Incoterms_® and Commercial Contracts

ICC Rules of Conduct on Extortion and Bribery in International Business Transactions and the OECD Convention on Combating Bribery of Foreign Public Officials are key reference points for corporate compliance programs. This chapter describes their evolution and principal requirements.

ICC COMMISSION ON ANTI-CORRUPTION

ICC effort to fight extortion and bribery in international business transactions began in 1975 when it established a committee chaired by Lord Shawcross, a former Attorney General of Great Britain and Nuremberg prosecutor. The committee was established in response to widely publicized corruption scandals, including bribe payments by US companies to government leaders in Japan, Italy and the Netherlands. The Shawcross Committee issued a ground-breaking report in 1977, which called for complementary and mutually supportive action by the business community, national governments, and international organizations. In doing so, ICC became the first international organization to take a stand against international corruption.

The Shawcross Report identified self-regulation by international business as a particularly critical step. To provide a basis for corporate action, the Shawcross Committee drafted “Rules of Conduct to Combat Extortion and Bribery”. These have become widely known as ICC Rules. The Committee also recommended [Page10:]an ambitious agenda for action by governments and international organizations, including a United Nations convention outlawing bribery and extortion and a panel of experts to which complaints about bribery and extortion could be submitted.

The Shawcross Report was ahead of its time. Although a UN convention was con- side red by the UN General Assembly in the early 1980s, it became stalemated in an acrimonious North-South debate. Representatives of industrialized countries claimed that corruption was primarily a problem in the developing world. Leaders of developing countries argued that multinational corporations were the real culprits. International financial institutions were unwilling to confront corruption. The US made bribery of foreign officials a crime in 1977, and ICC Rules served as a model for compliance programs of many US companies. No other country prohibited foreign bribery. During the 1980s, corruption faded from view as an international issue.

In the 1990s, a new wave of corruption scandals struck virtually all parts of the world, including Italy, France, Belgium, Japan, South Korea, Indonesia, India, Pakistan, Brazil, Venezuela, Mexico, Nigeria and Zaire. In 1994, ICC established an ad hoc committee chaired by François Vincke, then Secretary General of Petrofina of Belgium, to review and revise the 1977 Report. The Vincke Committee worked for more than a year and produced a report which was adopted by ICC’s Executive Board in March 1996.

The 1996 Report reconfirmed the dual premises of the 1977 Reports: the need for corporate self-regulation based on ICC Rules of Conduct, as well as a comprehensive programme of action by national governments and international organizations. The Vincke Committee revised the Rules of Conduct, making them stricter and more explicit. The recommendations to governments and international organizations were revised to reflect changed conditions and shifted the principal focus for multi- lateral action from the UN to OECD. When the ICC Executive Board approved the1996 Report, it reconstituted the Vincke Committee as a standing Committee on Extortion and Bribery to promote widespread use of ICC Rules of Conduct and adoption of the Report’s recommendations to international organizations and governments.

The Committee became the ICC Commission on Anti-Corruption in 2002. It continues to be chaired by François Vincke. The Commission’s members are designated by ICC national committees; it currently has members from over 30 countries and meets two or three times a year. As part of its work to promote corporate self-regulation, the Commission revised ICC Rules for a third time in 2005. The Commission also publishes this handbook, written mainly by Commission members, to assist companies to develop and manage integrity programs, of which this is the third edition.

The Commission’s international advocacy work has included active participation in the adoption, ratification and monitoring of the OECD Convention and in similar work on the UN Convention Against Corruption (UNCAC). The ICC Commission [Page11:]closely follows the work of the OECD Working Group on Bribery and has made practical proposals for strengthening OECD’s anti-corruption instruments. The Commission welcomed the adoption of UNCAC, because such a comprehensive and universal instrument provides the best prospect for achieving the level global playing field that international business wants. The Commission will continue to deploy its efforts to promote effective monitoring of UNCAC’s provisions by the States Parties. In addition, the Commission follows regional anti-corruption initiatives, including those of the Council of Europe, the European Union, the Organization of American States and the African Union.

Part II of this Chapter discusses ICC Rules of Conduct; Part III covers the OECD Convention; and Part IV describes the ICC Commission’s advocacy work with international organizations and governments.

ICC Rules of Conduct

When the Shawcross Committee developed the 1977 ICC Rules, it wrote on a clean slate. There was no established body of laws and practices. The concept was to set forth basic principles on which companies could build their own codes of conduct. The principal focus was on bribery and extortion “for obtaining and retaining business”. The 1977 Rules got the fundamentals right, covering both active and passive bribery (extortion), bribery of public officials as well as bribery within the private sector. The evolution of ICC Rules since 1977 reflects the progress made by the adoption of international treaties and national laws, and even more importantly the development of corporate experience in combating corruption.

When the 1996 ICC Rules were adopted, the OECD Working Group on Bribery had already published recommendations that foreshadowed the Convention. There was also experience from the US Foreign Corrupt Practices Act (FCPA), particularly by American companies. The most important change made by the 1996 Rules was to prohibit extortion and bribery for any purpose and not only for obtaining or retaining business, thereby covering judicial proceedings, tax matters, environmental and other regulatory cases, as well as legislative proceedings. Other changes made by the1996 Rules were to:

• Broaden the prohibition of bribery to bar not only kickbacks, but also other techniques such as subcontracts and consulting agreements that channel payments to government officials, their relatives or their business associates.
• Sharpen the provision dealing with the use of agents, to provide that payments to agents be limited to “appropriate remuneration for legitimate services” and require companies to take steps to ensure that agents do not pay bribes.
• Make more explicit the financial provisions of the Rules to prohibit the use of “off-the-books” or secret accounts and call for the establishment of independent auditing systems to bring to light any transactions which contravene the Rules.[Page12:]
• Urge boards of directors to establish and maintain proper systems of control, to conduct periodic compliance reviews and to take appropriate action against any director or employee who contravenes the Rules.
• Provide that political contributions may be made only in accordance with applicable law, that all requirements for public disclosure shall be full complied with, and that all such contributions must be reported to senior corporate management.

By the time the 2005 ICC Rules were adopted, the relevant body of anti-corruption law and practice had expanded greatly. The OECD Convention had been adopted by 36 parties, and these countries had also passed laws implementing the Convention’s prohibitions. Many more companies had adopted anti-corruption policies, including large numbers of non-US companies. Other organizations, including Transparency International, the World Economic Forum and the UN Global Compact were promoting and obtaining experience with corporate compliance programs.

• There has been a substantial policy change regarding facilitation payments, from toleration as a “lesser problem” to elimination wherever possible, and strict controls where they cannot be eliminated. This reflects the evolution of thinking in the international business community during the last decade. (Article 6).
• The basic prohibition of bribery and extortion in Section 1 has been expanded to explicitly cover:
  - Public officials at national, local or international levels;
  - Political parties, party officials or candidates;
  - Directors, officers, employees or agents of a private enterprise.
  - The provision dealing with agents has been expanded to cover other intermediaries, such as subcontractors, lawyers and consultants, and to require that agents explicitly agree not to pay bribes (Article 2).
• Anti-bribery provisions are made applicable to joint ventures and outsourcing agreements (Article 3).
• Provisions dealing with political contributions have been made more explicit and made applicable to charitable contributions and sponsorships (Article 4).
• A new provision has been added dealing with gifts, hospitality and expenses (Article 5).
• Procedural rules covering corporate policies have been expanded, including those providing confidential channels for whistle-blowers (Article 7). [Page13:]
• A new provision has been added dealing with the responsibility of boards of directors for anti-corruption compliance, including making resources available, sanctioning violations, taking corrective action and public disclosure.

The evolution of anti-corruption policies and programs is continuing to advance rapidly, and ICC is committed to spearheading corporate efforts to fight all forms of corruption. The Commission will ensure that ICC Rules are correctly aligned with the major international instruments. ICC Rules will also be coordinated, wherever possible, with other programs to promote corporate self-regulation. Therefore, a new edition of ICC Rules and of this handbook is likely to be needed within the next five years.

The OECD convention

The OECD established a Working Group on Bribery in 1989. In the spring of 1994, the OECD Ministerial adopted a Recommendation calling on member states to take “effective measures to deter prevent and combat the bribery of foreign public officials”. The Recommendation proposed half-dozen measures for consideration by member states, including making it a crime to bribe foreign officials and ending tax deductibility of bribes. OECD members were asked to report back on the steps they were prepared to take. It was a modest beginning after five years of deliberations by the OECD’s Working Group, but it got the ball rolling.

The Working Group continued to meet, trying to develop a consensus on how the proposed steps could be turned into specific legislative or regulatory proposals for adoption by member states. Initially, criminalization of bribes seemed too controversial, so attention shifted to the tax deductibility issue. At the spring 1996Ministerial, a new, somewhat convoluted Recommendation was approved. It urged “those Member countries which do not disallow the deductibility of bribes to foreign public officials to re-examine such treatment with the intention of denying this deductibility”. This was firmer than the 1994 Recommendation, but not an unambiguous call for action.

By early 1997, the Working Group had reached a consensus on “Agreed Common Elements of Criminal Legislation and Related Action”. This defined in considerable detail eight key subjects to be covered by national laws criminalizing foreign bribery. Instead of adopting a new Recommendation calling for national legislation embodying the “Agreed Common Elements”, however, the spring 1997 OECD Ministerial decided on a different approach.

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At the urging of France, Germany and Japan, it was decided that criminalization should be dealt with by means of an international convention. This was an unusual move, because the OECD normally uses recommendations and has only rarely used conventions. The US reluctantly concurred, in return for commitments that the convention would be based on the “Agreed Common Elements” and on a firm schedule. This called for completing the drafting of the convention by the end of 1997 and obtaining ratification by national legislatures by the end of 1998. Amazingly, the com- promise worked. The Convention was signed in Paris on 17 December 1997, and sufficient ratifications were secured by 15 December 1998 to meet the Convention’s entry-into-force requirement. As a result, the Convention entered into effect on 15 February 1999.

Moving from the soft recommendation of 1994 to bringing the Convention into effect less than five years later is an outstanding accomplishment. It is a tribute to the remarkable leadership of Professor Dr.Mark Pieth, the Chairman of the OECD Working Group. It also reflects a sea change in public perceptions and political positions on the need to combat international bribery.

As of 2008, the Convention has been signed and ratified, not only by all 30 OECD members, but also by seven countries that are not OECD members, including Argentina, Chile and Brazil. Accession discussions with additional countries are underway.

The Convention is of great strategic importance in the fight against international corruption, because the OECD member states are the home states of most major international corporations. This makes the OECD the ideal forum for curbing the supply side of international corruption. Action by OECD members to prohibit foreign bribery affects a preponderant share of international trade and investment. The Convention was a major breakthrough, because it overcame a previously insurmountable obstacle. After the US passed its Foreign Corrupt Practices Act in 1977, the first law making foreign bribery a crime, it became clear that other countries were unwilling to prohibit foreign bribery without assurance that their major competitors would do so at the same time. Agreement at the OECD cut the Gordian knot.

The Convention provides a solid framework for an effective system to prohibit bribery of foreign officials:

• Both “bribery” and “foreign officials” are broadly defined, as discussed in Chapter Three in this handbook.
• Penalties must be “effective, proportionate and dissuasive”. They must be comparable to those for the bribery of domestic officials, including provisions for prison terms. [Page15:]
• Bribes and “the proceeds of the bribery” are subject to seizure and confiscation. Proceeds are defined as “the profits or other benefits derived by the briber”.
• Accounting and auditing standards are required to prohibit the establishment of off-the-books accounts and other techniques for hiding bribery, as discussed in Chapter Five in this handbook.
• Mutual legal assistance must be provided in connection with criminal investigations and other proceedings. Bank secrecy may not be asserted, and extradition is provided for.

Article 12 of the Convention requires the parties to cooperate in carrying out “a programme of systematic follow-up to monitor and promote the full implementation of this Convention”. This is of critical importance to assure that all parties will be held to high standards in carrying out the Convention’s requirements. The monitoring programme is conducted by the Working Group on Bribery, which drafted the Convention.

Phase 1, evaluating the adequacy of national laws implementing the requirements of the Convention, began in 1999 and was largely completed by the end of 2001, except for new parties. The laws passed by more than 35 countries have been reviewed. The Working Group did an excellent job and did not shrink from criticizing deficiencies in the laws passed by some of the most powerful OECD members. Most of the deficiencies identified by the Working Group have been corrected.

Phase 2, reviewing the adequacy of national enforcement programmes, began in 2001. This is the most critical test of the effectiveness of the Convention. Reviews of enforcement programs are, by their nature, much more complex than reviews of laws, requiring field visits to each of the countries under review. Because of budget constraints, Phase 2 reviews had a slow start, and only four countries were reviewed in the first two years. After agreement in 2003 on an increased budget, with sufficient funding for country visits, the pace of Phase 2 monitoring stepped up to about six per year. As of 2008 almost all parties have been reviewed.

Phase 2 reviews are conducted by a team consisting of representatives from two “lead review” governments, plus staff from the OECD Secretariat, usually about ten people. The lead review governments include one with a similar legal system as the country being reviewed and one with a different legal system. Participation by members of the OECD Secretariat helps ensure consistency. Country visits generally last one week and include meetings with government officials, as well as with representatives of the private sector and civil society. The review team prepares a detailed report, often more than 50 pages long, which is first submitted in draft form to the government under review and then presented for discussion and approval at a meeting of the full Working Group. Governments are expected to report back to the[Page16:]Working Group on the actions taken to correct deficiencies, orally after one year and in writing after two years. When the Working Group is dissatisfied with the adequacy of corrective action, it can order a second country visit, a so-called 2bis review. This has been done several times, including for the UK and Japan.

OECD’s monitoring program has received excellent marks. The reports are extremely thorough and of high professional quality. They are published and are available on the OECD website. The Working Group consults regularly, not only with ICC, but also with its business and trade union advisory groups (BIAC and TUAC) and with Transparency International.

The progress of foreign bribery enforcement by parties to the Convention is still uneven, but is continuing to improve. According to an annual progress report prepared by Transparency International, there was significant enforcement in 16 countries in 2008, compared with 14 in 2007, 12 in 2006, and eight in 2005.

The termination by the UK government in December 2006 of the investigation of bribery involving a major arms order in Saudi Arabia, based on the assertion of over- riding national security interests, was a serious setback for the Convention. The Working Group on Bribery reviewed the UK’s action and expressed its dissatisfaction with the justification provided by the UK Government. In July 2008, the House of Lords decided that the termination was valid under UK law; it refused to rule on the availability of a national security exception under the OECD Convention. This is a matter of continuing controversy. (No explicit national security exception is provided, and the terms of Article 5 arguably preclude such an exception. However, the UK maintained that is has an implicit right to assert that national security interests over- ride the Convention.) This raises important issues for the future of the Convention. Should the UK action serve as a precedent for an unlimited, unilateral right for governments to exercise national security exceptions? Should OECD develop restrictions on the exercise of such restrictions, similar to those contained in other treaties?

With the OECD’s Phase 2 country reviews nearing completion, the Working Group has launched a wide-ranging consultation on its future activities. The ICC Commission has participated in this consultation. Decisions are likely to be taken in 2009. The key issues that the ICC Commission has urged the Working Groups to address include the following:

• Continuation of rigorous monitoring by the Working Group, including country visits, is essential because the goal of the Convention to establish a corruption-free level playing field for international trade and investment has not yet been achieved. The continued monitoring program should have two key objectives: [Page17:]
  -To assure that governments which have taken little or no enforcement action against foreign bribery undertake significant enforcement without further delays.
  -To assure that governments correct deficiencies identified in Phase 2 reviews.
• Because self-regulation by companies is essential for the success of the Convention, the Working Group should promote corporate integrity programs at the international, national and industry sector level, governments should encourage the adoption of effective integrity programs by taking them into account in sentencing guidelines.
• While the prime focus of the Convention is on the supply side of corruption, international business continues to be exposed to widespread extortion by foreign officials. The Working Group should address this issue by promoting cooperative action by member governments to assist their companies in overcoming extortion threats, including joint intervention with governments where such threats are common.
• Two long-recognized inadequacies in the coverage of the Convention need to be addressed:
  -Bribe payments to foreign political parties, party officials and candidates for office;
  -Bribe payments by foreign subsidiaries of companies based in OECD countries.
• On bribery in the private sector, ICC proposes that OECD introduce provisions in its anti-corruption instruments prohibiting private-to-private corruption.
• Facilitation payments were not covered when the Convention was adopted. ICC notes that the thinking of the business community on these payments has changed substantially in recent years, reflecting greater recognition of the damage caused by such payments. Multinational companies, confronted with divergent practices in different countries, increasingly opt for zero tolerance policies. ICC believes that OECD should re-examine its position on facilitation payments, by governments and other means.
• Whistleblower protection: corporations recognize that readily accessible complaint procedures can contribute substantially to uncovering corruption and other economic fraud and make it possible to solve problems at an early stage. Effective protection of whistle-blowers against retaliation is essential. ICC published guidelines on whistleblowing in July 2008 and recommends that OECD urge member governments to provide whistle-blower protection. [Page18:]
• Uncertainties about the issue of national security exceptions need to be resolved. Allowing unlimited, unilateral exceptions risks serious erosion of the Convention. The Working Group should agree to reasonable restrictions on their use, consistent with restrictions on the use of national security exceptions under many other treaties.
• Cooperation between OECD and the monitoring programs of other anti- corruption conventions - including the UN Convention Against Corruption, the GRECO program of the Council of Europe, the Inter-American Convention and the African Union Convention — is important to avoid duplicative monitoring and to build on the experience of different programmes.
• Accession to OECD instruments by major trading countries, including China, India and Russia is important for the achievement of a corruption free level playing field.

Chapters of this handbook cover the substance of most of the foregoing issues. Chapter Three discusses foreign subsidiaries and facilitation payments; Chapter Seven, whistle-blower protection; Chapter Nine, money laundering; Chapter Ten, political party bribery; Chapter Eleven, private sector bribery; Chapter Twelve, preventing extortion.

ICC advocacy programme

From the beginning, the ICC Commission has promoted anti-corruption pro- grams by international organizations and national governments. This reflects the conviction that there is a complementary relationship between corporate self-regulation and the efforts of governments and international organizations. The success of ICC Rules of Conduct requires supportive action by governments and international organizations, just as the success of anti-corruption programs of international organizations and national governments requires support from the business community.

ICC’s most intensive involvement has been with the OECD Convention. It began with efforts to encourage the adoption and ratification of the Convention, participation in monitoring reviews in many countries, and in the consultations to define the ongoing role of the Working Group on Bribery. The scope of this work has been covered in Part III, above.

The second most active priority for the ICC Commission has been the UN Convention Against Corruption (UNCAC). This reflects the recognition that global corruption must be addressed on a global scale. The ICC Commission participated in the Vienna negotiations in 20022003 that led to the adoption of UNCAC and encouraged efforts by ICC national committees to secure its ratification. The Commission also participated in the First and Second Conference of States Parties in Jordan in 2006 and in Bali in 2008. There, ICC pressed for action to establish an[Page19:]UNCAC monitoring mechanism, which has not yet been done. This effort is continuing in anticipation of the Third Conference of States Parties to be held in Qatar in late 2009. The adoption of an effective monitoring program is widely regarded as the key step to transform UNCAC from words to deeds. The scope of ICC work to encourage national implementation of UNCAC provisions important to the business community can be expected to expand substantially.

The ICC Commission has also worked with the World Bank, urging the Bank to use its lending programs to promote more transparent government procurement, including requiring bidders on Bank-financed programs to adopt ICC Rules and to disclose payments to agents.

The Commission is also cooperating closely with other organizations engaged in anti-corruption work, for example working with Transparency International, the World Economic Forum and the UN Global Compact to promote corporate integrity programs. An important objective has been to promote consistent standards and to learn from each other’s experience.

Fritz Heimann is Vice-Chair of the ICC Commission on Anti-Corruption. He is also the author of Chapters 2, 3 and 14 in this handbook.

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