by Melanie Reed
When you think of bribery, do you think of guys with slick hair giving each other suitcases full of cash behind old warehouses? Today’s bribers are much more savvy than that. In order to pay bribes without touching a single bill, they “cook” their company books to hide the funds transferred as bribes.
This does not mean today’s criminals are any better at outsmarting law enforcement, though. US agencies are tuned in, especially when it comes to bribery of foreign officials in connection with international business transactions, which is prohibited by the US Foreign Corrupt Practices Act (FCPA). The US Department of Justice and Securities & Exchange Commission have both amped up their resources in recent years to make sure they can uncover even the slyest schemes to pay bribes abroad. In other words, cooking your books to hide a bribe certainly doesn’t mean you won’t get caught—and in any case it doesn’t make it right.
So, what are some of the things companies have been doing to disguise bribery? Here are just a few strategies that led to penalties in 2012:
1. Letting third parties do the dirty work (or the ineffective “it wasn’t me who did it!” excuse)
So many FCPA enforcement actions involve third parties! Yet companies continue to get themselves into trouble by thinking that somehow their agents and distributors can pay bribes that they themselves cannot. Smith & Nephew, Inc., a U.S. medical device company, was penalized for this type of thinking. Smith & Nephew hired a Greek distributor to help it sell products in that country—and to pay bribes. To create funds for paying the bribes, Smith & Nephew sold its goods at full price to the distributor; then, it paid an additional “distributor discount” to the distributor’s offshore shell company. The distributor could then use those funds to pay bribes to publicly employed Greek healthcare providers (considered foreign officials under the FCPA) in order to influence their purchases of Smith & Nephew products. In this way, Smith & Nephew paid approximately $9.4 million to the distributor. In February 2012, the company was hit with a $16.8 million criminal penalty and forced to disgorge $5.4 million in ill-gotten profits (including prejudgment interest). What do we learn from this enforcement action? You can’t do through a third party what you can’t do yourself. A bribe is a bribe is a bribe, regardless of the path it follows from you to the recipient.
2. Dealing with fictitious entities (or the problem with mixing fact and fiction)
Why don’t we just agree on one thing? If you’re in business abroad, “fact” is better than “fiction.” Thus, for example, The NORDAM Group Inc., a company providing aircraft maintenance services, created a fund for paying bribes to Chinese officials by submitting payments to fictitious entities with which it had entered into “sales representation agreements.” To cover the costs of these bribes, NORDAM and two affiliated companies artificially inflated the price of goods paid to the end customer. The DOJ found that NORDAM and its affiliates had paid approximately $1.5 million in bribes to secure approximately $2.48 million in profits, and issued a $2 million penalty against the company. Bizjet, another aircraft maintenance company, did a similar thing in order to pay bribes to Mexican officials; one of its sales managers set up a shell company for the purpose of receiving bribe payments and then used false invoices to support the funds received. Its DOJ settlement cost it $11.8 million.
3. Paying fictitious invoices (or making deals you really shouldn’t keep)
Promeca, the Mexican subsidiary of the medical device company Orthofix International N.V., paid approximately $300,000 in bribes to Mexican officials from 2003 through 2010. How did Promeca do this? It started by agreeing to pay Mexican officials a specific percentage of the sales revenue it earned through its public contracts. To facilitate this, Promeca reported its total sales revenues to the officials it wanted to bribe. Then, the officials set up fictitious companies to issue fictitious invoices to Promeca for “medical equipment or training”; the invoices charged the amount the officials were “due” plus a value-added tax (so that the invoices would look legit). When Promeca paid those “invoices,” the officials pocketed their unlawful gains. (Promeca clearly was not keeping fact and fiction separate—as per point 2 above.) To settle charges of criminal misconduct with US enforcement authorities, Promeca agreed to pay a $2.22 million criminal penalty and to disgorge $5.2 million in ill-gotten gains (including prejudgment interest). Lesson learned? If you are making an agreement to pay a government official a percentage of any contracts you make with the official’s agency, you are already on shaky ground. Such agreements are rarely legal. And you will get yourself into even deeper water if you try to cover yourself using false documentation.
4. Mischaracterizing expenses (or the problem of not calling a bribe a bribe)
As long as we’re on the topic of honesty, any expenses a company incurs should be accurately recorded as what they are. Promeca didn’t just hide its bribes through paying fictitious invoices, as discussed above. It also covered its bribes by falsely recording them as promotional and training costs. This should have raised warning signs in the company, since it caused Promeca’s training and promotional expenses to be “significantly over budget,” according to the SEC. Nonetheless, the SEC explained that the company did “very little to investigate or diminish the excessive spending.” Industrial equipment company Tyco International Ltd. ran into similar problems when it and its subsidiaries falsely recorded bribe payments as “consulting fees,” “commissions,” “unanticipated costs for equipment,” “technical consultation and marketing promotional expenses,” “conveyance expenses,” “cost of goods sold,” “promotional expenses,” and “sales development expenses” (see the DOJ’s Non-Prosecution Agreement). Due to this and other problems it was having, in September 2012 Tyco became subject to a $13.68 million criminal penalty and to $13.13 million in disgorgement of profits and prejudgment interest.
5. Funneling bribes into benefits for officials
For years, people seeking government favors have wooed government officials with benefits and gifts. But while providing a benefit, such as travel, in connection with a legitimate business activity (for instance, to visit a manufacturing facility) may be a perfectly acceptable business expense, flying government officials to Disney World for vacation probably is not. Benefits must also be provided for the right reasons. Thus, asking a publicly employed doctor to assist in a clinical study may be legal in some circumstances, but it will almost certainly be illegal if the study is awarded in an effort to induce the doctor’s prescribing activity. Pfizer learned this lesson the hard way when it became subject to penalties in 2012, after having provided benefits to publicly employed doctors in order to influence them in prescribing its products. The benefits Pfizer provided included sponsorships, travel to trade meetings and conferences, the award of clinical trials, gifts, and entertainment. To settle the case, Pfizer and Wyeth (a company it acquired in 2009) agreed with the SEC to disgorge a total of $45.2 million in ill-gotten profits and prejudgment interest.
What do these strategies for hiding bribes show us? First, best practice is always transparency and honesty in business dealings. If a company is inclined to mischaracterize expenses, provide benefits to government officials for shady reasons, or deal with made-up entities or documentation, that company is likely headed for trouble. Second, being alert to bribery means thinking about the myriad non-cash ways that bribes can flow from a company to a government official. It may not be obvious that a bribe is a bribe, since it could be disguised as a legitimate business expense. Thus, establishing appropriate internal controls, policies, and procedures over the flow of company funds matters. In fact, in a number of recent settlements, the DOJ has required the defendant to set forth policies regarding outflows of company funds that are viewed as particularly susceptible to corruption, such as (i) gifts, hospitality, entertainment, and travel for customers; (ii) customer expenses; (iii) political contributions; (iv) charitable donations; and (v) sponsorships.
Finally, questions, concerns, and anomalies that arise should be addressed promptly. For example, if Orthofix had adequately investigated its excessive training and promotional spending, it might have been able to stop its course of conduct earlier. Better to investigate and address potential problems early on, rather than becoming subject to a US enforcement action later on.
 The FCPA (full text) prohibits companies and individuals with ties to the U.S. from offering, promising, or providing bribes or anything else of value to a foreign government official in order to influence that official in his or her duties in order to obtain an inappropriate business advantage.