This chapter outlines the basic prohibitions of ICC Rules and the OECD Convention concerning bribery and extortion. It then deals with four important problem areas: facilitation payments; gifts, entertainment and travel expenses; parent company responsibility for foreign subsidiaries; and offset arrangements.

RELEVANT PROVISIONS OF ICC RULES AND THE OECD CONVENTION

Basic definitions and prohibitions

ICC Rules

Article 1 Prohibition of Bribery and Extortion

Enterprises should prohibit bribery and extortion at all times and in any form, whether direct or indirect, including through agents and other intermediaries:

  1. Bribery is the offering, promising, or giving of any undue pecuniary or other advantage to:
  • A public official, at national, local or international level;
  • A political party, party official, or candidate; and
  • A director, officer, employee or agent of a private enterprise;

[Page35:]

  1. Extortion or solicitation is the demanding of a bribe, whether or not coupled with a threat if the demand is refused. “Bribery” as used in the Rules shall include extortion.
  2. Enterprises should not
    (i) kick back any portion of a contract payment to government officials or to employees of the contracting party, or
    (ii) utilize intermediaries such as agents, sub-contractors, consultants or other third parties, to channel payments to government officials, or to employees of the contracting party, or their relatives, friends or business associates”.

This Article is substantially broader than the corresponding provision of the OECD Convention, which deals only with bribery of foreign public officials. Article 1 of ICC Rules covers extortion as well as bribery; corruption in the private sector and the public sector; domestic as well as foreign corruption; bribery of political parties, party officials and candidates, as well as public officials.

The opening sentence of Article 1 makes clear that the prohibition of “direct and indirect” corruption includes agents and other intermediaries. The last sentence amplifies the prohibition of bribery for “other improper advantage” by adding as examples “in connection with regulatory permits, taxation, customs, judicial and legislative proceedings”.

Paragraph b) of Article 1 defines extortion broadly to cover solicitation of a bribe “whether or not coupled with a threat if the demand is refused”.

Paragraph c) further amplifies the broad scope of Article 1 by prohibiting kickbacks of contract payments and the use of intermediaries such as agents, subcontractors or other third parties to channel payments to officials, as well as to their relatives, friends or business associates.

The intent of Article 1 is clear: corporate policies should prohibit all forms of bribery and extortion, regardless of the method used. Companies should build on Article 1 to prohibit the techniques for paying bribes most likely to be used in the industries in which they do business. Continuing vigilance will be required because bribe payers and bribe takers are persistent and innovative. When the more common techniques are barred, they can be expected to develop alternative techniques and new subterfuges. Chapter Four deals in detail with the use of agents, probably the most common technique for transmitting bribes.

[Page36:]

OECD Convention

The OECD Convention is narrower in scope than ICC Rules, being directed only at prohibiting the bribery of foreign public officials. The Convention does not cover domestic bribery, private-to-private bribery or extortion, though the Convention’s preamble recognizes “the role of governments in the prevention of solicitation of bribes from individuals and enterprises in international business transactions”. However, within the Convention’s area of focus, its prohibitions are clear and specific. Both “bribery” and “foreign officials” are broadly defined. Among the key points are the following:

  • Bribery is prohibited “to obtain or retain business or other improper advantage in the conduct of international business” [emphasis added]. Thus, the prohibition applies not only to bribery in the procurement of orders, but also in such areas as regulatory permits, taxation, customs, and judicial and legislative proceedings;
  • Bribery is prohibited regardless of the form it takes: (“any undue pecuniary or other advantage”), or whether the bribe is offered or paid “ directly or through intermediaries”;
  • The breadth of the prohibition is reinforced by Commentary 7, which provides that bribery is prohibited: “irrespective of, inter alia, t h e v a l u e of the advantage, its results, perceptions of local custom, the tolerance of such payments by local authorities, or the alleged necessity of the payment in order to obtain or retain business or other improper advantage”;
  • The foreign officials who may not be bribed are also broadly defined to include “any person holding a legislative, administrative or judicial office ... whether appointed or elected”. Furthermore, “all levels and subdivisions of government, from national to local” are covered. Bribery of officials or agents of international organizations is also barred;
  • The prohibition against bribery also applies to “any person exercising a public function for a foreign country”. This covers the situation where a government delegates a public function to a private organization, for example, the evaluation of bids in public procurement or the collection of customs duties;
  • No bribes may be paid to employees of “public enterprises”. This covers “any enterprise … over which a government … may, directly or indirectly, exercise a dominant influence”. Included are companies in which governments own a majority of the stock or can appoint a majority of the board. (The only exception is for a public enterprise which “operates on a normal commercial basis substantially equivalent to a private enterprise, without preferential subsidies or other privileges”.)

[Page37:]

It should be noted that the definition of bribery of foreign public officials incorporated in national legislation passed by some OECD parties may differ from the language of Article 1 of the Convention. For enforcement purposes, the text of the national laws will be controlling. The OECD monitoring process seeks to ensure that national laws meet the requirements of the Convention and that any deficiencies are corrected.

Problem Areas

Facilitation payments

There has been a substantial evolution in thinking about facilitation payments since the 1990s. The traditional view, tolerating facilitation payments as a necessary evil, was reflected in the 1999 edition of ICC Rules and in the Commentary to the OECD Convention adopted in 1997.

  • The Introduction to ICC Rules (1999) stated that “under current conditions in some parts of the world, an effective programme against extortion and bribery may have to be implemented in stages. The highest priority should be directed to ending large-scale extortion and bribery involving politicians and senior officials … Small payments to low-level officials to expedite routine approvals are not condoned. However, they represent a lesser problem. When extortion and bribery at the top levels are curbed, government leaders can be expected to take steps to clean up petty corruption.”
  • The OECD Convention’s Commentary 9 (1997) provided that small facilitation payments to induce public officials to perform their functions, such as issuing licences or permits, “do not constitute payments made ‘to obtain or retain business or other improper advantage’ … and, accordingly, are also not an offence.” The Commentary, however, referred to facilitation payments as a “corrosive phenomenon” which should be addressed by programmes for good governance, but concludes that criminalization by other countries does not seem practical or effective.

[Page38:]

Resolution on facilitation payments

Adopted by the Transparency International Annual Membership Meeting, Bali, Indonesia, 28 October 2007.

“Facilitation payments are small payments made to secure or expedite the performance of a routine or necessary action to which the payer of the facilitation payment has legal or other entitlement. It has been the long standing policy of TI to oppose the use of facilitation payments and it is now proposed that the Annual Membership Meeting of TI resolve that: Transparency International – its Board of Directors, its National Chapters, its Individual Members, its Advisory Council and the representatives of TI to other organizations, reiterate its opposition to the use of ‘facilitating payments.’ Accordingly, TI will boldly voice its opposition to such payments. It will call on companies to cease making such payments immediately. It will also encourage all of its chapters to join with the Secretariat in campaigning for revisions in international agreements, treaties and conventions that permit ‘facilitating payments’ and it will also advocate, where appropriate, for revisions of national and international laws.”

Changing attitudes

There is still debate about whether exceptions for facilitation payments should be continued. However, the balance has shifted in favour of those who want to eliminate the exception. This reflects the following considerations:

  • The continuation of facilitation exceptions by prominent organizations such as ICC and OECD sends an unacceptable political message to the developing world and undermines Western efforts to promote anti-corruption programmes in developing countries.
  • Facilitation payments are often part of an organized system of extortion, with much of the money collected by low-level officials going to their superiors and politicians. They have a corrosive effect on the integrity of the country’s civil service.
  • Even though individual facilitation payments are small, the cumulative effect of their systematic collection has substantial adverse economic effects and particularly hurts the poor who are least able to meet pervasive demands for payments.
  • On the moral level, it is impossible to distinguish between small payments to low-level officials and large payments to high-level officials.
  • From the corporate compliance standpoint, a “zero tolerance” policy is clear and therefore easier to enforce than a policy that tolerates facilitation payments.[Page39:]
    -The facilitation-payment exception can erode the company’s anti-bribery policy, particularly if the company allows employees in the field to distinguish between permissible facilitation payments and improper bribes.
    -If the company requires headquarters’ approval of facilitation payments, such approval implicates management in payments that may well be illegal where made.
    -Facilitation payments also present troublesome accounting and tax deductibility questions.
  • Succumbing to pressure for facilitation payments can cause future problems.

The company that pays will be marked as a target for further payments, and officials have an incentive to create new obstacles, so that they can be paid off to remove them.

Those wishing to retain an exception for facilitation payments make the following points:

  • Corrupt officials often have intolerable leverage over those who r e f u s e to meet their demands. Where collection of facilitation payments is part of an organized extortion scheme, appealing to higher officials is more likely to result in reprisals than in relief from extortion.
  • Ending demands for facilitation payments will require major reforms in public administration, including living wages for civil service employees and the political will to root out entrenched extortion schemes.
  • Laws prohibiting foreign bribery are unlikely to be an effective tool for combating facilitation payments. The costs of investigating and prosecuting foreign bribery are very high, and prosecutors are unlikely to pursue facilitation payments.
  • Until national governments are prepared to prevent extortion, companies must choose among three unattractive alternatives:
    - Making facilitation payments;
    - Letting agents, such as customs brokers, make facilitation payments;or
    - Not doing business in countries where corruption is endemic, very costly option in countries where a company has already made substantial investments.
  • In countries where petty corruption is a way of life, failure to provide a facilitation exception could undermine the credibility of a corporate anti-bribery policy. Employees may regard a “zero tolerance” policy as a public relations exercise designed for home country consumption, not as a policy they can comply with in a corrupt country.

[Page40:]

New ICC position

In 2005, after reviewing the pros and cons, the ICC adopted the following position:

Article 6 Facilitation payments

  1. Enterprises should not make facilitation payments. In the event that an enterprise determines, after appropriate managerial review, that facilitation payments cannot be eliminated entirely, it should establish controls and procedures to ensure that their use is limited to small payments to low-level officials for routine actions to which the enterprise is entitled.
  2. The need for the continued use of facilitation payments should be reviewed periodically with the objective of eliminating them as soon as possible.” The new Article recognizes that, in the view of the ICC (Commission on Anti-Corruption), the arguments for ending facilitation payments clearly outweigh the arguments for retaining the exception. Where facilitation payments cannot be eliminated entirely, they should be subject to strict corporate controls. Their continued use should be reviewed periodically and they should be eliminated as soon as possible.

OECD position

The OECD Working Group on Bribery is conducting a systematic review of its instruments, which is scheduled for completion in the first half of 2009. Whether to continue the exception for facilitation payments provided by Commentary 9 is under consideration.

Notwithstanding the permissive approach of Commentary 9, at least 12 countries do not provide an exemption for facilitation. These include France, Germany, Italy, Japan, Korea, Mexico and the UK. Facilitation payment exclusions are provided by Australia, Canada, Sweden, Switzerland and the US. A number of countries, including the Netherlands and Norway, leave the treatment of facilitation payments to prosecutorial discretion.

The number of companies adopting a zero tolerance approach is increasing and includes major companies such as BP, Shell and Telekom Austria Group. The UN Convention against Corruption does not provide a facilitation payments exception.

[Page41:]

Proposed guidelines

We offer the following guidelines to companies:

  • The guiding principle should be to eliminate facilitation payments as soon as possible. Companies that are well established in a country, or are providing essential equipment or services, should be in a position to turn down requests for facilitation payments.
  • Whether facilitation payments must be continued should be determined by senior management based on country-by-country reviews. Information should be obtained from knowledgeable local sources, such as commercial attachés and chambers of commerce, and not only from local sales representatives, who may be predisposed in favour of continuing facilitation payments. Even in countries where petty corruption is widespread, there often are government agencies for which facilitation payments are not customary.
  • Companies must provide clear guidance to their employees, indicating under what circumstances facilitation payments may be made. Employees should be informed as to where they can turn for advice in specific cases, including advice on possible alternatives to avoid demands for payments. Situations in which companies could conclude that making facilitation payments is a lesser evil include the following:
    - When there are threats of physical harm to employees or serious damage to company property;
    - When facilitation payments are required to receive essential public services, such as mail, telecommunications, power, water and police protection.
  • A facilitation payment exception should only apply to small payments to low- level employees. It is essential that management controls be in place to assure that the facilitation payment exception does not undermine the company’s anti-bribery policy. Some companies have specified limits for individual payments, as well as limits on the total amount of facilitation payments than can be paid on a project.
  • Companies should work with local business groups, civil society and the media to encourage government reforms to eliminate facilitation payments.

[Page42:]

Gifts, entertainment and travel expenses

ICC Rules

Article 5 Gifts, hospitality and expenses

“Enterprises should establish procedures covering the offer or receipt of gifts, hospitality or expenses in order to ensure that such arrangements (a) are limited to reasonable and bona fide expenditures, and (b) do not improperly affect, or might be deemed to improperly affect, the outcome of a procurement or other business transaction.”

OECD Convention

The OECD Convention does not deal specifically with gifts, entertainment and the reimbursement of travel expenses of government employees. However these can become an issue when they reach a level where allegations can be made that they represent the giving of “any undue pecuniary or other advantage” (to use the OECD language) in order to influence the behaviour of a public official.

Guidelines

Corporate policies should provide guidelines establishing appropriate limits for gifts, entertainment and travel expenses. Decisions should not be left to the unfettered discretion of sales personnel or agents. A readily accessible help desk should provide guidance for specific cases. The following points are pertinent:

  • In determining proper levels for gifts, entertainment and travel expenses, the key is whether the amounts involved are reasonable and whether there is a legitimate business purpose. Covering expenses for a visit to the company’s factories and laboratories would be on the right side of the line. Paying for visits to gambling casinos or reimbursement of shopping expenses of spouses would be on the wrong side of the line.
  • Timing is sensitive. Gifts and entertainment that might be acceptable at other times, could well become questionable if they come at a time when contract awards or other important decisions are about to be made.
  • Government agencies, as well as major companies, are increasingly promulgating regulations and rules defining what gifts, entertainment and travel expenses their officials and employees are allowed to receive from sup- pliers or others. Where such rules exist they should be observed.[Page43:]
  • Where there are no applicable rules, the best test is: how would it look on the front page of a newspaper or on the evening news? A gift that can be accepted in public is likely to be on the right side of the line. Any gift that cannot withstand the light of day should be prohibited.

Bribes versus gifts: one company’s view

“When it comes to distinguishing between bribes and gifts, the perceptions of the donor and recipient often differ. A recipient may believe that what he is receiving is a gift because it in no way binds him to the donor. This applies particularly when he receives a benefit rather than cash. The donor’s intentions, however, might be very different. A gift may become a bribe if it is not declared.

However, there are some useful distinguishing features:

  • Bribes have to be made in secret, as they are neither legally nor morally acceptable;
  • Gifts are generally made openly as a gesture of goodwill or affection;
  • Bribes are often made indirectly through a third party;
  • Gifts are usually made directly;
  • A bribe creates an obligation on the recipient, who becomes sub- ordinate to the donor and who is encouraged to alter his or her behaviour in some way;
  • A gift comes with no such conditions and is intended to identify the d o n o r with the recipient to seal a relationship or friendship.”

Dealing with Bribery and Corruption: A Management Primer, Shell, Second Edition, 2003.

Parent company responsibility for foreign subsidiaries and joint ventures

ICC Rules

Article 7 (d) provides that corporate anti-corruption policies should

“Apply to all controlled subsidiaries, foreign as well as domestic”.

[Page44:]

The credibility of a corporate anti-bribery policy will be compromised if the policy is not applied consistently. Employees are increasingly transferred back and forth between the parent company and foreign subsidiaries. If bribery is tolerated at the subsidiary, employees may not comply with the parent company’s policy when they are transferred to the parent company.

To compete in a global economy, companies find it increasingly necessary to operate in a coordinated way. Particularly on large projects, the parent company and its subsidiaries are likely to work together, utilizing resources from different components. Corporate financial planning and allocation of resources also result in parent company involvement with subsidiaries.

Communication by e-mail among corporate components has become so widespread that it will be increasingly difficult for parent companies to claim that they do not know what their subsidiaries are doing. Even though parent companies differ in the degree of independence with which foreign subsidiaries operate, the overall trend is toward greater integration, particularly on the accounting and financial side.

Bribery scandals involving a foreign subsidiary can seriously damage a company’s reputation for integrity and drive down stock prices. Legal defences based on the corporate separateness of subsidiaries do not overcome the public relations damage: “bad reputation pierces the corporate veil”.

The position taken by ICC Rules is fully consistent with the efforts of the corporate-governance movement to promote greater accountability of corporate boards of directors for actions which could adversely affect a company’s financial results or reputation. Failure to provide adequate supervision has increasingly become a legal charge levelled against directors, CEOs and top officers.

Exercising the parent company’s controlling interest to assure that the subsidiary adopts and enforces the same anti-bribery policies as the parent is an obvious step. Negligent failure to supervise the conduct of subsidiaries has already been used by the US Securities and Exchange Commission (SEC) as a basis for civil penalties. It has been raised in Germany in the Siemens case. This trend is likely to spread to other countries. Prudent companies should anticipate the trend of legal developments and avoid the risk of being overtaken by them.

OECD Convention

The OECD Convention does not expressly address the parent-subsidiary issue. It is one of the “unresolved issues” on which the Working Group on Bribery may take clarifying action as part of their current review of OECD instruments. Several points are pertinent:

[Page45:]

  • Parent companies based in countries which have ratified the Convention cannot use their foreign subsidiaries as conduits for bribing foreign officials. Article 1, paragraph 1, of the Convention prohibits bribery “whether directly or through intermediaries”;
  • Article 1, paragraph 2, goes further and requires that “complicity in, including incitement, aiding and abetting, or authorization of an act of bribery of a foreign official shall be a criminal offence”. This language is sufficiently broad to make extremely dangerous any involvement by the parent in the subsidiary’s bribery scheme;
  • Only in the case of a completely independent act of bribery by a subsidiary can the parent company expect to avoid liability. Even then, failure to supervise subsidiaries may be raised;
  • A subsidiary based in a state that has ratified the Convention is prohibited from paying bribes;
  • Bribes by a subsidiary may be subject to prosecution in the state where the parent is based “when the offence is committed in whole or in part in its territory” (Article 4, paragraph 1). Commentary 25 to the Convention declares that “the territorial basis for jurisdiction should be interpreted broadly, so that an extensive physical connection to the bribery act is not required”;
  • That will also be the case if that state utilizes nationality jurisdiction and if its nationals were involved. This possibility exists when parent companies place their own nationals in responsible positions in their foreign subsidiaries a common practice.

Joint ventures and out-sourcing agreements

ICC Rules

Article 3 Joint ventures and out-sourcing agreements

Enterprises should take measures within their power to ensure that anti- bribery provisions consistent with these Rules of Conduct are accepted by joint-venture partners as applicable to the joint venture and by parties to out-sourcing agreements.

The same considerations discussed above with respect to parent company responsibility for subsidiaries arise in the context of joint ventures and outsourcing agreements. Companies should make sure those joint ventures in which they participate and companies with which they make outsourcing agreements adopt and enforce effective anti- bribery policies. It would be foolhardy to assume that a local partner can be allowed to “do the dirty work” without implicating other joint-venture partners. Company responsibility for preventing corruption by parties to outsourcing agreements follows a trend that has long been recognized in connection with supply chain responsibility for labour standards and human rights.

[Page46:]

Offset Programmes

Offset programmes have become a common element in large international business transactions. They are most frequently used in defence and aerospace projects, but are also used in other projects involving large procurement costs and advanced technology.

From the perspective of the purchaser, often a government agency offsets serve two important objectives: (a) they reduce (“offset”) hard currency requirements, and (b) they provide technology transfers or otherwise strengthen the local economy. Both are legitimate and beneficial to the purchaser.

Offsets can take many different forms. They can be closely related to the equipment being ordered, for example, establishing a local service shops to maintain the equipment or a spare parts manufacturing plant. Purchasers may specify that a fixed percentage of the purchase price must be spent on locally manufactured components and materials. Offsets can be completely unrelated to the contract work. Contractors may be required to buy local products for which they have to find a market in a third country.

From the perspective of the seller, offsets add burdensome and often undesirable complications to the deal. Sellers would prefer to receive the full selling price in euros or dollars, not be committed to onerous local procurement requirements and not be obligated to transfer technology that diminishes future sales. However, the commercial reality is that offsets are frequently a necessary condition for winning orders.

From the perspective of curbing corruption, offsets can involve sellers in complex arrangements where it may be difficult to distinguish between legitimate and improper practices. It is critical to determine the real beneficiary of the offset. The local service shop which must be established should not be owned by the brother of the minister who awarded the contract. The suppliers of locally manufactured components should be chosen through competitive bidding.

The legitimate reasons for offsets are sufficiently compelling to make it unrealistic to expect offsets to disappear. Regulation of offsets through international agreements seems impractical in view of the wide variety of offset arrangements. Given the potential for abuses, it is essential that companies entering into offsets exercise a high level of due diligence with respect to the participating parties. Offset arrangements should be made as transparent as possible. That may be difficult in the case of military projects. There full disclosure by the company to its home country’s government officials may serve as a substitute to public disclosure.

[Page47:]

Gifts, bribes and reporting

In its code of conduct, a major company has this language about invitations, gifts and payments:

“… Employees must not accept gifts and gratuities from suppliers or potential suppliers except for promotional items of limited value (such as inexpensive pens, mugs and calendars that bear the company’s name). The same standards apply to the corporation’s dealings with its customers: [The Company] does not offer gifts and gratuities to employees of customers or potential customers, except for modest items for promotional purposes. All such gifts must be properly reported on expense statements. Business entertainment must also be moderately scaled and clearly intended to facilitate business goals. If, for example, tickets to a sporting or cultural event are offered, then the person offering the tickets must plan to attend the event as well.

As a general guideline, business entertainment in the form of meals and beverages is acceptable, as long as it is modest, infrequent, and as far as possible on a reciprocal basis. ‘Everyone else does it’ is not sufficient justification. If you are having difficulty determining whether a specific gift or entertainment lies within the bounds of acceptable business practice, ask yourself these guiding questions:

  • Is it clearly related to the conduct of business?
  • Is it moderate, reasonable, and in good taste?
  • Would I feel comfortable owning up to the giving or receipt of this gift in front of other customers and suppliers? Other employees? My manager? My family? The media?
  • Am I certain the gift does not violate any law or business regulation?

If you have any concerns or uncertainties, contact your manager or the

[Page48:]

Summary of the ICC Recommendations and OECD Provisions

ICC Rules and the OECD Convention are complementary texts. Even though ICC Rules are broader in scope – applying to private as well as public bribery and to the demand side as well as the supply side of bribery – there is no contradiction between the two documents, and companies should adhere to the principles in both.

The laws implementing the OECD Convention carry the force of national law, while ICC Rules are voluntary and based on self-regulation. There is a need for both approaches. As ICC Rules point out, the “major responsibility” in this field rests with governments, but business also has the responsibility to police itself and to fill in the broad principles of the OECD Convention with specific steps at the company level.

Therefore companies should:

  • Establish policies which adhere to the provisions in ICC Rules prohibiting the taking as well as the paying of bribes;
  • Adhere to the letter and spirit of the broad OECD prohibitions against bribing public officials, whatever form such bribes may take;
  • Exercise vigilance to forestall bribe payers and the bribe takers from developing alternative techniques to g e t around company rules;
  • Eliminate facilitation payments as soon as possible a n d establish clear procedures and limits for employee w h e n facilitation payments may be made;
  • Provide clear guidance to employees with regard to the giving of gifts or entertainment expenses;
  • Establish a consistent anti-bribery policy which will apply to foreign subsidiaries as well as to the parent company.

Fritz Heimann is Vice-Chair of the ICC Commission on Anti-Corruption. Fritz Heimann is also the author of chapters 1, 2 and 14 in this handbook.