Ethics of 'facilitation payments' pit business principles against practicalities in the developing world

02 March 2018 00:00 by James Panichi

Depending on your point of view, they’re either the price of doing business in developing countries or a slippery slope leading straight to bribery and corruption. 

But as politicians around the world revamp their foreign bribery regimes, they can no longer sit on the fence on whether to allow the “facilitation payment” defense under their domestic laws.

The choice is a stark one: should companies doing business in foreign countries be allowed to offer small gratuities to foreign officials simply to get the job done?

It’s a question that Australian lawmakers are now pondering, with a parliamentary committee investigating the country’s framework for punishing companies engaging in foreign bribery expected to take on the vexed issue.

The recommendations of the inquiry into foreign bribery by the Australian Senate’s Economics References Committee won’t be binding, but the report could be a first indication of whether Canberra will join Canada and the UK in banning facilitation payments, or stick to its current policy of allowing the practice.

Either way, the committee will find itself at the center of an international tug-of-war between those who argue such payments are the thin end of the corruption wedge, and those who say that to suggest any connection with bribes totally misunderstands the reality of doing business in developing countries.

“You need to look through the prism of an under-developed African country, rather than that of a modern Western society, to understand the reasons for justifying the use of facilitation payments,” said Bill Turner, the director of the Australia-Africa Minerals & Energy Group.

Australian miners, who have lobbied hard to retain the facilitation payments exemption from foreign bribery laws, say that companies dealing with impoverished officials — some of whom often haven’t been paid — creates the need for practical thinking.

“Facilitation payments are defined as small payments made to ensure the timely delivery of a routine government service to which there is a legal entitlement,” Turner told MLex, adding that the difference between such payments and corruption is clear.

“When the underlying intent of the payment is to influence a public official to break the law, then it becomes an act of bribery,” he said.

People who come down against facilitation payments are “people who have never been involved in trying to operate in these environments, where facilitation payments are part of the business environment,” Turner argues.

That’s not an argument that holds sway with Robert Wyld, who was co-chair of the International Bar Association’s anti-corruption committee when the IBA made submissions to the senate inquiry into foreign bribery, recommending a ban on facilitation payments.

“Such petty payments maintain an acceptance of a culture of acceptable bribes without trying to address more systemic issues, which of course Australian businesses say is not their concern as they just want to engage in profitable business,” said Wyld, who’s now a partner with Johnson Winter & Slattery.

“Yet, these fundamental issues are of concern to the Australian government, as with many other governments, and should be the concern of ethical business,” Wyld told MLex.

“Facilitation payments are bad: they merely promote acceptance of systemic corruption and are invariably misused in practice with proper records a rarity,” he said. “They should be banned.”

No guidance, no records

Under existing Australian foreign bribery laws, companies can use the “facilitation payment” defense to justify giving money to foreign officials.

But to do so, they must prove that the benefit was “minor in value” and “offered for the sole or dominant purpose of expediting or securing performance of a routine government action of a minor nature,” according to the Criminal Code.

The payments must be recorded in detail and the records kept for a period of seven years, in provisions similar to those in place in the US.

The problem is that there’s no legislative or judicial guidance as to what constitutes a payment that is “minor in value.” And although the payments must be recorded for the defense to apply and should appear in the tax returns of a business, according to the Australian Tax Office, that doesn’t always occur.

The reason for this, according to the ATO, is the fear of additional scrutiny. And this lack of documentation is an extra layer of concern.

In December 2017, the Australian government released a draft law that would have amended the foreign bribery framework by introducing a “deferred prosecution” regime that would have allowed companies to defer prosecution for serious financial crime by negotiating an agreement with prosecutors with a range of specified conditions.

The bill also included a new offence of failing to prevent bribery.

But while many observers had expected the proposed legislation to remove the facilitation payment defense, the government remained silent on the issue. The proposed law would still allow what some businesses refer to as “grease payments” to remain both legal and tax deductible. 

That inaction on the part of government saw those wanting to end the practice under Australian laws pin their hopes on the Senate committee’s foreign bribery inquiry that got underway in 2015, lapsed, then recommenced last year.

Gold standard?

Under the UK’s foreign bribery laws — the 2010 Bribery Act — facilitation payments are specifically forbidden. However, companies are unlikely to face prosecution by the country’s Serious Fraud Office for one-off or indiscriminate small payments made to ease the wheels of trade.

However, companies making regular, systemic payments over a sustained period would likely face action.

In the lead-up to the legislation taking effect in 2011, some UK businesses said they would be disadvantaged if they weren’t allowed to make the payments.

But advocacy groups such as the UK arm of Transparency International called the payments “corrosive” and feeding a “culture” of bribery. Small bribes pave the way to bigger bribes, the group said.

The UK’s strong stance prompted Canada to include a provision that phased out its facilitations payment exception as of October 2017, when the country’s parliament amended the Corruption of Foreign Public Officials Act in 2013.

Under the amendments, legislators concluded that “any payment made by a Canadian to a foreign public official to secure or expedite the performance of acts of a routine nature that are within the scope of the official’s duties and functions in order to obtain or retain an advantage in the course of business will not be permitted under Canadian law.”

The US, however, appears unwilling to follow the UK’s cue. Washington allows facilitation payments under the country’s 1977 foreign bribery laws and that’s unlikely to change.

The logic for continuing the payments, according to US observers, remains strong. But there have also been complaints by companies that authorities haven’t given any clear guidance on what constitutes a reasonable facilitation payment.

There have been calls for either the Department of Justice, or DOJ, or the Securities and Exchange Commission, or SEC, to establish a threshold, or at least issue an opinion on the where to draw the line between a facilitation payment and a bribe.

“That’s the type of guidance DOJ has to provide if they’re going to be fair about this,” said Joe Spinelli, the senior managing director of consultancy Kroll, in an interview with MLex.

International confusion

Yet the lack of international agreement on how to view the payments is adding to the confusion.

For example, while the payments aren’t banned under the Organization for Economic Development and Co-Operation’s Anti-Bribery Convention, the OECD Working Group on Bribery encourages governments to “prohibit or discourage” such payments, calling them “corrosive” to economic development and the rule of law.

That position has attracted criticism. “It’s a weakness on the part of the OECD and its Anti-Bribery Convention not to require member countries to ban facilitation payments,” Wyld said.

But the uncertainty has also prompted the internal policies of companies doing business in developing countries to fill the void.

According to Steve Spiegelhalter, a principal in law firm Ernst & Young's fraud investigation and dispute services, most public companies already have good controls in place and have followed the UK in banning facilitation payments.

As a result, employees can only make the payments by calling them something else, creating what Spiegelhalter calls a “books-and-records issue.”

“If an employee circumvents the company’s controls to make those payments, it’s a potential criminal controls circumvention issue for the individual,” he told MLex.

Former prosecutors said that the DOJ doesn’t have much interest in pursuing facilitation payments. This means that the real risk for companies in the US is that the SEC will chase down payments that weren’t accurately documented as a “books and records” violation, or will pursue them under the internal controls provisions of the Foreign Corrupt Practices Act.

When in Rome

Back in Australia, 71 of the country’s top 100 companies have rules forbidding the use of facilitation payments, according to evidence presented to the senate foreign bribery enquiry in August 2017.

At the heart of the concerns in Australian boardrooms lies the fact that facilitation payments — which are essentially small bribes — are rarely, if ever, legal in the country in which they are made.

This raises a simple ethical question: why should a foreigner who is bound by anti-bribery laws at home be able to get away with making such payments without fear of repercussions?

Turner’s argument is that emerging country officials are often not paid for months at a time. Unless that changes, facilitation payments will continue to be part of doing business in these places.

He says there is absolutely no “competitive advantage” for a company that can make the payments. But without the payments, “it makes it incredibly more difficult to operate.”

Yet even the facilitation payments now allowed under Australian law are fraught. Most of the companies that allow them in Asia and Africa are not recording them — and this lack of documentation is often enough for regulators to classify them as bribes.

What’s more, the illegality of the payments under the laws of the country in which they occur could see the local official prosecuted, regardless of the payment’s status under Australian laws.

The senate inquiry is due to publish its report at the end of March. At two public hearings, the inquiry heard a significant amount of evidence on the issue, most of it in favor of abolishing the defense.

While the inquiry’s report is not binding on the government, it will certainly be influential and is likely to feed into the government’s review process. Therefore, it will be interesting to see if facilitation payments feature prominently in the senate’s recommendations.

The government will continue to be on the receiving end of influential lobbying groups that maintain business is unfeasibly difficult in Asia and Africa without these kinds of payments.

But the senate inquiry might be more alert to the tide of world opinion, which holds that grease payments are not acceptable and should be banned.

-Martin Coyle and Ben Lucas in London contributed to this report

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