corrupt payments was effaced as bribe amounts increased.   Moreover, the research showed that the “best performing” companies did not pay bribes; it was the “inefficient” companies that felt compelled to use this method to increase business.  These companies, it turns out, underperform for three years prior to receipt of the contract, and three years afterward.

The biggest bribes, to the highest ranking officials, produced by far the least profit, according to Rau.

An Overview of Turkey’s Corruption Problems – Part I Reply

Today’s post is by TRACE intern Asli Aksoylu, a Turkish attorney who recently received an LLM degree from Northwestern University School of Law.

turkey flag

A. Corruption of Turkish Officials by Foreign Companies

The Securities and Exchange Commission (“SEC”) announced on Sept. 24, 2012 that it had reached a settlement with Tyco International Ltd. (“Tyco”) following illicit payments by Tyco’s subsidiaries to foreign public officials in various countries, including Turkey. According to the SEC’s press release, Tyco’s subsidiary arranged illicit payments for a Turkish public entity in order to purchase microwave equipment. The name of the Turkish entity was not announced; however an employee e-mail of Tyco’s Turkish subsidiary indicated that “everyone knows you have to bribe somebody to do business in Turkey.”

Not surprisingly, Tyco is not the only investigation that US authorities initiated in connection with corrupt payments by intermediaries operating in Turkey. In 2007, the SEC found that a Turkish subsidiary of Delta&Pine had made improper payments to officials of the Turkish Ministry of Agriculture and Rural Affairs, and thereby violated the Foreign Corrupt Practices Act (“FCPA”) and the Securities Exchange Act of 1934.  The investigation revealed that the Turkish Deltapine’s payments induced officials to omit performing certain acts that were part of their lawful duty and caused them to violate the relevant Turkish laws while granting reports and certifications to the company. As a result, Delta&Pine and its Turkish subsidiary Turk Deltapine settled with the SEC, and jointly agreed to pay a civil penalty amounting to $300,000.

In another investigation, a joint venture that Germany-based automobile company Daimler AG (“Daimler”) and several Turkish companies established in Turkey, namely Mercedes Benz Turk, was involved in a bribery scheme. In 2006, Daimler’s corporate audit department found evidence indicating that nearly half of the payments of Mercedes Benz Turk, made in connection with vehicle export transactions, were improper payments and gifts to foreign government officials. The revenue reaped from these transactions was approximately €95 million. During the time of this improper conduct, Daimler was required to comply with the provisions of FCPA as its predecessor registered its shares with SEC in 1993. As a result of the investigations, Daimler settled with the DOJ and SEC, agreeing to pay approximately $185 million in total as criminal and civil fines without admitting or denying the charges.

Corruption in the Health-Care System

Aside from these examples, doctors in state-owned hospitals in Turkey were caught in the spotlight when the DOJ focused its investigations on the health-care industry. Investigations in this area are presumed to have started with Johnson & Johnson’s investigation, as the DOJ press release indicated that Johnson & Johnson’s cooperation played an important role in identifying corrupt practices in the life sciences industry. According to public information available, Medtronic is currently under investigation for potential violations of the FCPA in several non-US countries, including Turkey, in connection with improper payments made to government-employed doctors for the sale of Medtronic medical devices. However, Medtronic was not the only company allegedly dealing with corrupt practices in Turkish health-care industry. According to the DOJ, Micrus also made payments to doctors in Turkey and several other countries without obtaining requisite permits in order to induce hospitals to purchase Micrus products. As a consequence of the investigations, Micrus and its Swiss subsidiary entered into a deferred prosecution agreement with the DOJ under which they agreed to pay $450,000 in penalties.

B. Corruption within Turkish Entities Operating Abroad

UN Oil for Food Programme

Illicit payments to officials in the Iraqi government in order to secure contracts during the period of UN Oil for Food Programme has been another major focus of FCPA enforcement. Even though Turkey did not initiate investigations of the 139 Turkish companies that are alleged to have been involved in this corrupt practice in Iraq according to the 2005 Final Report of the Independent Inquiry Committee, internal investigation of multinationals revealed corrupt conduct in Turkey.  One example is York International Corporation (“York”), a US corporation that acknowledged liability for the misconduct of its subsidiaries in Delaware and Dubai, which allegedly made improper payments to the Iraqi government in connection with the Oil for Food Programme. During its investigation, York discovered that its subsidiaries paid bribes and kickbacks to obtain and retain business on government projects in Turkey along with other countries.

In 2008, Siemens settled charges with DOJ and SEC with the record-breaking penalty and fine amounting to $800 million.  The Turkish subsidiary of Siemens, Siemens A.S., formed part of this  investigation as well. Three years after the settlement, the Turkish Prime Ministry Inspection Board initiated an investigation against Siemens’ Turkish subsidiary in relation to alleged bribery of the company in Turkey and Iraq from 1999 to 2007. These payments in Iraq are presumed to be made in connection with the United Nations Oil for Food Programme. In this context, the Republic of Iraq filed an action before the US District Court for the Southern District of New York claiming damages against 93 defendants including Siemens A.S.

Kazakh company in which a Turkish telecommunications company holds a stake under investigation within the scope of FCPA

Aside from the above mentioned examples, a company in which Turkcell Iletisim Hizmetleri A.S. (“Turkcell“) holds a stake was under investigation (see earlier TRACEblog post, here).  Turkcell is the leading Turkish telecommunications company, and is currently the only NYSE-listed company in Turkey.  The company that was the subject of investigation is KCell, a mobile operator in Kazakhstan that is partly owned by Fintur Holdings B.V., in which Turkcell holds 42.5% of the shares.  Turkcell disclosed in its 2011 F20-F, however, that the allegations were not substantiated after the completion of an internal investigation.

For companies doing business in Turkey, TRACE offers due diligence reports on commercial intermediaries and model compliance policies.  TRACE members have access to the Resource Center, which contains summaries of applicable Turkish law, guidelines on gifts and hospitality, and research on corporate best practices.  For information, click here, or visit TRACEinternational.org.

New FCPA Guidance: There is no One-Size-Fits-All Compliance Program Reply

Compliance is the central theme in A Resource Guide to the U.S. Foreign Corrupt Practices Act recently issued by the Department of Justice and the Securities and Exchange Commission. Terms such as “foreign official”and “facilitation payment” are defined and clarified, enforcement approaches are explained, and the importance of self-reporting is addressed. But the crux of the matter remains C-O-M-P-L-I-A-N-C-E.

The Guide acknowledges that no compliance program is foolproof, and notes that enforcement agencies cannot provide formulaic requirements regarding compliance programs. Rather, companies are expected to be guided by common sense, and by three basic questions:

• Is the company’s compliance program well designed?

• Is it being applied in good faith?

• Does it work?

The Guide states that the individuals assigned to oversee the program must have both the authority and the autonomy to do their job. The authorities look at whether the resources devoted to the program are commensurate with the size, structure and risk profile of the business. Companies are admonished to focus resources where needed, and neither to treat all markets nor all transactions equally. Although in theory it makes sense that a “$50 million contract with a government agency in a high-risk country warrants greater scrutiny than modest and routine gifts and entertainment,” in practice not all companies take the sensible route.

This notion of using the corporate common sense to make compliance decisions will play a major role in the authorities’ assessment of a company’s compliance program. It’s actually a good thing that compliance professionals are expected to be smart as well as devoted. The DOJ and SEC stress the importance of effective, efficient vehicles for communicating compliance requirements and policies, and for training employees, executives and agents. The incentives and rewards which the company puts in place in order to encourage ethical behavior and both enforce and reinforce its compliance program will also be an important element in the assessment of a company’s compliance program. As stated in the Guide, the “DOJ and SEC will give meaningful credit to thoughtful efforts to create a sustainable compliance program if a problem is later discovered. Similarly, undertaking proactive evaluations before a problem strikes can lower the applicable penalty range…”

Lastly, the Guide expressly recommends that risk-based due diligence be performed, particularly on third parties. Some guiding principles to follow:

• Understand the qualifications and associations of third-party partners;

• Assess the business rationale for including the third party in the transactions.

• Develop a system of ongoing monitoring of third parties and third-party relationships.

The DOJ and SEC have, in this new Guide, compiled a useful and reassuring manual for FCPA compliance. Summing up the authorities’ approach to measuring the adequacy of companies’ compliance programs, the Guide explains,

“In the end, if designed carefully, implemented earnestly, and enforced fairly, a company’s compliance program—no matter how large or small the organization—will allow the company generally to prevent violations, detect those that do occur, and remediate them promptly and appropriately.”

Bribe payments by Scottish oil and gas company result in USD 8.9 penalty Reply

Recent Enforcement Developments

Scottish oil and gas services company agrees to civil settlement. On 23 November 2012, Abbot Group Ltd. agreed to a civil settlement of GBP 5.6 million (USD 8.9 million) with the Crown Office and Procurator Fiscal Service. The penalty, which will be invested in programs to foster youth employability, healthy lifestyles, and reduced recidivism among Scottish youth, represents the profit obtained from a 2006 contract between an overseas subsidiary of Abbot and an unidentified oil and gas company, resulting in improper payments by Abbot in 2007.  The authorities did not disclose the location or the identity of the individuals and subsidiaries involved, pending a criminal investigation of the transaction. This is the first instance of a Scottish company entering into such an agreement under the Proceeds of Crime Act.  The complete Compendium summary for this case may be accessed here.