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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
by François Vincke
RELEVANT PROVISIONS IN THE ICC RULES AND IN INTERNATIONAL INSTRUMENTS
ICC Rules of Conduct of 2005 encompass all forms of bribery, both public and pri- vate and, in Article 1, the Rules specifically refer to private-to-private corruption:
“Enterprises should prohibit bribery and extortion at all times and in any form, whether direct or indirect, including through agents and other intermediaries:
[...]a director, officer, employee or agent of a private enterprise in order to obtain or retain a business or other improper advantage[...]
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Article 21 of UNCAC contains a discretionary provision on “Bribery in the private sector”:
“Each State Party shall consider adopting such legislative and other measures as may be necessary to establish as criminal offences, when committed intentionally in the course of economic, financial or commercial activities:
Article 22 of the UNCAC Convention is another discretionary provision, which covers the embezzlement of property in the private sector.
Article 7 of the Council of Europe Criminal Law Convention on Corruption crimi- nalizes “active bribery in the private sector” in the following terms:
“Each Party shall adopt such legislative and other measures as may be necessary to establish as criminal offences under its domestic law, when committed intentionally, in the course of business activity, the promising, offering or giving, directly or indirectly, of any undue advantage to any persons who direct or work for, in any capacity, private sec- tor entities, for themselves or for anyone else, for them to act, or refrain from acting, in breach of their duties.”
Article 8 of the same Convention covers “passive corruption in the private sector”:
“Each Party shall adopt such legislative and other measures as may benecessary to establish as criminal offences under its domestic law, when committed intentionally, in the course of business activity, the request or receipt, directly or indirectly, by any persons who direct or work for, in any capacity, private sector entities, of any undue advantage or the promise thereof for themselves or for anyone else, or the acceptance of an offer or a promise of such an advantage, to act or refrain from acting in breach of their duties.”
Article 2 of the Framework Decision of the Council of the European Union of 22 July 2003 requires the member states of the European Union to criminalize both active and passive corruption in the private sector. The deadline for transposition of the Decision’s provisions into national law was 22 July 2005.[Page159:]
“Member States shall take the necessary measures to ensure that the following intentional conduct constitutes a criminal offence, when carried out in the course of business activities:
Article 1 of the same Framework Decision defines “breach of duty” in the following way:
“‘Breach of duty’ shall be understood in accordance with national law. The concept of breach of duty in national law should cover as a minimum any dis- loyal behaviour constituting a breach of a statutory duty, or, as the case may be, a breach of professional regulations or instructions, which apply within the business of a person who in any capacity directs or works for a private sec- tor entity.”
The African Union Convention on Preventing and Combating Corruption of 11 July 2003 also contains a provision concerning establishing active and passive private sector corruption as an offence.
The Introduction to the ICC Rules makes it clear that bribery is an offence against open competition. “The International Chamber of Commerce (ICC) has always been at the forefront of the drive for integrity in business life, because only a corruption- free system makes it possible for all participants to compete on a level playing field.” The Introduction also stresses the importance of fighting private-to-private corruption: “ICC has [...] insisted on the need to confront private-to-private corruption (corruption between private entities), as this form of bribery also distorts competition and can no longer be ignored in light of increasing moves to privatization as well as the blurring of lines between the private sector and the public sector.”
The OECD Convention is specifically aimed at the bribery of foreign public offi- cials and does not deal with private bribery. However, private corruption is a subject of OECD concern. The OECD has placed the matter on its program of future work and has entrusted the ICC Commission on Anti-Corruption with the important task of making concrete proposals in this field. As a result, ICC, with the help of the Max Planck Institute of Freiburg, Germany, has performed considerable work to obtain a better understanding of private sector bribery and to compare the various regimes[Page160:] in a number of countries, with a view to defining the best possible options to com- bat private-to-private bribery.
Private corruption is the subject of sanctions in many jurisdictions, be they criminal, civil or administrative. Nevertheless, as the study discloses, prosecutors rarely start investigations or initiate prosecutions against private sector bribery, probably preferring to direct all of their energy against the bribery of public officials. ICC has, in recent years, made specific proposals to the OECD with a view to including pro- visions prohibiting private sector corruption in its instruments.
The Issues
Introduction
Not surprisingly, a chapter on private-to-private corruption does not come at the beginning of a handbook on international corporate integrity. Indeed, this form of bribery is not the first that comes to mind when one discusses corporate integrity. Corruption is first seen as an illegal effort to influence civil servants, political authoities or political parties – to “buy” a favourable decision from persons holding a pub- lic office or having political influence. This practice is almost universally condemned: it is considered to be intolerable that those entrusted with public responsibilities in the community would “sell” their independent judgment for money or some other consideration.
Private corruption, on the other hand, is directed to private individuals entrust- ed with the furtherance of private interests. This form of corruption, though considered illegitimate, does not generally meet with the same censure in the public eye as the corruption of public officials.
Why is this the case? Perhaps it is because the public views the decision-making power of public authorities and private companies in different ways. Judge Noonan puts it this way: “It is beyond debate that officials of the government are relied upon to act for the public interest, not their own enrichment. When they take bribes they divide their loyalty … The […] resultant conflict of interest is always a dilution of loyalty, always a betrayal of trust … [This] trust comes with the office. A person is no mere power holder but an officer of government because he is invested with this trust” (John T. Noonan, Jr., Bribes, The Intellectual History of a Moral Idea, University of California Press, 1984, p.704).
Generally speaking, the expectations of society vis-à-vis corporate employees, managers and executives is different. These individuals are not seen to be entrusted with the responsibility “to act selflessly for the public good”. They are supposed to act for the good of their corporations - and that good might be, but does not always have to be, identical with the common good - and in accordance with the instruc- tions of their superiors. When managers and employees perform their corporate[Page161:]tasks, the common view is that they are pursuing the enrichment of their corporations and thereby contributing to the promotion of their own careers. They are allowed, and even encouraged, to pursue both these aims, as long as they avoid any conflict of interests between corporate and individual aims.
Corporate responsibility and the golden parachute
“It’s no secret that CEOs have been raking in millions of dollars in salaries, stock options, retirement benefits, and perks like country club memberships and private jet use at a rate that far outpaces the growth of rank-and-file workers’ wages. What’s more, even when their companies don’t perform well or when the top dog gets the boot, the CEO still gets out with a golden parachute worth millions in severance pay, retirement benefits, stock options, and other benefits.
Ordinary people have been crushed by the deepening housing crisis …2,203,295: Number of foreclosures reported in 2007 … 12 months: Number of consecutive months of declining house prices, as of December 2007.
…While CEOs of the companies that led us down this path have been let go with golden parachutes.
Countrywide’s founder and CEO Angelo R. Mozilo
$704 million: Countrywide Financial Corp. net loss in 2007. 11,000: Number of workers Countrywide laid off between July, 2007, and January 29, 2008.
$37.5 million: Approximate value of cash severance payments, consult- ing fees, and perquisites (including private airplane use) that Angelo Mozilo, founder and CEO of Countrywide, gave up after Countrywide’s merger with Bank of America.
$23.8 million: Estimated value of Mozilo’s company retirement plan in December 2006, the last year for which data are available. Mozilo did not forego these benefits.
Merrill Lynch’s former Chairman and CEO E. Stanley O’Neal (ret. Oct. 30, 2007)
$161.5 million: Value of securities and retirement benefits that Stanley O’Neal walked away with from Merrill Lynch when he retired. O’Neal did not receive a traditional severance payment.
$7.8 billion: Merrill Lynch net loss for all of 2007.
Citigroup’s former Chairman and CEO Charles Prince (ret. Nov. 4, 2007)
$17.4 billion: Citigroup write-downs on subprime related direct exp sures in 2007. $9.83 billion: Citigroup’s 2007 fourth-quarter loss. $40 mil- lion: Approximate value of Prince’s retirement package, shares, and options in Citi stock upon his retirement in November, 2007.”
(Center for American Progress, 27 February 2008)
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Still, the actions of corporate personnel, while not directed against the public interest, are not always identical with it. Their loyalty, therefore, is essentially a corporate loyalty. But one has to consider that this corporate loyalty will comprise obligations towards a large number of people – not only the management, staff and workforce of the company, but also, shareholders, who may be dependent on the corporation for their retirement income.
Retirees and the 2008 financial crisis
An article in the 23 September 2008 edition of the New York Times pointed up the severe consequences for American retirees from the autumn 2008 financial crisis in which major banks and insurance companies failed because of risky investments. In part, the article read:
“Older Americans with investments are among the hardest hit by the tur- moil in the financial markets and have the least opportunity to recover.
… ‘There’s a terrified older population out there,’ said Alicia H. Munnell, director of the Center for Retirement Research at Boston College. ‘If you’re 45 and the market goes down, it bothers you, but it comes back. But if you’re retired or about to retire, you might have to sell your assets before they have a chance to recover … .’
For older people, there is no upside to the distress. ‘They’ve got to adjust their expectations of retirement,’ said Martin Baily, a senior fellow at the Brookings Institution. ‘The market will recover, but you won’t.’”
Directors, executives and employees have to act in accordance with their professional duties, while companies have to be sensitive to the implications of corporate social responsibility. A corporation must take into account the legitimate expectations from an increasingly large number of other parties on societal, ethical and environmental issues. The corporate community has to become aware that a failure within the corporate system often will have ripple effects beyond the company.
During the years 2007 and 2008, one has witnessed how risky corporate practices can have catastrophic consequences for the world economy. Prestigious financial and insurance institutions had to be rescued, many banks saw their liquidity position weakened or went bankrupt, huge amounts of shareholders money disappeared, employment was slashed, credit became rare and the general economy slowed down. Certain commentators expressed doubt about the capacity of private enter- prise to organize itself properly. Irresponsible lending practices of many financial organizations during the property boom (the “subprime” scandal) linked to the use of sophisticated derivatives, such as CDOs, showed how deeply corporate mismanagement can affect people’s prosperity and society’s well being. The failure by corporate executives and managers to perform their professional duties diligently, the taking of badly evaluated risks out of sheer greed, the lack of transparency about such risks and the absence of adequate overview and control systems have caused considerable damage to the world community.
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Conflicts of interest in the financial sector
The accounting and financial scandals, which, in the 1990s, battered corporate America and the rest of the world, not only had the effect of stimulating new over- sight legislation in the United States and elsewhere – and new stock exchange rules to prevent conflicts of interests from occurring again – they also revealed how corporate trust can be betrayed by private individuals.
In the matter of initial public offerings (IPOs), the limits of corporate trust were difficult to define and easy to transgress. Certain top executives clearly gave a narrow interpretation to their duties to their corporation and the general public.
Specifically, many investment bankers managing IPOs provided lucrative rights to buy IPO shares to top executives of companies whose business the bankers wanted to obtain or retain. This resulted in an immediate profit for these executives when they resold the stock, because the offering price was set below the market price, which typically rose sharply after the offering date. This practice had several questionable consequences. The executives who received the profits usually did not report the favours they received to their own board of directors. Therefore, the board was in no position to scrutinize whether future business relationships with the investment bankers were influenced by these favours. It has also been argued that the investment bankers abused their duty to their IPO clients, to maximize the proceeds from the offering, by the favours provided to the bankers’ other clients. In addition, these transactions were not reported to other investors in the IPO.
In these and other instances of private corruption, the recipient accepts the advantage granted to him by a person from outside the company, without informing the corporate bodies or persons (the board of directors, the supervisory board, the executive committee or the immediate supervisor). In doing so, the recipient does not act for the common corporate good – and certainly not in the public interest. This is a clear conflict of interest.
Another conflict of interest was uncovered when it was revealed that stock analysts affiliated with some investment banks were pressured by managers to produce favourable research on companies with which the banks did substantial business. In some cases, analysts published reports inflating a company’s prospects, while with- in the bank they were downgrading their published recommendations. Shareholders and the general public were deceived, market values suffered and confidence in the financial system was undermined.
Different phenomena, same condemnation?
Corrupt practices within and between enterprises are unacceptable. In an impressive number of jurisdictions (such as Austria, Denmark, France, Germany, the Netherlands, Switzerland, the United Kingdom and most states of the United States), private corruption has already been condemned, and laws of a civil or criminal nature provide for appropriate sanctions, but, as noted above, enforcement cases[Page164:]are still relatively rare. In other jurisdictions, however, private corruption is a matter to be resolved between the employer and employee or between enterprises. In these latter jurisdictions, no legal intervention is available to cover private-to-private corruption and no judicial action can be brought to bear against it, except that employers can bring breach of trust actions against dishonest employees.
The FBI and corporate fraud
In a speech on 17 April 2008, Federal Bureau of Investigation (“FBI”) Director Robert S. Mueller, III, warned white collar criminals that agents are busy at work. Citing an alarming increase in fraud (up by “more than 80 per cent since 2003”), Mueller provided some interesting facts to attendees of the American Bar Association, Litigation Section Annual Conference.
Urging reform to protect shareholders and other relevant parties, Mr Mueller cited the need for independent (and arguably competent and objective) auditors, outside counsel and independent directors.
With the advent of deregulation, privatization and liberalization, large parts of what used to be the public sector have now been devolved to private enterprise. The lines between a state controlled economy and private enterprise have become blurred. Nationalized enterprises, such as public utilities, are now quoted on the stock exchange; public services companies, such as postal services, are subject to market economy rules; free competition has become the general rule and state monopolies are being dismantled. The distinction between public and private economy has become either purely artificial or only ideological. ICC approves of this evolution, as it corresponds to ICC’s support for a more open and free world economy.
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The transition to an economic system based on market values – rather than one based on state ownership – had been demanded by the world business community. But, as events in 2008 have demonstrated, a free market still requires a framework of workable regulatory rules. Morever, this development does not mean that large sectors of the economy, which were formerly subject to criminal laws on corruption, should now, as private enterprises, benefit from immunity.
Inversion of the roles
There is probably no better definition of private-to-private corruption than the one given by the late French philosopher Alain Etchegoyen, (“Le corrupteuret le corrompu”, Paris, 1995). Etchegoyen takes the example of a vendor of goods who wants to sell his products to a corporation and uses bribery as “a selling argument”. He offers his products for sale to a purchasing manager, but by introducing corruption into what would otherwise be an arms’ length transaction, he indicates his willing- ness to “buy” the decision of the purchaser of the goods. The latter is supposed to only consider buying the products offered, but in fact he offers his decision-making power to the corruptor.
In effect, the buyer becomes a seller and the seller a buyer. The organizational structure of the company is distorted, since the decision-making power is diverted from within the company to an outsider. The corrupted executive or manager abdicates his powers and abandons his freedom of judgment in return for money (or some other consideration). There is a significant risk that purchases will be made at overstated prices (in order to recover the bribes) and under unfavourable conditions, and that the products sold will not be of the optimal, or even the required, quality.
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Some examples
In all of these cases, open, fair and transparent competition among potential par- ties was rendered impossible. Candidates with better offers or lower prices were out- manoeuvred by others using non-transparent methods. The efforts and resources spent to establish complex and costly bidding documents were wasted. The trust of bona fide bidders in an open bidding system was betrayed. The flow of money resulting from the giving and receiving of private bribes was not accounted for, nor was it recorded in the company accounts.
The same occurs when an employee or an executive, in exchange for money, reveals corporate secrets or shares confidential documents. This also results in an inversion of roles and gives the briber an illegitimate position of power in the company. If the data are related to a bidding procedure, the procedure is rigged.
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Why disclosure and transparency matter ?
From the ICC Corporate Governance Guide. The full text is on the ICC website www.iccwbo.org/cg.htm
Corporate governance
The exchange of roles, transfer of functions, diversion of powers to an illegitimate outsider – all run counter to the most elementary teachings of sound corporate governance. The corporate governance theories, which are of American and British origin, have, in the last decade, contributed to new thinking about the conduct of corporate affairs. In particular, they have helped re-define the respective powers within a corporation; re-determine the roles of the shareholders, directors and executives; and impose higher standards of accountability.
Each part of the corporate system is supposed to act to achieve the corporation’s interest, and to optimize the shareholder value. The abuse of powers, misuse of corporate funds or assets, creation of conflicts of interests or confusion of roles are all inimical to a proper division of powers in the corporation, and contradict the[Page168:]basic rule that the shareholders’ interests must be served first. Shareholders have the right to a fair return, in addition to full and fair information through transparent accounts. No distribution of profits or transfer of value should be allowed that has not been approved by the shareholders or their duly appointed agents.
Accordingly, private-to-private corruption cannot be tolerated in corporations, because money, assets or value which belong to or are destined for the shareholders are diverted from their legitimate destination, while the power vested in an executive or manager is illegitimately transferred to persons who have no accountability to the corporation.
In addition, given the size of major corporations, the economic damage which can be caused by breaches of trust in the private sector can be just as serious as breaches of trust in the public sector.
The Solutions
The role of corporate codes
Employees, managers and executives should not act against the instructions of their principals or superiors and, above all, their board of directors. But how can they be expected to know, with a reasonable degree of certainty, what the board expects from them? Have they received clear, sufficient and understandable guidelines? When they are in doubt, do they receive the necessary practical guidance? Can they approach someone who, in confidence, will give them explicit advice?
To pose these questions is to prove the need for a well-written corporate code of conduct and a well-established system of compliance (see Chapter Five on Responsibilities of Enterprises). These codes are important tools in the battle against private, as well as public, corruption.
In fact, public corruption is quite well defined in national laws and international treaties. Private corruption, on the other hand – although just as destructive of corporate culture – is not so easily defined. Yet tolerating bribery in dealings with private customers has the same corrosive effect on the moral climate of the bribe-paying company as does the bribery of public officials. In both situations, bribe payments have to be kept secret, and accounting subterfuges, such as misleading book entries, are required. Senior management, corporate lawyers and auditors will be kept in the dark.
If an executive is asked what the difference is between public and private corruption, he may not know the answer. For him, corruption, in whatever form, is a kind of economic fraud that undermines market rules, can destroy the profitability of his enterprise and expose him to severe embarrassment. The subtle nuances between the public service status or the commercial position of the recipient of the bribe will not change his appreciation of the situation a great deal.[Page169:]
Consequently, those responsible for the corporation need to define clear guide- lines in widely disseminated codes of conduct, which forbid any form of corruption. These codes not only help avoid misunderstandings, they can also provide assistance and support to all members of the corporate community. ICC recommends that companies draw up their own codes, consistent with the ICC Rules and tailored to the particular circumstances of their business. Companies should also develop clear policies, guidelines and training programs for implementing and enforcing the provisions.
In codes of conduct, private corruption should be explicitly and openly addressed. A code should define private-to-private corruption and clearly forbid it, preferably by using examples, so that no manager or employee can later claim being unaware of the risks incurred by certain behaviour. Special attention should be given to gifts and entertainment provided to private sector guests or visitors and the precise conditions imposed on them.
In this regard, a corporate code should define the limits for gifts that can be offered and received (see Chapter Three on Prohibiting Bribery and Extortion: Narrowing the problem areas). It should also precisely define (in a dollar, euro or other currency amount) what value a gift can have and address the question of whether such gifts can have value in terms of promoting business relations or whether they should be forbidden altogether, even if they have a very small or nom- inal value. Also relevant in this context is the question of entertainment. Should entertainment be limited to accepted business practices in the country or region concerned, or must it be declined in all circumstances? Should entertainment be accepted only if it can be reciprocated, or is it unacceptable only if it reaches such proportions that it can influence the receiver’s judgment?
Generally, a good test is for employees to ask themselves whether the gifts or entertainment are of a nature that, if disclosed, would be an embarrassment for the receiver or the donor. Indeed, an effective corporate policy would require that all such favours (above a modest amount, to be defined) be disclosed within the corporation.
Codes: the importance of implementation
“Because corporate guidelines are voluntarily applied, critics often dis- miss them as lacking teeth. But what matters is the way they are applied within individual companies. Corporate rules can carry just the same authority for the employees of a company as national laws do for the cit- izens of a country. The key is management commitment” [emphasis added].
Excerpted from an article by Maria Livanos Cattaui, Former Secretary General of ICC, in the magazine World Markets.
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The implications for competition
In combating private-to-private corruption, corporations can make an important contribution to open competition. Rigorous and consistent policies against corruption among enterprises are crucial in this regard. The elimination of advantages granted by one corporation to the executive of another company will restore confidence in the “truth of the market” and ensure that companies transact business on the merits of their goods and services. No bribe should have to be recouped through inflated invoicing, and no sacrifice in quality should be based on unfair bidding procedures. If the free flow of goods and services is based on sound competitive pra tices, this will contribute to the well-being of corporations and the community as a whole. The establishment of clear rules in corporate codes by boards of directors – and their effective implementation – will demonstrate to the members of the enter- prise and to the outside world that these policies are fundamental to the company as well.
Non-profit organizations
Non-profit organizations have the same responsibilities as for-profit companies. In fact, questions of private-to-private corruption in these organizations have been widely publicized. Public interest was first captured some years ago by illicit payments within sports’ organizations, which attracted broad media and public attention.
In the 1990s, the corruption scandal surrounding the International Olympic Committee (IOC), and the payment of bribes to a number of sports figures generat- ed a strong international reaction. Some cities that were candidates for organizing the Olympics provided various advantages (e.g., scholarships and expensive travel arrangements) to certain IOC members in order to “buy” favourable votes for hold- ing the Olympics in their cities.
The reaction against these disclosures was forceful, because expectations sur- rounding the Olympic ideal were very high: the Olympic spirit and the holding of an international sporting event symbolizing international friendship were, in the public mind, associated with the highest standards of behaviour.
Corruption brought an element of disruption destructive of common values. The events in the sporting world vividly demonstrated that corruption is a pervasive phenomenon and that no culture, country or organization (public, private, for profit or non-profit) is exempt from corrupt practices.
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Non-profit bribery: the Abramoff scandal
In a special report on 25 June 2006, The Washington Post reported that documents in the Jack Abramoff investigation shed light on how the lobbyist secretly routed his clients’ funds through tax-exempt organizations with the acquiescence of those in charge. The federal probe brought a string of bribery-related charges and plea deals. Abramoff, a once-powerful lobbyist, was sentenced to five years and ten months in prison on 29 March 2006 after pleading guilty to fraud, tax evasion and conspiracy to bribe public officials in a deal that required him to pro- vide evidence about members of Congress.
Dozens of e-mails revealed that Abramoff and his team considered tax- exempt groups a ready resource in their efforts to influence Congress. In one instance, Abramoff ’s team wanted to send two lawmakers on a trip to the Mississippi Choctaw reservation in 2001, but one congressman’s office had concerns about accepting such a trip from a gaming tribe, so suggested that a non-profit organization, the National Center for Public Policy Research, sponsor the trip. Abramoff apparently viewed the non- profit as a convenient pass-through. Evidence revealed the Center was aware of the scheme.
At the time, the then IRS Commissioner Mark W. Everson said, “One of the most disturbing elements of this whole sordid story is the blatant misuse of charities in a scheme to peddle political influence.” Tax experts said it is impermissible for a tax-exempt organization to act as a pass- through for money destined for private business purposes.
One lesson to be drawn is that non-profit organizations, no less than their corporate counterparts, should have their own codes of conduct and strict compliance programs to implement them. In this instance and others, the non-profit sector could well profit from successful examples provided by their colleagues in business.
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Summary of the ICC Recommendations on private-to-private bribery
The economic and social climate in which corporations operate is constantly changing. Private sector rules, such as the ICC Rules on Extortion and Bribery, and inter- national instruments, such as those emanating from the OECD, the Council of Europe and the European Union, have placed new emphasis on corporate responsibility in the modern age.
The evils of private bribery, long overlooked in international discussions, are now being seen in a new light. Clearly, private bribery has consequences that can be as destructive as those wrought by public corruption. The abdication of responsibility in a corporation, the willingness to place decisions in the hands of outsiders, the consequences of acts not in the interest of shareholders or the community, and distortions of price and competition caused by private bribery all must be forcefully addressed.
Therefore, companies should:
François Vincke is member of the Brussels Bar and Chair of the ICC Commission on Anti-Corruption. He is the author of Chapter 5 in this handbook.