Shireen Muhiudeen is a Senior ESG Investment professional in Emerging Asia. She is the founder of Corston-Smith Asset Management.
Corruption leaves no one untouched, and there is increasingly less tolerance for its existence at any level. With news becoming easily available at the click of a button on social media, the person on the street can now see the effects of corruption in the education system, in healthcare, as well as in the state support system.
Global corporations today, especially those led by a responsible, ESG-aware Board, can no longer claim ignorance to corruption practices by their subsidiaries or partners in another jurisdiction that they operate in.
According to the Transparency International Corruption Perception Index 2020, since 2012, only 26 countries have improved their scores, while 22 countries have shown a decline. All other countries appear to have shown no material change.
However, global corporations have made some longer-term progress by enforcing anti-corruption standards via their own Foreign Corrupt Practices standards; and some countries have done this using the Deferred Prosecution Agreement (DPA). You would have seen the DPA surfacing on our shores a few times, as more and more local companies collaborate with foreign companies that now are now subject to serving out a DPA judgement.
From a layperson’s point of view, the steps of a DPA are generally as follows:
- A corporation engages in criminal activity, for example, a massive fraud. The corporation or individuals involved are caught with evidence by the enforcement agencies. (In some cases, cross border enforcement agencies work together to nail the corporation or individuals.)
- An agreement is reached between a prosecutor and the company on the charges that otherwise could be prosecuted. This arrangement is with the approval or under the supervision of a judge.
- The agreement allows prosecution of the case to be suspended for a defined period, provided the organisation meets very stringent conditions or compliance programmes with clear timelines.
Make no mistake, a DPA means you are guilty as charged. (You can’t say, “I wasn’t asked to comment or argue against the charges.”) A DPA implies that you know you are caught, and you’ve chosen to avoid going through with a messy trial, which will disrupt your company’s operations; so the DPA is a way forward for the company to adhere to the list of changes, which will be closely monitored.
The changes could include closing down branches or even removing PEPs as clients (politically exposed people or corporations). And, of course, hefty fines, firing the staff and individuals involved in the criminal activity. Being under a DPA means it is not business as usual.
Signing up with a global company should not be viewed as just making a headline statement in the media to bump up your stock price. Instead, it means that you are now compelled to adhere to global compliance standards.
Two years ago, a well-known global telecommunications giant entered into a DPA with the United States Department of Justice (DOJ). The company ‘admitted to undertaking a campaign of corruption in five countries to solidify its grip on the telecommunications business.”
The summary of breaches reads as a typical playbook used:
- “Using third party agents and consultants to pay bribes to government officials and/or to manage off-the-books slush funds.
- Agents were often engaged through sham contracts and paid pursuant to false invoices, and the payments to them were improperly accounted for in the books and records.
- The resolutions cover the Company’s criminal conduct in five countries in Asia. Two are from Southeast Asia.
- Creating a subsidiary, and paid approximately US$2.1 million (10% of a contract size) in bribes to high-ranking government officials in order to obtain a contract with the state-owned telecommunications company.
- The subsidiary entered into a sham contract with a consulting company and approved fake invoices to conceal the bribe payments.
- The telco’s employees also completed a draft due diligence report that failed to disclose the spousal relationship between the owner of the consulting company and one of the high-ranking government officials.
- The subsidiary caused tens of millions of dollars to be paid to various agents, consultants and service providers, a portion of which was used to fund a travel expense account that covered gifts, travel and entertainment for foreign officials, including customers from state-owned telecommunications companies.”
I’m sure this playbook will sound so familiar to many of us.
In a press release by the DoJ, the US attorney involved in the case succinctly said: “Through slush funds, bribes, gifts, and graft, the said company conducted telecom business with the guiding principle that ‘money talks.’ Today’s guilty plea and surrender of over a billion dollars in combined penalties should communicate clearly to all corporate actors that doing business this way will not be tolerated.”
“Implementing strong compliance systems and internal controls are basic principles that international companies must follow to steer clear of illegal activity,” said the chief of IRS Criminal Investigation, in the DOJ release.
It’s worth repeating that once a DPA is served, the company is guilty as charged in the agreement. You have agreed to every sentence in the DPA, down to the last comma. This means that no matter what your views are regarding the contents of the DPA, you have to follow the stated changes and timelines to implement the new robust compliance requirements. In some cases, a monitor will be sent to ensure the implementation of a system of accountability and new controls.
Just so that you can understand the gravity of the DPA with a monitor; the monitor arrives at your offices around the world with a very experienced and sizable team, tasked to interview anyone they choose to speak with. They do not only grill the board and the executive team, but will go right down to the junior staff. This process is definitely stressful for everyone involved, as the monitor will assess if the corporation is making the necessary changes that have been agreed upon in the DPA.
You may ask what happens if a company refuses to follow the details of the DPA. The most telling was when a US lawyer said : ”Well, worst case is that your corporation may not be able to trade dollars.” That is a huge wake-up call to companies; as nearly every business in the world has some form of exposure to the dollar. And if you are isolated or treated as a pariah to the dollar, no other institution will be willing to risk their status by dealing with you.
We all assumed that the global telco giant would adhere to every comma of the DPA. However, fast forward to the last quarter of 2021, where the company has received correspondence from the DOJ, which states that the DOJ “has determined that the company has breached its obligations under the DPA by failing to provide certain documents and factual information”.
It’s too early to say what will happen next to this telco and to all the companies within its ecosystem; but one thing is for certain – as investors, we must use our ESG investment dollars to shun these types of companies, and as a consumer stop using their services and products. If we stick together against graft, our small voices combined can make a difference.