Corruption in Asia: what should Canadian companies do?
This September, Nazir Karigar will become the first person to be prosecuted under Canada’s Corruption of Foreign Public Officials Act (1999) for bribes he allegedly gave to a former Indian aviation minister. In many circles, this case is being lauded as a landmark shift away from Canada’s poor record on the prosecution of its citizens’ and businesses’ corrupt activities.
Canadians disapprove of corruption, citing its moral failings and undermining of good governance and competition as key problems. But in some parts of Asia, corruption is endemic. Bribery is often a part of everyday life and an established mode of business. It creates a dilemma for many Canadian firms and businesspeople operating in the region. Do they follow local practices? Do they stick to Canadian principles? Or, is the best option somewhere in between? What should Canadian companies do?
Key Things You Need to Know:
- Corruption is the abuse of entrusted power for private gain.
- Petty corruption includes, for example, bribing a low-level official to get out of paying a speeding ticket; grand corruption refers to larger scandals, such as bribing high-level official to approve a business contract.
- 83% of Canada’s Asia practitioners have witnessed or heard first-hand about corruption in the conduct of their business or professional activities in Asia.
- Corruption especially prevalent in developing economies with poor institutional checks and balances on power, high levels of poverty, and limited enforcement of the rule of law.
As a result of the Corruption of Foreign Public Officials Act (CFPOA), participation by Canadian companies in bribery in Asia, as anywhere in the world, can result in them paying unlimited fines and individuals going to jail for a maximum of five years. Calgary-based Niko Resources’ $9.5 million fine, in 2011, for bribing a Bangladeshi Minister of Energy is ample proof.
The law is clear, and, indeed, this issue is not one of following Canadian principles but of following Canadian law, which makes it illegal to bribe a foreign public official. Also clear is the fact that all national laws prohibit bribery of their own public officials.
Reality may seem to differ somewhat, and so Canadian companies sometimes find it difficult to find their way. One murky area is that of facilitation payments or petty corruption, i.e., paying small amounts to public officials for them to carry out the work they are already hired to do.
Facilitation payments are allowed under the CFPOA, as they are under the U.S. Foreign Corruption Practices Act. However, the newly constituted UK Bribery Act does not allow for facilitation payments. Because of business they do in and out of the UK, many Canadian companies must now conform to the UK Bribery Act, regardless of the fact that they may be working on a project in Asia.
Once a company has paid a bribe, it is on a slippery slope. Nor is it immune to investigation by the RCMP, if it is an agent or other intermediary, rather than a company employee, who has paid the bribe. In order for a company to ensure it is not the victim of rogue bribe payers within its ranks, it must ensure that an effective risk management program is in place.
Transparency International Canada (TI-Canada), the Canadian National Chapter of TI, the global coalition against corruption, has put together the TI-Canada Anti-Corruption Compliance Checklist, a critical “tool of tools” for those Canadian corporations seeking to significantly enhance their risk management processes. These tools assist companies of any size to Assess, Plan, Act, Monitor, Report to Stakeholders and Assure, in order to ensure they are playing their part in achieving transparent, level playing fields in international markets, through honouring commitments of transparency, accountability and integrity, established in their own codes of conduct.
Canadian companies need not feel they are doing this alone. The “established mode of business” is changing around the world and people’s tolerance for petty corruption is diminishing, in Asia and elsewhere, thus making it easier for Canadian companies to do business abroad.
In my two years working in China as the general manager for a Western joint venture, I was not directly asked or offered anything with any expectation of benefit. However, there were local business practices that would cross the boundaries of acceptable conduct for most in Canada.
Situations I encountered include: expectations by some public officials that we would provide them with cash cards as gifts for their personal use and for distribution to their staff; acquiring large quantities of free cigarettes for surprise visits by the Public Security Bureau and others; generous red envelopes (gifts of appreciation prior to the New Year Festival); being required to subscribe to the China Post Service’s News Letter to ensure mail delivery from the local carrier; and repeated demands from the tax department for payment, despite recent audits that established that no payment was owed.
Much of what Canadians would consider inappropriate gift giving is characterized as ‘relationship maintenance,’ since ‘this is the way business is done in China’. It functions in a state of dynamic equilibrium where everyone seems to know their role. It is very difficult (impossible) to achieve fair treatment without participating.
Our policy was to support community endeavors only when official receipts (fapiao) were obtainable. In matters requiring entertainment and minor gift expectations, this practice was continued but restricted to relatively small contributions at times of the year when such contributions were part of the common practice. Trusted local assistants were used to judge the appropriateness and magnitude.
Our longer term strategy included taking opportunities, while attending dinners or lunches, to set out our policy on treating everyone fairly and hoping that we would be treated fairly in return. We sought confirmation that our guests were also interested in fairness and went out of our way to be fair in our business and personal dealings. We did not expect that this would have an immediate effect, but believed that we should model the behavior we wanted to receive. After two years, there was some evidence that this approach was having a positive effect.
If a business situation becomes especially egregious, there are consulting companies in China who claim to have contacts within the PLA or CCP. These consultants can sometimes arrange fixes for problems. The fees for these services are substantial and depending on the magnitude of the issue involve six figure sums or more. One is left to wonder if some of your funds are being used as bribes or if perhaps you are just being taken.
Asia-based managers are often left with few choices: pay bribes; resist and become less competitive; or leave the market. This mainstream business discourse is contributing to a perceived sense of helplessness by managers. To minimize corruption, businesses must come to terms with how corruption impacts its people on the front-line.
Managers, aware that shareholders are often Canadian pensioners depending on growth, sometimes pay bribes believing that they are acting in the company’s interest. There is little economic incentive to resist bribery, as managers are rewarded for securing lucrative contracts.
It’s also easier for executives to not ask questions of how profit is acquired when times are good. Some managers may act as rogue operatives, though often they support families and are given unpersuasive arguments as to why they should resist corruption. Even if they succeed in bringing home profit, these managers are thrown under the bus when their questionable business practices become public.
This is a story that has been told for decades, but with major corruption cases involving Canadian business in Asia on the front page of newspapers, the business community is now listening and looking for ways to respond:
• First, open a dialogue and find ways of working with competitors and civil society on how to minimize your exposure to corrupt practices. Business associations must step forward and take the lead to openly discuss and document the challenges posed by corruption in Asia.
• Second, management must offer more resources to their employees. A one-day workshop on anti-corruption mechanisms, political governance, human rights, as well as the geopolitics of Asia can change the thinking within a firm on how to develop meaningful compliance measures.
• Third, managers should reward employees who document and reject bribe paying. These employees must come to believe in their product and the ability to compete without resorting to corrupt measures. Employees should also be trained in corporate social responsibility and compliance strategies, not by communications and marketing professionals but by outside counsel.
• Fourth, to minimize future risk, businesses should model their anti-corruption strategies after the globally accepted benchmark of the U.S. Foreign Corrupt Practices Act. Canadian legislation is weak and does not currently apply to acts of corruption that lack a clear and substantial link to the Canadian territory (i.e., land). However, given the pressures placed on Canada by the OECD and the U.S., this law will eventually change.
• Finally, business schools must offer training on how to deal with corruption and encourage their students to take courses on the politics, history and geography of the Asian region. This will help build Asia competency and keep Canada’s future business leaders out of prison.
The Canadian Corruption of Foreign Public Officials Act (CFPOA) has been in force since 1999 but only streaked across the radar screens of compliance officers when Niko Resources paid a fine of almost $10 million as a result of bribes paid to a Bangladeshi official. The large fine is only half of the story. Niko Canada and its subsidiaries were placed on probation requiring that the companies develop compliance procedures based on risk assessment.
The concepts in the prior sentence bear repeating as they are novel in Canada. The Order pierces the corporate veil to include subsidiaries, places a corporation on probation and requires a system of risk assessment. The following paragraph from the probation Order demonstrates the extent to which risk assessment is now a mandatory element of compliance in the anti-corruption arena:
The company will develop these compliance standards and procedures, including internal controls, ethics and compliance programs on the basis of a risk assessment addressing the individual circumstances of the company, in particular foreign bribery risks facing the company, including but not limited to, its geographical organization, interactions with various types and levels of government officials, industrial sectors of operation, involvement in joint venture agreements, importance of licences and permits in the company’s operations, degree of governmental oversight and inspection, and volume and importance of goods and personnel clearing through customs and immigration.[emphasis added]
The Niko case confirms that Canadian companies can be liable under the CFPOA for activities that occur elsewhere provided that there is a real and substantial connection between the offence and Canada. The case also illustrates the tension between parent and subsidiary companies that may exist in foreign jurisdictions. The general rule that parents are legally separate from their subsidiaries is subject to rare exceptions where the subsidiary is a mere conduit of the parent. Niko Canada had 100% control through a holding company of Niko Bangladesh and the President of Niko Bangladesh reported to the CEO of Niko Canada. As a result, there was clearly a real and substantial connection between the activities in Bangladesh and the offence in Canada.
A good compliance programme should encourage the development of compensation schemes that reward compliance in addition to and perhaps in contrast to financial performance measurements. There is strong evidence that compensation schemes will skew choices made by managers. The mathematics of risk may be overruled by the emotional perception of risk takers as leaders compared to risk avoiders who may be viewed as worthy of a back office. We need a new paradigm that better reflects the mathematical realities of risk management. Compliance bonuses must be the mirror of performance bonuses.
Read this piece in its entirety on the University of Toronto Law School’s Faculty Blog
“Read More +
In some Asian countries, corruption is a part of everyday life. For Canadian companies seeking to thrive in regions of Asia where corruption is endemic and widespread, engaging in bribery may seem like a common sense solution.”
Alanna Mackenzie, Undergraduate, University of British Columbia
In some Asian countries, corruption is a part of everyday life. For Canadian companies seeking to thrive in regions of Asia where corruption is endemic and widespread, engaging in bribery may seem like a common sense solution.
Before doing so, however, companies should seriously reflect upon the numerous risks that they face by engaging in bribery. Canada’s Corruption of Foreign Public Officials Act (CFPOA) recognizes the bribery of foreign public officials as a criminal offence. The CFPOA is far from being a perfect legal instrument, and contains several loopholes – for example, in demanding that a “real and substantial” link exist between the offence and Canada, the Act implies that Canada’s jurisdiction over the bribery of foreign officials has concrete limits.
By taking advantage of these loopholes, companies may further their short-term interests. However, there are obvious risks to bribing foreign government officials in Asia, including the possibility of receiving a heavy fine under the CFPOA, and the risk of inflicting irreparable damage upon a company’s reputation.
Aside from these more visible consequences, there are additional hidden costs of bribery. Engaging in bribery overseas projects a poor image of Canada internationally, and implies that Canadian businesses are willing to dismiss the values of the Canadian public when they move abroad. Other hidden costs associated with bribery include environmental or social consequences – for instance, if bribery is committed in order to persuade officials to turn a blind eye to environmental disasters or social disruptions caused by a company’s negligent behavior.
Finally, Canadian companies should be cognizant that some Asian countries are stepping up their own commitments to fighting bribery. Bangladesh, for instance, has an Anti-Corruption Commission which has co-operated with the RCMP in past bribery investigations. China recently passed an amendment to its Criminal Law which criminalizes the bribery of foreign public officials by Chinese companies and nationals.
If anti-bribery efforts in Asia continue to gather momentum, it will become increasingly difficult to sustain one of the most popular arguments articulated in support of bribery overseas, that Canadian companies must engage in bribery to compete with Asian companies who face fewer penalties for doing so.
Alanna majors in History Honours with a minor in French. She is a student journalist for the Ubyssey Newspaper and plans to pursue a law degree. Currently an intern at APF Canada, Alanna participated in a discussion on corruption at the first NCA Campus Conversation in Vancouver on March 3.