The end of swag?

Rich Thomas and Stefan Theil
July 1, 2002

Until recently, Europeans could pay off foreign officials and write it off as a tax deduction. Now they’re joining a rich-nation front with high hopes of rolling back the global culture of corruption.

Baksheesh. Kiti Kodogo. Swag. Most every language has its vaguely derogatory slang term for bribery. The King James Bible predicted long ago that the “the congregation of hypocrites shall be desolate, and fire shall consume the tabernacles of bribery.” It didn’t say when. Whether delivered in a bag, a brown wrapper or a red envelope, bribery has been accepted for centuries as part of the lamentable human condition. Cultures that outlawed paying bribes did so only at home, while allowing or even encouraging the habit abroad. The puritanical exception was the United States, which banned the “corrupt practice” of bribing foreigners in foreign lands as early as 1977 and has been trying to get the rest of the rich world to pass similar rules of law ever since. Now this long-shot campaign to turn back centuries of grease and greed is gaining unlikely momentum.

Consider: the World Bank is compiling a blacklist of bribers, sending shudders through the international construction companies that feed at its trough. The bank has quietly begun encouraging poor client states to prosecute bribers, and the first big, precedent-setting trial is underway in Maseru, capital of Lesotho. Deeply Christian and proudly straight, this mountainous African kingdom recently tossed one of its own officials in jail for taking $1.1 million in bribes, and is about to close the trial of the first of 12 major Western contractors accused of paying him off. Last week the rich nations of the Organization for Economic Cooperation and Development, having agreed in 1997 to criminalize the practice of paying bribes, met in Geneva to discuss ways to start enforcing a flurry of new laws recently passed by 32 of the 35 member states. “We’re only starting to turn the screws,” says Mark Pieth, the OECD’s chief anti-corruption officer. “Our hope is that in five years we’ll have a situation where in Indonesia, for example, there will be no more bribery, at least not by companies from OECD countries.”

Before you laugh at that bold prophecy (as most world-traveled business people do), consider the novelty of this attack on an ancient problem. The recent history of corruption is littered with fallen, multimillion-dollar bribetakers: Suharto in Indonesia, Roh Tae Woo in South Korea and the late Sani Abacha, whose family last month agreed to return $1 billion of his booty to Nigeria if they could keep $100 million. Most of these strongmen saw their ill-gotten treasure confiscated by a new regime. The OECD idea is to mount a sustained campaign by a united global front against the other side of the bribe: the payers, particularly the executives of multinational corporations. “We’re taking a supply-side approach,” says Pieth. “If we can manage to shut off the faucet of willing bribe payers, then the ability of despots and corrupt officials in, say, Africa, to accept payments and pay off cronies is going to go down as well.”

A more united front is indeed emerging. The view that bribery is the harmless “grease in the wheels” of global capitalism is still widespread in the corporate world, but starting to fade. A growing body of evidence suggests bribery is not a lubricant but a bent wheel steering global trade and investment into corrupt, inefficient hands, and costing both poor countries and multinational corporations billions each year. (The Asian Development Bank estimates that corruption now amounts to as much as 17 percent of GNP in poor countries.) Amid an embarrassing string of scandals, Swiss giant ABB got religion and became an aggressive leader of the movement against bribers. “We don’t even want to discuss whether it’s right or not,” says ABB general counsel Beat Hess. “It’s an issue of risk management and survival. If you tolerate corruption, in the end you’re going to be a prisoner yourself and subject to blackmail.”

The front does not need to be entirely united to have an impact. The top 10 industrial countries (the United States, Germany, France, Canada, Britain, Italy, Japan, South Korea, Belgium and the Netherlands) dominate the most bribe-riddled industries: defense, civilian aircraft, telecommunications systems, oil and gas, heavy construction. Top U.S. prosecutors believe enforcement can improve dramatically even if just a handful of key countries and companies get serious about the new laws. The OECD is now working industry by industry, trying to bring the top corporations together in voluntary agreement to stamp out bribe paying. Pieth brokered the first such meeting last week, bringing together such power-system giants as GE, Siemens, an unnamed Japanese firm or two and ABB at a Swiss villa owned by ABB.

The long, solo fight of the United States to stem the global culture of bribery shows that progress is possible. The U.S. law grew out of the Watergate scandal, in which some of the hush money paid to President Richard Nixon’s break-in artists was traced to corporate slush funds used to pay overseas bribes. Public outrage led to passage of the 1977 Foreign Corrupt Practices Act, which made a quick impression. Today virtually all big U.S. corporations have compliance officers, and many take their anti-corruption mission at least semiseriously. “Chief executives were subject to penalties,” says James Thompson, chairman of the American Chamber of Commerce in Hong Kong. “That caused a lot of companies to tighten up.”

It also unleashed an angry lobbying blitz. American companies complained that while their execs could now land in jail for making payoffs, their European rivals were getting tax deductions for bribes. Strange but true. Before passage of the OECD Anti-Bribery Convention in 1997, 11 of its members, including Britain, France and Germany, openly allowed tax deductions for bribery overseas. “Europeans saw bribes as the only way they could overcome an inherent U.S. competitive advantage resulting from diplomatic and military leverage,” says Peter Eigen, chairman of Transparency International, the anti-corruption watchdog agency in Berlin. “Accordingly, they were tax-deductible, and a culture of corruption evolved.”

The White House under Jimmy Carter began lobbying other rich nations to crack down on bribers, but it made little headway until the arrival of Bill Clinton and his aggressive brand of commercial diplomacy. In 1994, the administration ordered the Central Intelligence Agency to begin collecting information about bribes in international business. By early 1996, U.S. Trade Representative Mickey Kantor was calling for a global crackdown on bribers, saying Washington had uncovered almost 100 cases in which foreign bribes had helped trump U.S. bidders in competition for contracts worth a total of about $45 billion. “We believe this is just the tip of the iceberg,” Kantor said.

Meanwhile the CIA kept digging, compiling what the State Department now calls “significant allegations of bribery by foreign firms in over 400 competitions for international contracts valued at $200 billion” between 1994 and early 2001. The snoops had tallied up bribe-paying companies in 50 countries, which fed the mounting anger in Washington. U.S. diplomats began pressing what they regarded as scandalous CIA revelations on their opposite numbers in Europe. “We did share this information with our European friends,” says Stuart Eizenstat, an author of the Foreign Corrupt Practices Act who became a top Clinton administration official and is still deeply critical of the European record. “We’ve brought 70 enforcement cases and Europe has brought none,” he says.

By the mid-’90s, however, Europe was no longer so indifferent to bribery in foreign lands. The issue was coming home to roost. In the Elf Aquitaine kickback affair, which resulted in jail sentences for former foreign minister Roland Dumas and former Elf chairman Loik Le Floch-Prigent (both free on appeal), the money came from slush funds Elf used in part to bribe foreign heads of state. Those funds dated to Elf’s roots as a state oil company set up by Charles de Gaulle to keep American and British rivals out of France’s domain in Africa. The campaign-funding scandal now shaking German Chancellor Gerhard Schroder’s Social Democrats involves slush from construction companies also named in bribery cases in Africa. “You cannot unleash this monster of corruption outside your borders and expect it to not come back and eat at society at home,” says Eigen. “That’s exactly what’s happening now.”

Europe thus had an incentive to chase down bribers, if only to quiet a mounting backlash at home. “Around 1995 we saw that the issue wasn’t going to disappear, that sooner or later there’d be criminal laws on the books. All of a sudden, the whole environment had changed,” says Hess of ABB. “There was pressure from the World Bank, the OECD, the NGOs, media, investors, analysts, business partners and not least from our own younger employees, who started asking us about business ethics–a question that was unthinkable 10 years ago.”

In response to similar pressures, the World Bank had begun compiling its bribers’ blacklist around 1996. Three years later the bank quietly encouraged prosecutors in Maseru to go after alleged bribers in the $1 billion Lesotho Highlands dam project. The 12 target companies include major players from Germany, France, Britain, Italy and Switzerland. “We are determined to prosecute every single one of them,” says Lesotho Attorney General Fine Maema. “The attitude has always been that Africans are corrupt. But it takes two to tango, and we want rich world corporations and countries to acknowledge their role.”

The landmark Lesotho case illustrates many of the difficulties of prosecuting international corruption, a game typically played through murky middlemen and foreign subsidiaries. All the accused companies have issued vehement denials, saying they had no idea that any part of the large payments they made to middlemen wound up in bank accounts controlled by the Lesotho official responsible for assigning contracts for the Highlands dam project. Acres International of Canada, which faces closing arguments this week, is accused of paying $674,000 to a local agent who passed on roughly 60 percent of that in bribes. An Acres spokesman has said it came as “a shock” to the company that its man in Maseru would be accused of doing anything untoward to get the contract: “We have agents all over the world who do this sort of thing.”

The new crackdown against bribers takes direct aim at the middleman problem. The laws recently passed by OECD members generally make it a crime for a home office to engage in “willful blindness or reckless disregard” of clear evidence that an offshore representative is paying a bribe. “If you have agents or consultants in a country where the standard commission is 5 percent, and your agent says, ‘I need 30 percent,’ we’ll sue you if you pay the 30,” says a U.S. prosecutor. The new rules are also designed to break what U.S. officials call the most common hurdle in international bribery investigations: lack of cooperation from local authorities.

The Americans are urging the emerging enforcement regime to target big bribes only. U.S. law has stirred controversy among OECD allies because it allows “facilitating payments” (informally capped at $500) to minor officials who demand money for routine bureaucratic functions, like visa stamps or residence permits. As long as the service is legal and the company keeps a record of the payments, the United States thinks every nation should allow small-time baksheesh. “We don’t want to waste resources to prosecute people who pay $200 to get a telephone hooked up,” says Peter Clark, a senior Justice Department lawyer who has been enforcing the U.S. law since it was enacted. “This is really not what we’re here to do. We want to stop real bribes.”

That’s not the only budding controversy. Critics say the United States stand against “big fish” is hypocritical, since its record of 70 prosecutions includes very few cases against large corporations and even fewer victories, including a minor fine against IBM in a multimillion-dollar bribery scandal. The blacklist compiled by the World Bank, widely seen as an arm of Washington influence, includes 80 mostly small, little-known companies. Meanwhile, international businessmen still believe Washington uses its superpower diplomatic and military clout to help big U.S. corporations win contracts (survey). The new anti-bribery rules do nothing to address this form of influence, complains Dominique Lamoureux, general secretary of the Thales Group, a major French defense contractor. He says Thales recently lost a Korean contract to an American rival due to “political pressure” from Washington, and still faces insistent bribery demands: “Our own salespeople are going to tell us, ‘You’re crazy, we’re going to lose the contract’.”

All this bodes poorly for an end to bribery. Businessmen tend to doubt this novel crackdown will do much. In Hong Kong, James Thompson says bribery will be around “as long as man is on the face of the earth.” In Zurich, even a convert to the anti-corruption movement like Hess of ABB is guarded: “Corruption has been around for a few thousand years; I don’t think it’ll be gone in five.” He predicts that courts in some countries, like Germany and Switzerland, will start to strictly prosecute foreign bribery, while others (which he doesn’t care to name) will not. Activists and regulators are more optimistic: Jeremy Pope of Transparency International hails the Lesotho case as “the dawn of a new age… If executives see they can be prosecuted, humiliated and jailed, their firms barred from work and their names damaged, they will conclude bribery is not worth it.” Certainly, no one can hope he’s wrong. But it’s worth recalling that the King James Bible predicted as much five centuries ago, and the tabernacle of bribery is still standing.

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