Businesses will face corruption temptation, risk amid coronavirus slowdown
30 Mar 2020 12:00 am by Richard Vanderford
Companies face an unprecedented economic downturn amid the Covid-19 pandemic, and with it, unprecedented pressure to stay afloat as revenue dwindles. The reduction of business opportunities, particularly in the hard-hit developing world, will likely see companies turn to bribery to secure cash.
Though the pandemic is still unfolding, the economic figures emerging are stark: a record 3.3 million jobless claims in the US in a week, emergency rate cuts by central banks, trillions of dollars in bailout packages from governments in the world's richest countries. One top Federal Reserve official has speculated that the unemployment rate in the US could hit a staggering 30 percent this year, up from 3.5 percent as recently as last year.
Emerging markets, too, have seen a record outflow of capital recently, at $83 billion, International Monetary Fund Managing Director Kristalina Georgieva said last week. Two of the largest developing economies, China and India, have ordered large numbers indoors, with India taking the until-recently unimaginable step of telling its 1.3 billion people to stay home for weeks.
The desperate times are likely to produce a major compliance challenge, with sales staff eager to cheat to win business, and managers pushed to cut compliance staff to improve the bottom line.
Some companies with business in developing markets have already reported issues. SNC-Lavalin, a large Canadian engineering firm, said Friday that it had withdrawn its previous earnings guidance because of uncertainty created by the outbreak. Its executive leadership will be taking a 20 percent salary reduction. Glencore, a UK-Swiss commodities company, reported some stoppages in business in several countries. Both companies, coincidentally, have previously faced bribery scandals.
Recent experience in the US and UK suggests that despite the panic, rigorous compliance during the crisis will likely pay off when the world returns to normal. Along with antitrust, penalties for foreign corruption are among the largest an organization can face, and regulators are unlikely to accept "Covid made us do it" as an excuse.
Recent bribery actions led by the UK’s Serious Fraud Office have centered on schemes which have arisen at times of vulnerability in high-risk jurisdictions, including China and Angola.
In a recent global settlement, Airbus was hit with a record-breaking penalty of 3.6 billion euros ($4 billion) after UK, US and French prosecutors uncovered massive bribery in multiple countries. Airbus engaged with various intermediaries to divert hundreds of millions of euros to countries including Ghana, Malaysia, Taiwan, Sri Lanka and Indonesia — one of which was referred to by its former chief executive as a “bullshit castle.”
In the US, bribery actions in the last decade have overwhelmingly centered on China, with India, Mexico and Brazil following. The expected economic turmoil seems likely to follow — and intensify — that pattern.
Recent cases have also shown that any political unrest that emerges from the turmoil is likely to lead to corruption.
Venezuela has offered perhaps the most compelling example of the phenomenon. As its currency collapsed, executives at state-owned oil company Petróleos de Venezuela embarked on a scheme to use their access to official foreign exchange rates to embezzle money, ultimately taking more than $1 billion.
The conspiracy wasn't merely local to Venezuela — former Julius Baer managing director Matthias Krull in 2018 pleaded guilty in Miami federal court to helping launder the money, and was subsequently sentenced to 10 years in prison.
In another prominent New York case, former Guinea minister of mines Mahmoud Thiam was found guilty in connection with about $8.5 million in bribes he took from a group of Hong Kong investors. Thiam had returned from New York to his native Guinea after a 2008 coup d'etat and used his position to enrich himself, opening an account in Hong Kong with a French passport to hide his official role.
The examples illustrate a clear, dramatic link between instability and corruption. Not all Covid corruption will feature scheming Swiss bankers or globe-trotting crooked officials, though. Much will be far more banal examples of otherwise upright corporations turning a blind eye to the use of third-party agents.
Third-party agents, though they have come under intense scrutiny, are a common feature in large business transactions. Freed from the banner of the client company, they can operate as a kind of "money goes in, deal comes out" machine. Companies facing hardship will have little incentive in the moment to pry into how exactly the money they gave a consultant for a connection or introduction might have actually been spent.
While various anti-money laundering rules — like ‘know your client’ checks — have begun to support virtual meetings, anti-bribery measures aren’t as easy to track.
Even companies with stringent anti-bribery and financial crime measures may not be sensitive to the pressures they face in international jurisdictions, or could simply turn a blind eye.
Lawrence Hoskins, a UK national recently sentenced in the US for his role in bribes paid by then-employer Alstom, summed up the problem succinctly: it was easier to look away.
"It was simply about performing the role I was tasked with," Hoskins told a judge at his sentencing earlier this month. "Regrettably I became a complacent cog in a big machine."
Hoskins, 69, has been ordered to serve 15 months in prison away from his family in England. Alstom's failure to catch bribery by its executives, or its willingness to turn a blind eye, also cost the company dearly. In 2014, it agreed to pay a then-record $772 million to resolve the US Justice Department case against it. Penalties since then have only gone upward.
The Alstom bribery occurred in a normally functioning economy. The normal pressures of competition and a weak compliance culture ultimately combined in the company's being hit with an enormous penalty.
In what is likely to be a profoundly weak and dislocated economy, with immense pressure on businesses to produce, only strong compliance cultures and teams can save their businesses from similar outcomes. Though the economic crisis is unfolding, it isn't too early for companies and their compliance departments to take measures that could end up saving billions.
FinCEN Files show banks should play greater role in disrupting financial crimes, head of New Zealand's FIU says16 Oct 2020 8:44 am by Ben LucasThe FinCEN Files show that banks and other financial institutions should be playing a greater role in disrupting and preventing financial crimes early on.
24 Sep 2020 4:19 pm by Annie RobertsonThe current legal safeguard for whistleblowers in the UK is "toothless, overly complex and lacks the backing it needs to be effective."
Deloitte executives reading newspaper headlines would be forgiven for finding more to grimace about there than in the multimillion-pound malpractice fine.