Grease for the wheels of justice


Every year around $300bn - more than what the federal government collects in revenues - is paid in bribes in Russia, and to many companies here this astronomical figure represents factitious hurdles in an otherwise lucrative market, proof that bribery has become an inevitable cost, and a demonstration of the vast amount of wealth that flows in the netherworld – unseen, untaxed and uncontrolled by society. This is a threat to some and an opportunity to others.

For the time when bribing foreign decision-makers was legal, and even tax deductible, has gone and, more importantly, for governments and lawyers nailing those who still do business that way is becoming an increasingly attractive business.

In April Daimler AG, a German auto giant, pleaded guilty to bribery charges brought by the US government. Its foreign subsidiaries, including the one in Russia, admitted giving kickbacks to government officials to win business. ZAO Mercedes Benz Rus, for example, paid over a number of years $4m in bribes.

One hundred and eighty five million dollars in fines will be paid to settle the matter. In addition, the carmaker will have to cover lawyers’ fees for the years of investigation - in accordance with American law it was assigned to the New York law firm Skadden - a sum in triple-digit millions. Overall, the scandal will cost the company more than half a billion dollars.

Still, Daimler got off relatively cheaply. To Siemens, another German giant, a bribery scandal cost over $2bn. And even this figure could have been bigger. Fines so far exacted by the US Justice Department and the Securities and Exchange Commission were attained by settlement rather than trials. For the latter is not just embarrassing but tremendously costly: penalties ordered through court proceedings can be as high as the company’s revenues for all years of criminal activity.

That is why the pile of penalties is mounting. In 2007, fines related to foreign corruption cases paid to the US government were $87m. In three years that figure increased at least 16 times to reach $1.4bn in just four months in 2010.

The law strives to see who may be corruptible in principle

So, why do foreign companies, above all German ones - Daimler, Siemens, MAN or Ferrostaal - pay so handsomely to the American government and American lawyers? They became bound by US anti-corruption laws and by the Foreign Corrupt Practices Act (FCPA) when their shares were listed in this country.

The law prohibits the bribery of foreign officials. It also requires for companies to control all dispositions of assets so tightly that the existence of slush funds for illegal payments could not be hidden. In effect, FCPA doesn't just look for the incidents of corruption. It strives to see who may be corruptible in principle.

And this is where the real trouble - and money – lies. A recent survey by Steele Foundation, a risk-management firm, found that only 10% of companies with an average income of $250m had adequate compliance systems in place.

In addition, more than one country and one legal system can be involved. Just two weeks after Daimler had to bow to American justice, Hewlett-Packard, a technology leviathan from California, came under the investigation carried out by Russian, German and, later, US authorities. Allegedly, the HP’s Moscow office paid $10.9m to the Russia’s Office of the Prosecutor General to ensure a $47.8m deal. The Germans became involved because the equipment was sold by a HP's subsidiary in Germany and the Americans, because the company headquarters is based on American soil.

The response of the Russian authorities, on the other hand, has been a strange mixture of irritation, contrition and impotence. The reaction was quick and impressive, but it was in the wake of actions from abroad, and though even the Kremlin’s critics agree that it now tends to take corruption more seriously than before it does not look as if a breakthrough is anywhere near.

Hopefully, the games the big fish are playing may help Russians to deal with the way business is done in their country. The international community in which Russia is now embedded does care - however pragmatic and self-centred its motives may be - about what is going on in this country. To the extent, then, that Russia manages to get itself out of its predicament it will owe a debt to western lawyers and journalists - against which Russia so often set its face - for tackling Russia’s internal problems.


May 9, 2010
text: J. Vermin
picture: Eugene Tokarev -





Interview with Max Gutbrod, partner, Baker & McKenzie



Corruption is a crime in Russia and in the case of an international company in the country of its origin. So far, however, foreign courts have not interfered very often in what was going on abroad. Why?

Prosecution of corruption at an international level is technically difficult because the link between a payment and an action can typically be established only by witness testimony. The relevant witness will face pressure from many sides not to testify and will typically not be located in the jurisdiction of the payee.

Also, there are many technical difficulties in interpreting the relevant articles of criminal codes on an international level because they vary from country to country. For instance, a public servant in one country will not automatically be considered a public servant elsewhere. In these circumstances to be robust a verdict will require clarity in law and a high standard of proof.

So, why are they getting more active now?

A lot has changed over recent years due to international organizations focussing on the issue, the growing importance of shareholder value considerations, and the increased liability of management.

International pressure has, for instance, made Germany change legislation that previously allowed payments for corrupt practices to be deducted from profit for tax purposes. Also, many companies are now listed in the US and are, therefore, subject to US legislation. US securities legislation is unique in that it allows the SEC to start procedures, confiscate materials and impose very substantial penalties. SEC actions also generate significant publicity worldwide.

In addition, the responsibility of management for corruption has expanded considerably in the West. In the past, managers would only be liable if they actively participated in corruption. Nowadays tolerating corrupt practices leads to criminal and civil liability. If a manager knowingly failed to prevent money being set aside with the aim of using it for corruption it would be considered as tolerating corruption. Corruption is also understood as a major corporate governance problem because the real cost of goods sold in a corrupt manner remains unclear to shareholders and part of the management of the company itself. If the sums paid in corruption cannot be shown in official accounting, they cannot be taken into account when evaluating the success of the company.

What should be done?

I believe that the focus should be the fundamental and underlying issues. These are:

When goods or services are purchased under the influence of corruption the recipient of goods or services receives them under less favourable conditions than otherwise. Accordingly, it is of primary importance that contracts that have been concluded based on corrupt practices are void and can be unwound with non-corrupt competitors having the chance to replace the corrupt ones. This will automatically act as a strong incentive for competitors to watch each other and be more effective than commitments to good behaviour

Corruption in government is a thorny issue because evaluating the usefulness of government action is particularly difficult, and government officials, in comparison with managers in private business, tend to be underpaid. Accordingly, those that, like NGOs and journalists, monitor governments deserve specific encouragement. Accordingly, corruption in government can realistically only be tackled if the media feels free to raise suspicions openly about government officials at all levels.

Compliance assessments, in particular if conducted in the American manner, are very costly. They involve all service contracts of a certain magnitude linked to purchases. However, some services to establish sales strategies or to teach potential purchasers about services or goods can be difficult to distinguish from services that simply disguise corruption. Excessive use of such assessments could possibly hinder the transformation of an economy from a goods-based economy to a services-based economy and discourage the outsourcing of services. Clearly every company should be able to react to extraordinary circumstances as it sees fit but it is not always clear that the best interest of companies is kept in mind when reporting requirements are being established for compliance investigations, leading doubt to be cast on perfectly reasonable, if unusual, market strategies.

The cost of the prosecutions mentioned above is visible because it will be disclosed in the context of the investigation and can run into the billions. However a substantial part of the cost of fighting corruption is not visible because it is spent by the relevant companies themselves.

These costs are mentioned not to suggest that no effort should be spent in fighting corruption, but rather to seek value for money in this fight.



Nailing bribery becomes business. Hopefully, Russia will benefit.