ICC RULES, THE OECD AND THE UN CONVENTION AGAINST CORRUPTION

ICC Rules specifically include a prohibition against extortion. Article 1, entitled “Prohibition of Bribery and Extortion”, states: “Enterprises should prohibit bribery and extortion at all times and in any form, whether direct or indirect, including through agents and other intermediaries.”

The OECD Convention focuses primarily on criminalizing the supply side of bribery. Bribery of foreign public officials is prohibited (punishable under the laws of the home country). However, the Convention does not adequately address the problems arising when companies are confronted with direct or indirect solicitation/extortion of bribes.

The UN Convention (UNCAC) goes further and, in addition, formally criminalizes the demand side (solicitation/extortion) and private-to-private bribery.

  • Article 15 refers to “Bribery of National Public Officials”. Here it is mandatory that national governments criminalize bribery as well as solicitation.
  • Article 16 refers to “Bribery of Foreign Public Officials and makes it mandatory for national governments to criminalize bribery; it is discretionary to criminalize solicitation.

[Page174:]

UNCAC has – as yet – no efficient monitoring process.

In any case, extortion cannot be used to justify or defend bribery. This would encourage the complicity of both sides in corruption and undermine all efforts to eliminate it. OECD Commentary No 7 provides that “the alleged necessity to obtain or retain business is not a defence” against bribery.

In reality, companies still operate in an environment in which bribery – though forbidden – is still prevalent in practice. In many countries the perception is that unless a company bribes its way through the administration, it will never be able to win orders and implement planned contracts, projects and investments.

Extortion – the deafening silence

by Maria Livanos Cattaui, former Secretary General of ICC

“Perhaps some observers have the impression that companies seeking contracts abroad willingly open their pockets and distribute largesse to a range of corrupt foreign officials. However, what happens in the bulk of cases is that companies are either told – or are strongly led to believe

– that unless payoffs are forthcoming, no business will be coming their way. Blatant and discrete extortion is a fact of life, and it is a stain on international commerce.”

Introduction

Corruption/extortion causes competitive disadvantages for honest businesses, unpredictability for investments (especially in new markets) and adds to the costs of doing business.

Businesses have actively supported international efforts to fight bribery. However, a company’s decision to stop bribing is only the first step. It does not change the environment if a company does business where extortion is still prevalent. In fact, even when companies do not allow their executives and employees to bribe, businessmen are often confronted with demands to make payments in order to secure business, obtain a permit or receive official documentation. These demands can come in the form of either blatant or discrete extortion,

In general, large companies having an established market position and companies known for having a strict no-bribery policy are confronted less frequently with extortion or other forms of solicitation (except in large projects where political influence prevails). The companies that suffer most are smaller-scale companies[Page174:]entering new markets. Their smaller structures, fewer resources and recent appearance in the international market make them more vulnerable than larger and more experienced corporations.

Through the adoption of appropriate strategies, companies, both large and small, can reduce the risk of being faced with solicitation or extortion. SMEs especially need the concrete support of their home governments.

Extortion: some real-life examples

  • A small manufacturer of specialized chemicals has sold its product for the last seven years to a giant textile mill in an emerging country. Their new purchasing manager indicates that its competitor had offered substantial gifts and wonders if the company can match these.
  • A company bids in a public tender to build a power plant in a difficult country. Before it bids, it researches local suppliers for the needed construction materials and includes their prices (with a small margin) in its calculations. The company wins the tender, starts construction and then finds that there is virtually no cement available and that there are no import licences issued.
  • Having made an in-depth study of costs, availability of qualified staff, local suppliers etc., a company decides to set up its factory in Country X. When construction comes to an end, it asks the local telephone company for 30 outside lines. One evening one of the telephone company’s staff visits and asks if the company needs these lines in three days, three months or two years…
  • A company has a manufacturing subsidiary in an emerging country. One day an employee of the local power supply company informs the company of impending power cuts. The power company indicates that these might be avoided with a little extra help;
  • A company has finished construction of a plant to produce chemicals. All that remains is to recuperate the 15 per cent retention bond after a successful start-up. A messenger informs the company that it would be advantageous to pay 8 per cent to Mr X to ensure that the start-up runs smoothly and, following this, the protocol confirming the successful start-up will be signed;
  • A businessman from a country rich in first-class raw materials offers a company interesting quantities of them substantially below world market prices. However, the company is asked to pay substantial funds to a Geneva account to assure a second delivery.

[Page176:]

How bribing can lead to extortion

The problem is that once a company starts bribing, it will always be asked for more. It will not only have to pay to obtain contracts or licences or to start up factories, etc., but once local administrators, subcontractors and others in the business and social surroundings find out that the company pays bribes, scores of other people will find (or invent) an excuse to “kindly” ask for “favours”. New artificial barriers will be erected, so that someone can show up to solve the problem. In short, if a company starts bribing at the outset, it will be subject to extortion throughout the years of the project’s operation.

A company should also be prepared for some nasty experiences if it pays one solicitor of bribes but rejects another. It is easy for a disgruntled party to throw metal parts into machines, flatten tyres, put sugar into the tank of a car or delay the delivery of supplies.

Time and again, a “rejected” solicitor of a bribe will produce evidence whether true or false that a company has bribed an official or a private business person of the host country and show this evidence to this company with the intention of blackmailing it (by threatening to inform the press, the public prosecutor, the tax office, for example). Often companies will give in and pay and pay again. This also opens opportunities for blackmail, requests for protection money and longer-term industrial espionage.

Solicitation: the consequences

When faced with solicitation, companies can find themselves facing different predicaments:

  • Solicitation can be made indirectly and implicitly, often via middle men. Companies are often told, or strongly led to believe, that without payment of bribes, their planned business transaction will not be accepted.
  • Often insufficient evidence is available to prove a case of solicitation. Therefore, companies may be reluctant to report incidences of solicitation for fear of facing defamation lawsuits.
  • Extortion is not considered to be a defence against bribery under the relevant international conventions. Therefore, companies that give in to demands for bribes face the threat of criminal prosecution.

When demands for bribes are made in the early stage of business transactions, companies typically try to safeguard their business interests. If they turn to their home government for help, they face a dilemma – they have to guard against reprisals, such as the disqualification of the concerned company from the bidding process. On the other hand, if companies have already made large investments in a project, this renders it more difficult for them to resist extortion at a late stage of the venture.

[Page177:]

A definition of extortion

“Extortion is unlawful exaction of money or property through intimidation or undue exercise of authority. It may include threats of physical harm, criminal prosecution, or public exposure. Some forms of threat, especially those made in writing, are occasionally singled out for separate statutory treatment as blackmail.”

Britannica Concise Encyclopedia

Other difficulties in dealing with solicitation

  • In many countries it is difficult to obtain quick and reliable information about the true costs of obtaining tender documents, licences, etc. Ideally, such information should be provided by the relevant authorities, ministries, etc.)
  • Solicitation is often hard to identify when it is part of an on-going business relationship. A company may be in such a relationship for some time and not be aware that certain payments made in exchange for services rendered may be for the benefit of a public official and constitute a bribe.
  • Invoices from agents may include items for “commissions” or “fees” which can be legitimate payments for services rendered – or may, in some instances, be disguised bribe payments. Accounting procedures aimed at greater transparency often do not detect instances of solicitation, because companies may not always know whether the fees paid are legitimate government requirements (e.g., fees to obtain documentation during a bid- ding process) or payments demanded by officials to improperly influence the outcome of a decision (e.g., fees in exchange for being short-listed or selected in a bidding process). Companies need to be sufficiently diligent to distinguish legitimate payment from the creation of slush funds.
  • Even in countries where there is generally little enforcement of anti-corruption laws, the police and judiciary can be extremely efficient “if they want to get you”.

Public and private extortion – case studies

  • A government official asks for bribes as a condition for granting permits to conduct business. Payments are to be made in cash or by purchasing paintings at excessive prices. In addition, he offers his services to identify potential business partners – for a fee;[Page178:]
  • In a public procurement process, bidders have to pay a “reasonable fee” to obtain copies of necessary documentation. Later, they are asked to pay a substantial amount to be put on the short list and an even greater amount to win the bid;
  • A manager of a supplier asks for a bribe to provide urgently needed materials;
  • Employees organize a network to obtain kickbacks from their company’s suppliers. The purchase prices are increased accordingly;
  • An employee of a big corporation extorts suppliers to pay money into his account and provide travel vouchers for his family; to form another company (with himself as a major shareholder); to give him thousands of shares of a major supplier of his own employer;
  • A company needs formal authorization to obtain export credit insurance for a project close to realization. As this authorization is not dealt with, a middleman offers his services “to solve the problem” for USD 1 million – payable offshore;
  • A company suggests that granting an unsecured loan at favourable terms to a member of an influential family will ensure the unhindered acquisition of a substantial part of an infrastructure company;
  • A machinery company pays low salaries, but provides generous incentives for individual performance. The sales manager has been reproached for poor performance. With a new contract in an emerging market, the frustrated manager pays a large bribe and secures a nice kickback for himself. A competitor learns about this and blackmails the director, who – over the next three years – divulges almost all of the company’s secrets, including technical drawings.

What companies can do on their own

Even in notoriously corrupt societies, there are businessmen doing good business without having ever paid bribes. They have declared from the beginning that their corporate policies and principles forbid them to bribe, and they have kept their word. At the beginning, they were possibly viewed with some curiosity or suspicion by the potential solicitors of bribes, but their position was (mostly) respected. These businessmen promised impeccable quality, timely delivery (unless hindered by bribe solicitors), good, long-term after sales service, spare parts supply, etc. Everyone in the market knew that they were keeping their word, and their refusals to pay bribes were accepted.

Companies can lessen their exposure to solicitation by their own efforts. The following measures can substantially reduce the likelihood of solicitation from government officials and others:

[Page179:]

Before starting to negotiate in a foreign country

Companies should –

  • Do their homework in depth – draw up an in-house ethics or anti- corruption code. The CEO should make public statements to announce the new anti-corruption strategy to the media. Staff and salesmen should be trained in anti-corruption policies and techniques;
  • Communicate to their staff that management knows that without bribes it will take more time to finalize sales and projects, but that the additional time will be largely offset by reduced costs (no bribes) and fewer problems during the life-span of the project. Furthermore, management should be prepared to lose some orders rather than pay bribes;
  • Have staff on the company team who know both the country it is targeting, as well as its national customs, the legal and market situation and the local language;
  • Educate employees and agents (as well as sub-contractors) in the host country, so that they know the laws and company rules. It will be necessary to translate their anti-corruption code into the local language and to insert anti-corruption clauses into employment and agent contracts; it might be necessary to re-formulate the code, so that the company’s local staff interprets it in the same way as headquarters;
  • Pay adequate salaries, especially in delicate sectors. Pay bonuses for the performance of whole teams, rather than individuals. In sectors where the result can only be seen in several years time (extractive industries, plant construction, finance), pay extra bonuses some years down the line to make sure that the responsible team takes the long-term view, rather than just have an interest in a first signature and short-term implementation;
  • Research in depth the background of agents, consultants etc. with whom the company wants to work;
  • Research future business partner(s) in depth, i.e., what is their company history, their personal reputation, the most influential managers in their company, their weak points;
  • Research the government officials who might be relevant to their project. Are there officials higher up the ladder who are known to be “clean”? or, on the contrary – known to be “on the take”;[Page180:]
  • Research the legal situation, i.e., are there anti-corruption laws? Can one sue under these laws? Is there a functioning appeal mechanism to a higher court? Is there a law covering public tender? What is the legal timeframe for bidding? Is there an appeal process and authority against decisions of the tender board? (see Chapter 14 on Public Procurement);
  • Draw conclusions – if the result is not encouraging, and there are no apparent ways around corruption, consider abandoning the project.

After starting to negotiate in a foreign country

Companies should –

  • Communicate a clear “no bribe” policy. In its first negotiation abroad, the company should make it clear that it has a strict policy not to pay bribes or any form of “facilitation payment”. The company may also wish to add that it offers excellent after sales service and that it will inform authorities of the host country about a bribe solicitation;
  • Never let a solicitation (extortion) go unanswered. A company manager or staffer should not give the impression that he will think about the situation and/or refer it to top managers at headquarters;
  • Inform the party with whom the company is negotiating that under their contracts the company is obliged to report any solicitation/extortion attempt to its headquarters and that it will report it to all relevant authorities;
  • Communicate, that in case of solicitation, the solicitor will be sued for violation of local law in the local courts;
  • Keep detailed records of all solicitation/extortion attempts with dates, etc., and later estimate the loss of time and increased costs due to them. When the CEO visits a high-level official in the host country, have him present this list and explain how much extra costs his staff have incurred due to extortion attempts;
  • Insert anti-corruption clauses into all of its letters of intent, contracts, etc.;
  • Provide assistance to subsidiaries in host countries. A company should establish procedures to assist employees with guidance from the head office and from staff whose internal responsibilities include dealing with these issues;
  • Consider regular job rotations for staff in delicate sectors and countries;[Page81:]
  • Establish intra-company help lines in a department that inspires trust (so that staff can discuss delicate situations without the fear of immediate consequences;
  • Not cover up mishaps. When they occur, they should be discussed and lessons should be drawn from them;
  • Make use of anti-corruption agencies, help lines or ombudsmen where they exist in the host country. These sources can be a first assistance point for advice in cases of doubt;
  • Continuously check adherence to the company’s anti-corruption rules;
  • Try to reach an “integrity pact” with other bidders;
  • Seek out organizations – such as national committees of the International Chamber of Commerce, Transparency International and local business organizations to provide help and advice and to coordinate anti-corruption measures with the host country government.

International Investment projects

In many countries it is assumed, that unless a company bribes its way through the administration, it will never be able to implement his proposed investment. However, with the right preparation, an investor can better the situation and strongly reduce the likelihood of solicitation from government officials and others involved in the implementation of its investment.

As mentioned previously, it is important to be clear from the start, that the company has a strict policy not to pay bribes or any other form of “facilitation money”. It will also help to have staff on the company’s team who know the country the company is targeting for its investment and who speak the local language(s); to find (local) allies, who have an interest in the investment.

After the company specialists have made their in-depth research on the target country and region for the investment, as well as on the legal situation and the local actors, the company, at its first meeting may wish to inform its partners about its long-term strategy and show the advantages to their region (increased taxes, training, education, etc.). If necessary, it can inform its partners of the alternative options it has in other countries for the investment.

Local officials will find it difficult to solicit bribes, if they know that the company is not in a hurry, that all of the information on the project may be published, including transaction payments and that the local community will benefit from the project in terms of jobs, training and improvements in the living standards of local people.

[Page182:]

In addition to talking to the relevant officials and politicians, companies should quickly seek help from the local community where they plan to invest. They should visit the local major, the local press, the local priest and all opinion leaders in the community and be prepared to help local inhabitants with their difficulties, to create jobs, to educate job applicants, but never simply to dispense money unless the villagers contribute their share, their physical work. etc. It must remain “their project”.

Local politicians and officials will find it difficult to solicit/extort bribes or reject a project, if they know that the villagers want the project and that the project is good for the region.

Governments and international organizations

Governments, international organizations and various associations can help reduce the likelihood of extortion. When confronted with demands for bribes, companies need a contact person or department to which they can report these cases, find guidance and obtain support for possible action. Confidentiality and discretion must be assured. A contact independent from the prosecution authorities will enhance the business community’s confidence in the reporting system.

Contacts should be established in embassies or consulates abroad. Companies seeking to determine whether a specific transaction could violate anti-bribery laws will find it useful to obtain a prior opinion from a competent body as to the legality of the transaction along the lines of mechanisms set up under the US Foreign Corrupt Practices Act (FCPA).

While the United States – the country with the longest experience of criminalizing bribery of foreign public officials – has established a notification mechanism in cases of solicitation and while other countries (e.g., Bulgaria, Hungary) have laws stating that extortion constitutes a defence, most current governmental actions focus only on the supply side, i.e., the offering of bribes.

At a minimum, governments should establish help lines so that their companies know where to turn in the event they are confronted with extortion. This procedure has worked reasonably well in the United States, and other countries can learn from it. Once help lines are set up, the OECD, as noted earlier, should establish networks to facilitate multilateral intervention.

Before doing business in a delicate environment, companies would do well to establish contact with the commercial counsellor in the home country embassy and explain their project. With regard to large projects, it will also be helpful to inform the ambassador to ask for guidance and the assurance of back-up. These officials may know higher officials in the bureaucracy concerned with the company’s project. In some cases, they may communicate with these officials, endorse the company’s anti-corruption stand and make it clear that they will keep a watchful eye on the project.

[Page183:]

In the case of large, well-connected companies, embassy officials may engage in discussions with the host country’s government to set up procedures and support and to explain their anti-corruption policy. If satisfactory solutions cannot be found, companies should carefully consider whether to do business in that country.

Streamlining regulation

Many instances of solicitation occur in areas of economic activity subject to complex, overlapping and non-transparent regulations. Government efforts to modernize and simplify regulations will be useful. Appeal mechanisms in bidding processes further reduce the risk of decisions being influenced by bribe/extortion payments. National governments should also work in tandem with international organizations to promote principles of good governance.

Raising awareness

The OECD and the signatory countries of UNCAC should do more to raise awareness of the OECD and UNCAC Conventions. An extensive educational process has to be implemented to accomplish that end. Business should be supported in its no-bribe policy by a clear message, directed to trading and investment partners, that the OECD and UNCAC Conventions require governments to criminalize the bribery of foreign public officials; consequently, solicitation will/should be in vain. When discussing the issue of bribery and other forms of corruption, the supply side and the demand side should be addressed publicly to make it clear that neither paying nor demanding bribes will be tolerated.

Furthermore, governments should be made aware that one reason for solicitation is the low salaries of government officials. Streamlining the tax system and raising salaries is a more efficient way to allocate resources and to improve the economy.

International cooperation

The follow-up mechanisms of the international conventions should encompass actions to counter explicit or implicit demands for bribes in close cooperation with business. Collecting data may be difficult, since formal proof will seldom be available and business secrets have to be safeguarded. Therefore, it will be necessary to establish reporting bodies as “filters” that can provide the necessary information in an anonymous and aggregated form. In order to avoid conflicts of interest, these reporting bodies should be separate from entities or individuals having competence in judicial or penal prosecution.

The World Bank, ICF and other multinational donor agencies have established increasingly efficient anti-corruption programmes and departments. They screen projects and establish blacklists of violators.

[Page184:]

Therefore companies should:

  • Prepare for their new business by doing their homework in depth;
  • Demonstrate a quiet, relaxed, but clear strength in their negotiations;
  • Never be in a hurry; never have rigidly fixed dates unless necessary. Many emerging countries do not have the concept of “time is money”;
  • Seek reliable information about the legitimacy of business arrangements from official sources not engaged in penal prosecution;
  • Reduce exposure to solicitation by making clear from the start to counterparts that the company has a strict “no-bribe” policy;
  • Establish procedures to provide employees with guidance when they are faced with blatant or discrete demands for bribes;
  • Depending on local circumstances, inform local business partners that – as a basic policy – the company will respond to requests for extortion by reporting them to higher-level governmental officials or suing in local courts for violation of the local anti-corruption laws;
  • Seek agreements with other bidders on contracts to ensure that competitors also resist instances of extortion or other forms of solicitation (“integrity pacts”);
  • Clearly signal that they may scrap their project(s) if their local counterparts demand facilitation payments (and be prepared to do so) – and openly let counterparts know of options the company has in other countries;
  • Resist paying bribes in all circumstances, not only because it is illegal, morally wrong and a distortion of trade, but also because it can lead to extortion and “requests” for further payments.

Maximilian Burger-Scheidlin is Executive Director, ICC Austria and a member of the ICC Commission on Anti-Corruption.

Thomas Pletscher is Secretary General of ICC Switzerland and Vice-Chair of the ICC Commission on Anti-Corruption.