What is a bribe in 2011?

Enforcement of anti-corruption laws is ramping up worldwide, but the line between gift, gratuity and bribe remains as grey as ever. In fact, you may have already crossed it.

Photo: Hamin Lee

Qasim Sharif had a difficult conversation on June 14, 2005. David Sproule, Canada’s ambassador to Bangladesh, had summoned him to the High Commission in Dhaka to discuss alarming reports appearing in the Asian country’s newspapers. Niko Resources, a Calgary-based oil and gas company for which Sharif was the senior in-country executive, was being accused of bribery, thereby jeopardizing diplomatic relations. Sharif sought to assuage Sproule’s concerns. “These things are done all the time,” he said.

Niko’s situation was grim indeed. That January, its natural gas well in northern Bangladesh had exploded, leaving a huge crater. Flames erupted from the hellish wasteland for weeks. A government investigation quickly concluded that Niko had been negligent, and recommended the company be fined. Energy Minister AKM Mosharraf Hossain ominously vowed to take “necessary steps.” To make matters worse, Niko was in the process of negotiating a crucial agreement that would determine the price at which it sold its gas to the government. Years of relationship-building were in jeopardy.

A company called Bapex, Niko’s partner in Bangladesh, proposed a solution. As part of their joint-venture agreement, Niko was purchasing a $191,000 Toyota Land Cruiser Cygnus for Bapex staff’s use. Bapex suggested Hossain receive the SUV instead. That May, Sharif and another Niko official personally delivered the vehicle to the minister’s house. Sharif thought fences had been successfully mended. “Everything was tapering off,” he later told investigators, “until the car thing hit.” The following month, Dhaka’s newspapers broke stories detailing the bribe. When reporters sought comment from Hossain, they discovered he was in North America—as Niko’s all-expenses-paid guest at an industry conference in Calgary and visiting family in the U.S.

Bribery is readily understood. It means “receiving or offering any undue reward” so as to influence an official’s behaviour “and to incline him to act contrary to his duty and the known rules of honesty and integrity.” This definition comes from Bouvier’s Law Dictionary, published in 1856, and has changed little since. But Sharif, an American citizen with Bangladeshi roots, was right about one thing: bribes were standard practice in Bangladesh. Transparency International, an NGO, each year produces the Corruption Perceptions Index based on surveys of business people, including locals. A score of five or less indicates corruption “pervades all aspects of public life.” In 2005, Bangladesh scored 1.7, tying for last place with Chad. “There was this perception that if you wanted to do a job in Bangladesh but didn’t have the expertise, you could do so by bribery,” says Iftekhar Zaman, executive director of TI’s Bangladesh chapter. “It was a common thing.”

What Sharif missed, however, was a monumental shift in attitudes. During the preceding decade, developed countries introduced a slew of laws prohibiting bribery abroad. Although these new rules were for years rarely enforced, that too was about to change. Not only has the ensuing global crackdown made outright bribes dangerous, but it’s redefining what is appropriate during the conduct of modern business relations. Things that were once “done all the time” are increasingly hazardous, no matter where in the world you are. Many are far subtler than Sharif’s offence.

In September 1987, two friends, Kenneth Greenwood and John Tsinosis, were watching a baseball game on Greenwood’s TV. At some point, Tsinosis remarked that he couldn’t afford the cable service. After he’d left, Greenwood’s wife suggested the couple buy their friend a subscription as a gift. When he learned of the plan, Tsinosis resisted: after all, he worked for the Ontario government prosecuting traffic offences, while Greenwood ran a firm that defended people so charged. That’s how they met. But Tsinosis relented, and Greenwood and his firm paid Tsinosis’s cable bills for the next seven months, totalling $225.

Was this offside? Greenwood and Tsinosis found out after being charged under a section of the Criminal Code that prohibits paying “a commission or reward to or confer[ring] an advantage or benefit of any kind on an employee or official of the govern ment with which [the person] deals.” Both men testified that they considered the subscription a gift between friends. The judge accepted that and acquitted both men, a verdict upheld on appeal. But in its decision, Ontario’s Court of Appeal had to ponder what constitutes a “benefit of any kind.” Such broad language seemed to capture not only a cable subscription but a cup of coffee. The court concluded that such an interpretation would stretch the law beyond all sensible limit. “There must be at least a rough equivalence between what judges say is criminal and what the community regards as morally blameworthy,” it reasoned.

Two decades after that ruling, considerable uncertainty remains around what “the community” regards as unacceptable. Only today, failure to gauge that properly can trash your company’s reputation and land you in prison.

To understand why, you need to know some history.

For decades, the prevailing attitude was that if overseas governments allowed corruption to blossom within their borders, foreigners could be forgiven for following local custom. As with Britain’s efforts to stamp out the transatlantic slave trade in the 19th century, the campaign to eradicate bribery originated in a single country on largely moral grounds, spanned many decades and spawned resentment among those profiting from the status quo. In 1977, the U.S. introduced the Foreign Corrupt Practices Act (FCPA), the first legislation criminalizing foreign bribes. It represented a fundamental change in thinking: it recognized that wealthy nations’ companies should not abet corruption elsewhere.

For the following two decades, Americans complained they’d been put at a disadvantage. Europeans, Japanese and Canadians could snatch contracts from under their noses by slipping some money under the table. In some cases—including Germany and Sweden until 1999—they could even get tax deductions for it. It wasn’t until the 1990s that other countries began following the American example. The Organization for Economic Co-operation and Development (OECD) and the United Nations took up the anti-bribery cause, pressuring members to introduce similar laws. Proponents demonstrated how corruption, far from being victimless, was particularly harmful to the developing world’s most vulnerable citizens. They lost out because officials diverted state assets to their own pockets. They lost out because their markets were saddled with substandard goods and services. They lost out because honest business people stayed away.

By the late 1990s, western nations were adopting anti-bribery legislation en masse. Canada’s Corruption of Foreign Public Officials Act (CFPOA), a product of this era, became law in 1999. Its terse, vague language left some perplexed. Shortly before it entered force, Sarkis Assadourian, a Liberal MP, wondered aloud at a parliamentary subcommittee what would happen if “baksheesh” were given to a businessman in a Swiss account. “Who is to say whether that’s a commission or bribery?” he asked.

But some dilemmas were subtler. Take “facilitation payments.” That’s a euphemism for a small bribe intended to get an official to perform a routine task more quickly. Keith Morrill, a criminal law expert, supplied an example before the same parliamentary subcommittee. He’d worked in an unnamed European country as a foreign-service lawyer, and each Christmas the mailman arrived on his doorstep demanding a present. “This was normal, and we gave him about $20,” Morrill said. “The people who didn’t give him $20 didn’t get their mail. It was as simple as that.” Morrill didn’t think the mailman should go to jail; such payments “do not have the nature of the bribery that undermines the whole process,” he claimed.

Accepting that facilitation payments are largely necessary and harmless, many anti-bribery laws explicitly permit them. The CFPOA allows payments “to expedite or secure the performance” of official duties, such as issuing permits or processing visas. But others protest that facilitation payments are but small bribes that have the same corrosive impact as their larger counterparts.

Responsibility for sorting out such dilemmas lay primarily with the courts—which for years seldom considered them. A decade ago, the U.S. had just three ongoing FCPA investigations. Britain and Canada pursued even fewer. This encouraged complacency among multinational corporations, some of which barely bothered to conceal their bribes. Peter Dent, a partner at Deloitte in Toronto, recalls investigating a European company doing business in Indonesia during his four-year stint as head of the World Bank’s fraud and corruption team. He saw an internally circulated spreadsheet detailing illegal payments the company made to various levels of government. “In the early 2000s, [bribery] was legal one day, illegal the next,” he says. But the cultural shift occurred more slowly, “so the spreadsheets continued for a few years.”

Then, around 2005, the U.S. once again changed the tone, rapidly ramping up investigations. By the end of 2010, the Department of Justice and Securities and Exchange Commission had 120 bribery cases on the books. They successfully targeted huge corporations such as Alcatel-Lucent, Daimler AG and BAE Systems, many of which were foreign. Siemens, the German conglomerate, got the worst: it paid about €2 billion in fines to German and American enforcers. Late last year, U.S. Assistant Attorney General Lanny Breuer heralded what he called “a new era of FCPA enforcement.”

Meanwhile, the OECD and Transparency International attacked countries still not taking corruption seriously. This shaming campaign helps explain why, in late 2007, the RCMP introduced a new anti-bribery team with 15 investigators. “It was only a matter of time before a big case was launched and significant charges were laid,” Mark Morrison, lawyer at Blake Cassels & Graydon, warned clients at the time.

Niko turned out to be that case: in June, the company pleaded guilty to CFPOA violations relating to Hossain’s SUV and North American junket. It agreed to pay a $9.5-million fine, the first serious penalty imposed in Canada for foreign bribery.

It’s too early to say whether this presages a new era of enforcement. But last year, the RCMP told a group of OECD officials it had more than 20 CFPOA investigations in progress, and early signs indicate some are bearing fruit. Recently, the squad raided two more companies: in July, they visited the offices of Calgary-based Blackfire Exploration, a privately owned mining firm, pursuing allegations that the company had bribed a Mexican mayor. Two months later, they raided SNC-Lavalin’s Oakville office looking for evidence relating to a project in Bangladesh it bid on earlier this year. Neither company has been charged.

Regardless of how the anti-bribery squad performs, Canadian business people can’t afford to ignore the changing climate. That’s because legislation in other countries can have powerful extraterritorial reach. “If [companies] are listed on a U.S. exchange, they’re automatically subject to the U.S. FCPA,” warns Morrison. “If they conduct any business in the U.K., they are subject to the U.K. Bribery Act.” Both legislations are tougher than the Canadian version. For example, the CFPOA and FCPA both pursue bribes only to public officials, while the U.K. legislation outlaws any improper payment, including a bribe to a procurement officer at another company. And while the Canadian and American systems provide exemptions for payments permitted or required under the laws of the foreign country, Britain’s legislation prohibits any payment that would be illegal in the U.K., including facilitation payments. “The environment is evolving toward what I would call a highest common denominator,” says Paul Conlin, a lawyer at Norton Rose in Ottawa specializing in bribery law.

Everybody has a price, the saying goes. Although some Bangladeshis were surprised Hossain’s was so low, few disputed that he’d been bought. “By any standard,” opined Canadian law firm Osler in a commentary, “the facts involved in the Niko case were flagrant.”

Not all transgressions are so conspicuous, however. Expensive meals and liquid lunches have long been staples of business networking. Relationships are forged at exclusive steakhouses and courtside at tennis matches. Everything from logoed pens and jackets to Caribbean vacations and cash incentives changes hands. With officials around the world increasingly adopting a zero-tolerance approach to bribery, where are the lines drawn today?

The pharmaceutical industry affords a good example of how the norms are changing. It spends huge amounts (13% of industry income, by one estimate) promoting its products. Doctors, usually the only people with the power to prescribe, are popular targets for everything from product samples to conferences to outright cash incentives.

Some common tactics have lately gotten Big Pharma into hot water, though. Consider what happened to Johnson & Johnson. Between 1998 and 2006, the global giant paid Greek doctors who installed its artificial knees, hips and other surgical implants in patients. (The payments were often described as “support” or “professional education” in J&J’s books.) The company also paid for Polish doctors and hospital administrators to travel (often along with family members) to medical conventions in the U.S. and Europe. The Justice Department concluded these junkets “amounted to vacations” and were intended to incite the recipients to influence tenders in J&J’s favour. In April, the company admitted these and other allegations, and agreed to pay US$77 million in penalties. This should be sobering, as junkets have long been a favourite tactic for building relationships.

Rockwell Automation, an industrial designer and manufacturer, also stumbled over hospitality restrictions. Between 2003 and 2006, its Chinese subsidiary regularly hosted sightseeing trips for employees of state-owned companies. Rockwell paid US$450,000 to ferry its contacts to Germany, Australia and U.S. destinations. Although they were recorded in Rockwell’s books as business expenses, “some of the trips appeared to have no direct component other than the development of customer good will,” alleged the SEC. Without admitting or denying these allegations, Rockwell accepted a cease-and-desist order earlier this year and agreed to pay more than US$2.7 million.

Whatever the guilt of these particular companies, fighting bribery charges only extends ugly publicity. To avoid such predicaments, many British lawyers advise companies not to risk taking clients on “marketing” trips lacking obvious business purpose. While Britain’s Serious Fraud Office has suggested that “the most routine and inexpensive hospitality” likely would not attract prosecution, the line can quickly blur. The SFO reassures that flying a foreign official to New York, taking her to a fine restaurant and a baseball game won’t get a company into trouble. Yet if that same company had already met that official in her country the previous week, it might be a different situation. Morrison warns that companies need to have a sense of proportion. “It’s context-driven,” he explains. “A $50 lunch in Canada may not be that big a deal. A $50 meal in an African country where the average salary is $100 a month would be a different situation.”

What about gifts? They got IBM in trouble. The SEC alleged that employees of its South Korean divisions provided free notebook computers to government officials to secure product sales. Without admitting guilt, IBM agreed to pay US$10 million in penalties in March.

Facilitation payments, long seen as necessary, are also increasingly proscribed. “It used to be that companies would think they could make these small payments all the time,” says Dent. “But U.S. enforcement actions suggest that if they’re repetitive payments, then they’re not facilitation payments.” Multinational corporations are responding by instructing employees to cease making facilitation payments altogether: a recent KPMG Forensic survey of British and American executives found that only 9% of the Brits and 13% of the Yanks still allow them, down considerably from previous surveys. Morrison, for his part, sees facilitation payments as dangerous because there’s never been a numerical threshold distinguishing them from bribes. “You don’t want to put your employees in a position where they’re asked to exercise discretion in a difficult legal area,” he says.

To understand how international business might be conducted in the future, consider Siemens. Stung by its corruption scandal, the company completely renovated its compliance infrastructure. What had been 50 employees within its HR department became a stand-alone division of 600 dedicated to the issue. Siemens dramatically reduced the number of agents and consultants it worked with, assuming greater control over its overseas representatives. It instituted a new training program for all 400,000 employees. Bank accounts were centralized to enable tighter monitoring of payments. By one estimate, the overhaul cost Siemens €700 million.

The biggest changes revolved around corporate hospitality. At first, employees were prohibited from paying for the smallest morsels consumed by government officials. “There were quite a few rules,” says Hentie Dirker, Siemens’s regional compliance officer in Canada. “You can’t take a customer out more than once in a six-month period. Nothing that’s not business related. That type of thing.” But these restrictions proved too disruptive for a sales and marketing organization, and were relaxed as Siemens developed online tools to help employees understand what’s acceptable. The days of free-flowing slush funds, though, are over. “If we invite people to go golfing or hockeying or for factory visits, it goes through an approval process,” Dirker says.

Most recent insights on the shifting boundary between friendly hospitality and filthy lucre come from American courts. But seldom do those cases delve into grey areas. Ernst & Young claims both the incidence of bribery and the dollar amounts are rising—whereas in the 1980s bribes rarely topped 5% of a contract’s price, today 20% is not uncommon. With so many cases of outright graft to pursue, authorities have little cause to split hairs over cups of coffee.

Although Canada’s courts have rarely tackled foreign bribery, there’s a wealth of Criminal Code case law they will likely draw on in future CFPOA prosecutions. And the enforcement radar is on. “Companies that are compliance-minded are going to have to comply with the strictest standards,” says Ottawa lawyer Conlin. “They’ll be taking on considerable risk in circumstances where they don’t.”