No Free Pass
In the arabic-speaking world, it's known as baksheesh. In Italy, bustarella. The Japanese refer to it as wairo, Latin Americans as soborno. In India, they might call it a backhander. Elsewhere it's a little something for the weekend--or, if you care to be straightforward, a bribe.
No matter how you say it, payola isn't pretty. It is, however, part of the universal language of business. And while it's often considered to be a problem that resides only in other, less economically developed nations, the consequences can hit uncomfortably close to home. Consider the long list of counts against Louisiana Congressman William J. Jefferson, who was indicted in June on bribery and racketeering charges, which he denies. Jefferson became the first sitting U.S. lawmaker to be indicted under the Foreign Corrupt Practices Act, or FCPA. Among the charges: that he delivered money to an unnamed "Nigerian Official A."
The FCPA has been around since 1977, but it was seldom enforced in the first 25 years of its existence. Now that's changed, thanks in part to the Sarbanes-Oxley Act and an international anti-bribery convention that went into effect in 1998. The Securities and Exchange Commission and the Department of Justice, which both have jurisdiction over the law, are now aggressively prosecuting individuals like Jefferson as well as U.S. companies and even businesses based abroad. There were 15 reported investigations in 2006, up from eight in 2002, according to Danforth Newcomb, a partner with law firm Shearman & Sterling, who has compiled a digest of FCPA cases. And even the 2002 number far exceeded enforcement levels of the late 1990s, when there was only about one prosecution a year. Dozens more investigations initiated by the SEC and DOJ have never been made public. And companies that haven't been targeted still have had to rethink the way they do business overseas.
The FCPA is broad-ranging and often frustratingly vague. It prohibits American citizens, American companies, and the employees of American companies from making payments to foreign politicians or government officials to secure any improper business advantage. But that's not all; the law applies to all U.S. "persons," which can include any noncitizen who does business with an American company, according to John W. Brooks, senior international counsel at Luce Forward Hamilton & Scripps in San Diego. "For years, U.S. companies thought the only thing they had to do was to make sure that there was a company policy that didn't condone bribery and an internal compliance program to make sure that employees knew what to do and not to do," says Brooks. "Now the government thinks that's not enough."
Fines can range into the tens of millions of dollars, and offending companies are sometimes forced to retain the services of a compliance monitor at their own expense. While public companies are investigated more frequently, private companies aren't immune. In 2005, Micrus Corporation, a medical device maker in Sunnyvale, California, admitted to making more than $105,000 in improper payments to doctors in state-run hospitals in France, Germany, Spain, and Turkey. Micrus, which had uncovered the misdeeds during an internal audit, accepted responsibility for the misconduct, paid a $450,000 fine, and instituted internal controls. The company, now called Micrus Endovascular, has since gone public.
The FCPA is far from clear-cut. For example, you may pay an official extra money to do something he was going to do anyway. In other words, you can pay a customs official to process your import faster but cannot pay to let in something that should be kept out. The trouble is, it can be hard to know whether you're paying to grease the wheels or to improperly influence a decision--and investigators after the fact get to decide which it is. What's more, the FCPA prohibits bribes to government officials, not private individuals; unfortunately, it's not always clear who is a government official and who isn't. That's especially true in China, where many companies are partially state-owned and many private individuals also work for the government.
To be safe, it may seem easier to simply turn over your business dealings in emerging markets to a local partner or distributor who knows the territory. But relationships with third parties are now a source of legal liability. Indeed, it was the activities of its distributors that hurt InVision, a technology company based in Newark, California. InVision had retained distributors and sales agents in China, the Philippines, and Thailand to sell bomb-detection equipment to local airports. According to the complaint filed by the SEC and DOJ, the local distributors gave cash or gifts to officials as part of their sales process and InVision didn't stop them. InVision, which was in the process of being acquired by GE (NYSE:GE) when the misdeeds came to light, settled with the government, paying more than $1 million without admitting or denying guilt. The business now performs rigorous background checks on all third-party relationships, says Timothy Bixler, general counsel of GE Security's Homeland Protection, the unit that absorbed InVision. "We get complaints about how intrusive it is," he says. Some potential business partners are unwilling to participate.
But the company has little choice in the matter. Government prosecutors don't accept the "I didn't know this was happening" defense, says Bruce Casino, who specializes in white-collar criminal defense at the Washington, D.C., law firm Baker Hostetler. If you should have known, you can still be held liable for a business partner's bribe. "You can't protect yourself by just refusing to pay any attention," says Casino.
Sometimes, that means business deals just can't get done. Three years ago, Nam Mokwunye had left his technology job in Boston and returned to his native Nigeria to launch a company called UDC, with the goal of providing wireless broadband access to universities in the West African nation. He was about to sign his first deal, a multimillion-dollar arrangement with what he will refer to only as a public-private entity in Nigeria. Suddenly, everything came to a bewildering halt. "Nothing moved," says Mokwunye. Eventually, he turned to his local business contacts to ask what was happening. The client's representative, he learned, was waiting to hear what his cut would be.
He walked away from the deal. "Had I done it, I would have been probably three years into our business plan by now," he says. Instead, he's in the start-up phase and is working with an incubator at Stanford to gear up again. "When you lose a multimillion-dollar deal, you definitely ask yourself questions: Why am I doing it this way? Why are others getting ahead and I'm not?"