Today’s Strategies for Paying Bribes Abroad

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).[1] 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)

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