FCPA fines not the only worry for non-compliant Asian institutions, says report

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By Ajay Shamdasani Fines under the U.S. Foreign Corrupt Practices Act (FCPA) are only the beginning of worries for firms in Asia, according to a new report issued by Kroll Advisory Solutions. The report focused on global anti-corruption legislation and high-profile cases illustrating the costs of non-compliance, and found that there is still a major gap in the perceived exposure of Asian companies to the risks they face as global anti-corruption efforts ramp up. “We've already seen the enforcement capability of the FCPA across Asia-Pacific in recent years," said Abigail Cheadle, managing director of Kroll's Southeast Asia financial investigations practice in Singapore. She told Thomson Reuters that with the UK Bribery Act's (UKBA) implementation last year, companies needed to raise anti-corruption efforts, not only to comply with legislation, but to avoid the fines, disclosure requirements, possible arrests and remedial action costs which frequently accompanied violations. "Falls in stock price and intangible reputational damage are further compelling reasons to maintain the highest compliance standards,” warned Cheadle. On August 9, 2012, Kroll announced the first installment of its "Complying with Global Anti-Corruption Legislation: Perception Versus Reality" survey. The survey aimed to identify the risks Asian companies faced under the FCPA and the UKBA, and local anti-corruption legislation. It focused on high-profile cases in which Asian companies faced major financial penalties from breaching anti-corruption legislation. Despite such cases, Kroll said an attitude of ambivalence continues regionally, which has historically resulted in substantial losses both tangible and intangible. In January 2012, Japanese trading company Marubeni agreed to pay a $54.6 million criminal penalty for its role in the decade-long Bonny Island scheme, in which Marubeni sought to bribe Nigerian government officials for contracts on behalf of its client, TSKJ joint venture — clearly violating the FCPA. In 2011, Japanese engineering and construction company, JGC, agreed to pay a $218.8 million criminal penalty for its role in the same scheme. Fines from Western regulators can be large, but they are often just the first of many bodies to impose penalties for corruption. Firms can also face fallout because of corruption, even without formal violations. In August 2010, Singapore plastics manufacturer JLJ saw its share price drop after the arrest of Apple executive Paul Divine. He was charged with receiving kickbacks from JLJ in exchange for confidential information on Apple products. Although JLJ claimed no wrongdoing and were not prosecuted under the FCPA, the fact that a former JLJ employee was indicted in a related civil suit was enough to hurt stock value. Businesses face fines in markets where their infractions occur, and in the jurisdictions where they operate or are registered. "Many local jurisdiction bribery rules are just as stringent as the FCPA, they’re just not necessarily enforced consistently nor do they levy the fines that the FCPA has historically," said Cheadle. One surprising aspect of the Kroll study was that it did not mention local laws, which are easier to enforce for corruption crimes in Asia, said Julian Russell, managing director of Pacific Risk, a boutique risk management firm in Hong Kong. For example, the Hong Kong Bribery Ordinance makes it a crime in Hong Kong, even if a bribe is paid offshore. Local Asian laws can also be multi-jurisdictional laws," he said. Thirty-nine countries have laws similar to the FCPA and UKBA in terms of extraterritorial prosecution of overseas graft, said John Bray, director of analysis at Control Risks in Tokyo. "Regulators agree on the principles, but prosecution and enforcement is uneven," he added. Japan has only ever prosecuted two foreign bribery cases, one of which was very minor, he told Thomson Reuters. "However, as the Kroll report notes, there have been three FCPA enforcement cases against Japanese companies in the last 18 months." Additionally, organisations found guilty of violations must return the profits of corrupt practices. Local governments are increasingly collaborating with U.S., UK and other European regulators to grant access to assets outside of their home jurisdictions. Asian multinational corporations (MNCs) with operations overseas can have assets seized from such collaborative enforcement. Many countries have also signed on to the Organisation for Economic Co-operation and Development's Anti-Bribery Convention (1997) and implemented it into domestic law, said Russell. Compliance challenges The compliance challenges facing financial institutions in Asia are legion. More recently, however, Cheadle stressed that they pay attention to the whistleblower bounties introduced by the U.S. Dodd Frank Act (2010). She also said that the U.S. Securities and Exchange Commission's (SEC) focus group specifically devoted to Asia was a cause for concern. "Financial institutions are the next big industry to be investigated," said Cheadle. She added however, that non-global financial institutions tended not to be up-to-speed on broader, transnational compliance issues such as anti-corruption when compared to their global counterparts. Cheadle said that when operating in developing markets, institutions frequently had to deal with the government — either as clients or in state-owned enterprises in places like mainland China and Indonesia — and that added to their corruption risks. "Financial institutions obtain business from governments and obtain licensing from governments, amongst other things," she said. Additionally, if banks think they are not subject to the FCPA, they could find themselves in the middle of a transaction with a lender, borrower or letter of credit that leads that financial institution right into U.S. jurisdiction, said Lesli Ligorner, a partner with law firm Simmons & Simmons in Shanghai. "The lesson for financial institutions: even if you don’t think you’re subject [to the FCPA], U.S. jurisdiction could be based on the transactions you are party to or the companies with which you do business," she said. "One critical thing that companies in the financial sector should pay attention to is that many of them don’t think that they are subject to either the FCPA or UKBA; that’s a mistake." For example, Japanese company JGC was not listed in the U.S., nor did it have a U.S. office or do business there. Yet, it still pled guilty to FCPA violations. "Speculation is that they had a number of clients around the world that are subject to the FCPA or the UKBA. They worried about how it would look if JGC disputed the jurisdiction of the FCPA, because it would mean that they could not guarantee the representations and warranties to their clients that they had anti-corruption policies and procedures in place," said Ligorner. She added that as with JGC, if companies wanted to maintain a client base that was subject to the FCPA, they had better comply. Even if one is not a U.S. or UK company, or listed in those nations, there could be some bribery offence nexus with them, rendering a business liable to the FCPA. U.S. prosecutors, in particular, are very creative in finding ways to exercise jurisdiction over non-U.S. companies, said Bray. "It isn’t just a matter of being listed in the U.S., even if you just pay a bribe through a U.S. bank they may have jurisdiction," he added. A recent FCPA enforcement case in Shanghai against a former Morgan Stanley executive was an example of U.S. enforcement against a U.S. company in China, said Bray. "But it’s also worth noting that recently, the UK levied fines on two insurance brokers, Aon and Willis, in matters relating to intermediaries. The U.S. followed up with a related enforcement case in relation to Aon and this specifically cited several Asian countries." It appeared, therefore, that the FCPA and UKBA would be enforced globally with more rigour than local anti-corruption legislation, said Jay Jhaveri, head of Asia for World-Check (a Thomson Reuters company) in Singapore. "With extraterritorial reach, all companies that may be 'on the edge' should be very worried about running afoul of the U.S. and UK anti-corruption legislation," he said. Yet, the vast compliance investments that global institutions have already made may give them an edge over other MNCs. "In one sense, financial institutions have an advantage over other sectors because they’ve already got a [compliance] framework in place, it just needs to be tweaked. For example, they’ve got some of the best know-your-customer (KYC) policies and procedures, but other businesses will need to get such things," said Cheadle. ??She added, however, that institutions still needed to make incremental modifications for anti-corruption compliance. "Initially, there might be a slight increase in staffing levels, but only marginally so. Banks already have monitoring tools and data analytics, which they use for anti-money laundering (AML) and KYC compliance that can be applied to anti-corruption," said Cheadle. Yet, compliance should not simply be about technology and formalistic adherence to rules, said Abdulali Jiwaji, a Simmons & Simmons partner in Hong Kong. "It’s not ‘tick-the-box’ compliance which is needed, but a meaningful process that improves the culture and helps mitigate the risk of bribery and corruption within an organisation," he told Thomson Reuters. Timing Cheadle said the report was released to coincide with the passage of one year since the UKBA became effective. "We asked 27 questions and only 34.6 percent of respondents appreciated or understood the FCPA, whereas 38 percent understood the UKBA," she said. Of respondents, 88.5 percent said they had some exposure to the FCPA or UKBA, or some sort of anti-corruption legislation. A further 35 percent operated in high-risk industries. Fifty percent of respondents operated in high-risk countries. Twenty-three percent of companies said they were doing absolutely nothing in regard to have anti-corruption compliance. "I’m not sure if Asian companies fully appreciative what they need to do to comply and effectively minimise risk," said Kroll's Cheadle. "Even though they might be satisfied, it is our experience that most frameworks in Asia companies are insufficient to minimise the risk." Some 36.4 percent said that they were doing something specifically about anti-corruption, with the rest in the middle doing something compliance-related, but not corruption-specific. Some 59.1 percent of respondents said that they were satisfied with their existing frameworks and thought that they had effective ant-corruption procedures in place. "Asian companies generally think that foreign rules and regulations have no effect on them, even though a lot of foreign legislation is applicable to them," warned Cheadle. Another installment of Kroll's global anti-corruption survey report will be published later this month.