Jerry Yang ACC 725

Bribery in the business

By definition, bribery is an act of giving money or gift giving that alters the behavior of the recipient. The bribe is the gift that may influence the recipients conduct, decision or act. The bribe may be money, property, preferment, privilege advantage, promise, and etc. to induce action, vote or influence of a person in government agent. There are numerous forms of bribery and it can be from individual, managers, or corporations. In business, Bribery can appear in any level of the company including top management and board directors. Company gains unfair competitive advantage through bribery over others in competition, auction, or legal rights. According to the World Banks estimation, $1 trillion in bribes is paid annually to government officials worldwide. Bribery is definitely illegal and unethical; therefore it should be detected if not prevented by forensic accountants.

Foreign Corrupt Practices Act

The Foreign Corrupt Practices Act (Hughes, 2013) is federal law known for addressing accounting transparency requirement under the Securities Exchange Act of 1934 and concerning bribery of foreign officials in United States. The FCPA applies to anyone who has a certain degree of connection to the Unites States and involved with any corrupt practices in foreign countries. This Act not only applies to U.S. companies but also any foreign corporation trading securities in the United States. The bribee is not limited to the officials and agents in any foreign government, but also any person in the foreign firms. The bribe does not have to be material to FCPA to make the action illegal. This Act focuses more on the intent of the bribery
1

more than on the value. The Act is still valid regardless the violator is physically present in the United States. The Act governs any payments to foreign officials, candidates, and parties. The payments are not restricted to just money but may include anything with values. According to U.S. Securities and Exchange Commission in the mid-1970s, over 400 U.S. companies made payment excess of $300 million to foreign government officials (FCPA, 2013). The bribery by U.S. business made significant influences to foreign governme nts decisions including purchase, projects and even tax rate. By 1977 President Jimmy Carter signed the act to restore public confidence in the integrity of the American business system. However, FCPA was not effective after the year 2000. According to the Securities and Exchange Commissions records, there was only less than 10 cases charge before the year 2000 (SEC, 2013). In the past, not many companies operate internationally, and U.S. companies which operated oversea assumed bribery as a way to do business oversea. The government agents did not enforce the FCPA and afraid to slow down the business growth internationally. In recent year, SEC really focuses on monitoring companies which performs corrupt practices oversea, and the fines were significant. However, nine of the top 10 largest corporate settlements have involved companies outside the United States.

Travel Act
Travel Act was passed by United States Congress in the year 1961 and has been amended six times until today. The Act forbids the use of the U.S. mail, or interstate or foreign travel, for the purpose of engage in certain specified criminal acts including bribery as of the wrongful act.
2

Travel Act is commonly used when the corrupt practice involves foreign private sector. There is no federal law specifically bars foreign private sector bribery, so the United State government can only prosecute private sector bribery under the Travel Act if the bribe violates a state law. The person violates the Travel Act when he or she committed a predicate violation of state law, and that the bribery practice was committed internationally by using mails or traveling.

Effects of Public Sector and Private Sector Bribery

Bribery has significant influence in both public and private sector, because it inhibits economic development and distorts competition in the market. It destroys incentives to compete on quality and price, disrupts distribution channels, undermine market efficiency and predictability, and causes firms and countries to lose long term competitiveness. Firms will no longer compete with quality of their product or services but amount of bribe. Often time, some companies bribe the government officials to avoid regulation, decrease tax rate, or compete government projects. Bribe in public sector was originally intended to avoid delays and costs, but paying a bribe almost always leads higher cost and legal issues. Bribes are more likely to be taken by government officials in countries with a low per capita income, because corrupt countries are often associated with lower level of investment, productivity, growth, environment quality, and low appearance of governmental legitimacy. These bribes can harm the countries, because the non-exist of safety and quality controls. Corrupt businesses will attempt to make money as quickly as possible regardless the negative
3

consequences to the countries. For example, a company may pay bribe to an undeveloped country, so it can construct factories which may release toxic substances into the water. The government approves the proposal because officials receive bribe from the company. However, the people will have to suffer from the toxic waste which will create pollution to the environment in the long run. The bribery in private sector refers to company bribes another company to gain competitive advantage over other bidders or competitors. Employees from large corporations have the position power to demand money, supplies, or kickback from smaller firms for exchange of business opportunity. However, it causes significant harm to the economic by distorting the marketplace. In the Transparency Internationals 2011 Bribe Payer Index, which conducted interview for 3016 business executives across thirty countries, found that the perceived frequency of private sector bribe was usually same or higher than bribe in public sector. The bribery culture in private sector affects the entire market, and small businesses that cannot afford or refuse to bribe are being penalized. It is up for the government to criminalize the bribery behavior in the business competition. Otherwise, the bribery culture will destroy the functioning and creditability of free and open global competition by penalizing the other businesses.

Siemens
Siemens is a German multinational engineering and electronic conglomerate company which headquarters are in Munich and Berlin. It is the largest Europe-based electronic and electrical engineering company. The company is a public traded company in United States with
4

the symbol of SI in New York Stock Exchange. In 2012, Siemens had total assets of $108.3 billion in Euros and 405,000 employees across nearly 190 countries. However, Siemens success is closely related with its bribe practices worldwide. Siemens has a record setting of $1.6 billion fine after pleading guilty to corruption on a global scale (Schubert and Miller, 2008). Siemens had been penalized by SEC for corrupt practices in Russia, United States, Argentina, and many more. The corrupt case in Argentina was one of the biggest corruption practices in the United States history. Siemens Argentina committed over $100 million dollars in illegal bribes to many high level government officials including two formers Presidents in Argentina for a favorable position on its contract proposal. The proposal was about creating an ID card for every citizen in Argentina, and the contract amount was estimated to be exceeding $1 billion dollar. The proposal was originally canceled by President Fernando De La Rua on March 18, 2001. Siemens Argentina continued to bribe related officials of government administration, including President Fernando De La Rua, in an effort to bring the proposal back on the line. These bribes were delivered to the government officials through shell companies which set up as payment intermediaries. One of the shell companies, MFast was set up to receive $1 million dollar bribe for the head of SIGEN, Marcelo Bielsa. SIGEN stands for Sindico General De La Nacion, and it is an independent body of the internal control system within the Argentina government. The goal of SIGEN is ensuring the implementation of principles of financial regularity, legality economic, efficient and effective delivery, and implementation of public resources (Carlos, 2012). SIGEN played a big role with Siemens project proposal, so Siemens made sure the bribery covered to this agent. An integrator in SIGEN, Carlos Moran was suspected with Siemens project proposal.
5

He found out later that the company was involved with numbers of corrupt practices to multiple government officials to push the proposal contract. He immediately reported the finding to his boss, Bielsa to suggest rejecting Siemens contract proposal for corrupt practices. Moran did not know Bielsa also received bribery from Siemens. In Bielsas report, it ignores any of the Morans investigation result, but only mentioned a few financial issues about the company. Siemens proposal project was never reinitiated by the new Argentina government despite Siemens effort. The company instituted an arbitration and proceeding against the government for breach of contract, and seeking for $550 million dollar for lost profits and expenses for wrongful termination of the project. Siemens was fear that Moran to expose the corrupt practices, because the evidence of such corrupt practices would have a significant influence to the court decision. Moran threated to disclose all his finding of Siemens corrupt practices which would expose many Argentina government officials and Bielsa. Moran was threatened by Bielsa, but Moran showed no fear to the verbal threats. Shortly after, Moran was brutally attacked and beaten in front of his own house. He recognized one of the attackers to be Rodolfo Galimerti, who was employed by Siemens Argentina at one time, and also advisor of Carlos Menem, the former president of Argentina. The attack was to silence Moran to protect the government officials and Siemens. Moran resigned from SIGEN, because he and his family was felt life threaten. The Argentina Police ignored Morans request to be protected. In Sep 2012, Carlos Moran filed his lawsuit in federal court in Miami against Siemens for responsible for attacks he

suffered. Siemens corrupt practices in Argentina were exposed and Siemens was subjected to be investigated by SEC. According to the SEC, about $31.3 million of the bribes paid were made after March 12, 2001, after it became a U.S. issuer subject to U.S. securities laws. Siemens Argentina was entitled to receive more than $217 million plus interest from the ID contract from the Argentina government. However, Siemens had to wave the arbitration award after setting bribery charges with the U.S. Siemens was subjected to more than $1.6 billion fines by the U.S. authorities, because the corrupt practices in Argentina. In Dec 2008, Siemens pled guilty to following agreement (SEC v. Siemens Aktiengesellschaft, 2008):

Siemens AG pled guilty to one count of failure to maintain internal controls and one count of books and records violations;

Siemens S.A. Argentina pled guilty to one count of conspiracy to violate the books and records provisions of the FCPA;

Siemens Bangladesh Limited pled guilty to a one court information charging conspiracy to violate the anti-bribery and books and records provision; and

Siemens S.A. Venezuela pled guilty to a one court information charging conspiracy to violate the anti-bribery and books and records provision.

SEC agreed to reduce Siemens penalty to $800 million, because the coordination of Siemens headquarter in the investigation. According the court record, Siemens investigation included conducting more than 1,750 interviews and gathering more than 100 million
7

documents across from 34 countries. 14 millions of those documents were reviewed and about 24,000 documents were received by SEC and Justice Department. SEC was impressed by Siemens effort and citied the investigation as a model in the future. However, the ongoing investigation of Siemens personnel even after the significant corporate fines to both U.S. and German authorities. More than seven executives in Siemens were charged by SEC for corrupt practices, and several of them are facing possible sentence penalty.

Control Components, Inc.

Control Components, Inc. (CCI) is a world leader in the design, manufacture and service of control and isolation valves for the severe service applications of the fossil power, oil and gas and nuclear industries. It is one of the five business units of IMI severe Service, and was set up to supply growing demand for valves that could handle very high pressure liquid hydrogen and oxygen. CCI has been established for more than 50 years across more than 60 countries. However, some of CCI successes in foreign countries are related to corrupt practices in both public and private sector. From 2003 to 2007, approximately $4.9 million bribe was made to officials and employees of numbers state-owned companies to secure the contracts and project technical specifications. CCI senior executives approved the corrupt practices, but some bribes were made personally for self-incentives. In total, CCI made approximately 236 corrupt payments in more than 30 countries including China, Korea, Malaysia, and the United Arab Emirates. The forms of bribery include expensive gifts, oversea trips, or even the college tuition of the children of CCIs customers. IMI did not find CCIs corrupt practices, because the employees
8

provided false and misleading information to cover up. Some of the same employees even destroyed important documents to mislead internal investigators. CCI earned $31.7 million in net profits from sales related to those corrupt payments. Six former CCI executives and two former employees were charge for violating FCPA and the Travel Act. Most of them pled guilty to avoid longer sentence penalty. In 2009, CCI pleaded guilty, and admitted it had been bribed foreign officials over a ten year period in an attempt to award with contracts in 36 countries. The company also agreed to pay $18.2 million criminal fine to settle the charges. In addition to paying a monetary penalty, CCI must create and adopt an anti-corruption compliance code and enter a three year term of organizational probation (Ungreasing the Wheels, 2009).

Bribery Prevention The tone at the top is extremely important in companies when it comes to prevent bribery. The senior managements and directors must make it clear to all employees that bribery is not acceptable in any circumstance. Employees will be fired and reported to the SEC if committed any crime including bribery. Every manager should carry out a review of the functions for which their areas are responsible and undertake a risk assessment of those areas which may be at risk of bribery or improper conduct. The sales department may be in high risk to offer bribe to customers, so it can increase the revenue. The purchase department may

be in high risk to accept bribe from supplies. Therefore, due diligence is crucial on knowing employees, customers, and suppliers. Companies must make it clear that employees know what procedures are in place. For example, hotline or reward program for whistle blower to prevent corrupt behavior. Companies can also provide training programs to educate employees about bribery related acts and avoid the gray area. Employees must realize the possible monetary and sentence penalty to them and the companies from FCPA and the Travel Act (Gaff, 2013). In fact, sometimes people are unclear when they are involved with bribery especially in foreign countries. Therefore, Ethics Committee should set clear guidelines by regions for any business activities which may involve money. For example, gift or meal to clients should not exceed $50 dollars to prevent bribery behavior. Companies may not be able to stop bribery by themselves, because they have to rely on U.S. government for monitoring and punishment. The government must be active on detecting and restrict bribery behavior in the foreign countries in both private and public sector. The penalty should not only focus on the corporations, because huge corporations can afford millions of fine. They may be willing to take the risk for big contract or project. However, the government can issue heavier penalties on the managements and related employees. The
10

managements should be penalized for lack of awareness to companys corrupt behavior. Therefore, top managements will pay more attention and focus on preventing bribery.

Conclusion
Companies should compete with each other on quality of product and service instead on bribery. Whenever companies or government receive bribe, only a few people benefit from the illegal gain. The company or general public have to suffer the bad consequences when a bad company reward with contract by bribery. Therefore, it is important for both government and companies to consider bribery as a serious threat to the market. In order to stop bribery behavior in the businesses, corrupt practices should never be tolerated, and companies and related personnel must be punished.

11

Reference
Carlos A Moran v. Siemens Aktiengesellschaft. Case 1:12-cv-24443-UU. United States District Court for the Southern District of Florida 2012. FLSD docket. Web. 20 Nov. 2013. Gaff, B. M., Huggard, S. G., & Carey, G. W. (2013). Paying Bribes Abroad Will Get You in Hot Water in the US. Computer, 46(2), 11-13. doi:10.1109/MC.2013.60

Hughes, A. G. (2013). Drawing Sensible Borders for the Definition of "Foreign Official" Under the FCPA. American Journal Of Criminal Law, 40(3), 253-279. Schubert Siri and Miller Christian (2012, Dec. 20). At Siemens, Bribery was just a line item. Retrieved from http://www.nytimes.com/2008/12/21/business/worldbusiness/21siemens.html?pagew anted=all SEC enforcement Actions: FCPA Cases. Retrieved from http://www.sec.gov/spotlight/fcpa/fcpa-cases.shtml

SEC v. Siemens Aktiengesellschaft, Case No. 1:08-cv-02167. FLDS docket. Web. 20 Nov. 2013.

Schubert Siri and Miller Christian (2012, Dec. 20). At Siemens, Bribery was just a line item. Retrieved from http://www.nytimes.com/2008/12/21/business/worldbusiness/21siemens.html?pagew anted=all Ungreasing the wheels. (2009). Economist, 393(8658), 68-69

12