ANALYSIS-Companies could get caught in Asia as corruption rules tighten
By Rachel Armstrong
SINGAPORE, Jan 20 (Reuters) – Multinational firms trying to get a bigger piece of the Asia growth story face a rising risk of becoming embroiled in corruption scandals unless they enforce stricter compliance norms and new regulations.
The region may have moved centre stage in many companies’ growth strategies as developed economies struggle but firms are also scrutinising investment projects even more and stepping up due diligence before jumping into new joint ventures and M&A.
The United States has ramped up its enforcement of the Foreign Corrupt Practices Act (FCPA), while the UK’s tough new Bribery Act comes on stream in April.
“There is an awful lot happening in the region when it comes to anti-corruption and multinational companies, wherever they’re headquartered are having to do a big review of their compliance procedures” said Kelly Austin, a partner at law firm Gibson Dunn in Hong Kong.
Avoiding corruption in Asia is notoriously tricky given the woeful record many countries have when it comes to tackling bribery. In Transparency International’s league table of the least corrupt countries, China comes in at 78 and India at 87 while Indonesia and Vietnam are languishing at 110 and 116 respectively out of 178.
Last year, a record number of enforcement actions were brought under the United States’ Foreign and Corrupt Practices Act, which bans payments of bribes to foreign officials.
A big chunk of those 74 cases involved Asia with Alcatel Lucent , the latest big name to get caught up. It agreed to pay $137 million last year to settle charges it paid bribes to foreign officials in a number of Asian and Latin American countries.
This step up in enforcement was one factor that prompted law firm Kobre & Kim to open a Hong Kong office last November specialising purely in U.S. litigation – the first of its kind in the city.
“There is definitely a lot of concern in the market place – more intense in Asia than in other areas,” said William McGovern, the former Morgan Stanley lawyer who heads the office.
A typical case for him tends to involve U.S. firms under competitive pressure to find a foothold in the Chinese market who get caught in a gift-giving or bribery scandal with a public official.
“U.S. government prosecutors have demonstrated that they expect companies operating in China to adhere to U.S. standards despite the pull of Chinese business norms,” he said.
This sort of cases is set to increase given the United States’ Securities and Exchange Commission has recently opened an FCPA enforcement unit in San Francisco specialising in Asia and California.
FCPA ON STEROIDS
But even for companies well-established in Asia with an FCPA-compliance programme in place, there’s a new rule looming that is forcing many of them to review their control procedures.
The UK’s new Bribery Act comes into effect in April, applying to any company with operations in Britain, even if the bulk of its business is done elsewhere.
Dubbed the “FCPA on steroids”, it goes further than prohibiting bribery payments to foreign officials. It criminalises bribes between private businessmen — meaning lavish examples of corporate hospitality are likely to come under scrutiny — and bans the payment of facilitation payments.
“The new law is incredibly tough – the initial response when we advise clients about it is disbelief,” said Wilson Ang, a dispute resolution lawyer at Norton Rose in Singapore.
“We’ve had to approach most of our clients here in Asia as they just assume that it’s a UK bit of legislation so won’t apply to them, but it’s very far-reaching.”
Staying clear of these types of bribery cases in Asia is notoriously tricky.
Facilitation payments — small sums of money used to speed up routine procedures such as licensing applications — are common across the region.
‘A NEW CAR EACH YEAR’
A British businessman working for an international firm in Indonesia said he can’t move goods long a road in the country without having to make a series of these payments.
“The operator of a port I have used seemed to be very successful and so I asked him if he had any problems with corrupt officials, and he said ‘no, I give them a new Toyota each every year’,” he said, declining to be identified because of the sensitivity of the issue.
While this is generally seen as a cost of doing business, the businessman says his company is now unlikely to open a new plant in the country because of the payments.
“If you buy a company that has been engaged in improper payments you are to an increasing degree responsible for that — and we’re doing a lot of work on that,” said Gibson Dunn’s Austin.
Until recently, rigidly enforce these rules in Asia was extremely tough. But several developments mean cases are now more likely to drop into law enforcers’ laps.
The whistleblower directive in the Dodd Frank Act entitles individuals who report breaches of the FCPA act to between 10 and 30 percent of any penalty over $1 million.
“This new directive doesn’t just protect whistle blowers, it incentivises and glamorises them,” said Norton Rose’s Ang.
Already there are reports of U.S. law firms posting advertisements on Chinese websites trying to recruit locals working at multinational firms to act as whistleblowers.
“If you look at the amount of money you can potentially receive as a bounty it is substantial — particularly in an Asian context – it could easily be more than a Chinese or an Indian employee could ever hope to make in their entire working life,” said Gibson Dunn’s Austin.
Added to this is an escalation in efforts by Asian governments to clamp down on bribery.
“There’s no doubt that the Chinese authorities are extremely active – the statistics are just overwhelming in terms of domestic corruption prosecutions,” said Simon Clarke, a partner at Allen and Overy in Hong Kong.
And while prosecutors in Asia tend to go after individuals rather than companies, an employee or contractor of a multinational found guilty of bribery will usually provide a clear cut case for other authorities.
(Additional reporting by Benjamin Kang Lim in Beijing and Neil Chatterjee in Indonesia; Editing by Anshuman Daga) ((email@example.com)(+65 68703835)(Reuters Messaging: firstname.lastname@example.org))