Finbarr Bermingham reports on the scourge of bribery and corruption, and how the world is trying to get on top of it.
A French commodity trader collects a cargo of coal from the mining home of Indonesia, Kalimantan. He’s already sold it to buyers in China, but knowing how tricky the transportation process can be, he chooses to escort it to the port. A few miles down a dirt road, surrounded by thick jungle, gunmen appear from the trees, ordering the convoy to stop and to pay them off in order to get by. The ambush is repeated once more before our source, who for obvious reasons wishes not to be named, finally gets his coal on the boat. In an excruciating call to his boss, he explains that rather than making money from the coal shipment, the company will now be making a loss. “This is Indonesia,” he says, exasperated. “This is how it works.” And while this is an extreme example, it illustrates the inherent perils of trading in Indonesia’s commodities sector. The country officially produces 400 million tonnes of coal a year. It’s estimated that its illegal coal mining sector produces another 80 million tonnes. “You can’t produce this quantity of coal without the knowledge of local government,” says our source. “Everyone from customs to transport is involved. This can’t be done without inside knowledge.”
Of Asia Pacific’s commodity powerhouses, Indonesia is ranked by Transparency International as being the most corrupt. Right near the bottom of the chart is Taiwan, considered by the architects of the Corruption Perception Index as being less crooked than Spain and South Korea. But our trader says that when he sells coal to buyers in Taiwan, 50 cents on the dollar is paid under the table. “We haven’t seen nor anticipate a great outbreak of honesty anytime soon,” says Frank O’Toole, lead partner in Deloitte’s Forensic practice in Australia. “This has been around for centuries. In terms of the modern economy, it’s been around for as long as that’s existed. Wherever you put money, people and opportunity together, someone will do the wrong thing.”
But it seems to lend itself more easily to the extractive industries. The sheer scale of the projects at hand, the amount of money involved and the level of public sector involvement are all known to be elements that nurture a culture of bribery. Where there are contracts, assets or concessions to be awarded, the chances are someone will want a slice of the pie. Another big factor is that the goods need to be moved around a lot. Once they’re out of the ground, they need to get to market, presenting more potential palms to be greased: and it’s not exclusive to the developing world. Deloitte data shows that 23% of organisations polled in Australia and New Zealand have experienced corruption on home soil over the past five years. It also shows that despite anti-bribery regulations coming into place for UK companies and crackdowns in Australia, China, Germany, the US and other industrialised nations, 35% of companies polled have experienced bribery in perceived “high-risk jurisdictions” over the same period – compared to 21% in 2012.
The problem isn’t going away: it’s getting worse, and the line on what constitutes a bribe can be blurry and ambiguous. “Sometimes corruption can begin innocently enough,” says Philippa Foster Back, director of the Institute of Business Ethics, in an email exchange. “You get taken for dinner. Then invited to an expensive sporting event. Then a weekend break somewhere. Before you know it, you are beholden to your host and they expect preferential treatment from you next time there’s a contract to be tendered for. It’s not all that long ago that you could note your bribe down as an expense, and in certain jurisdictions bribes were even tax-deductible. Bribery can take many forms, and there are many grey areas – for example when is a gift not a gift, when is a trip to the football a bribe? If you let your local police officer use your company pool for free, is that corruption?” In recent years, a number of high-profile cases have helped shed some light on the wide-reaching impact bribery can have, as well as highlighting just how far up the food chain it often travels.
In Brazil, the scandal engulfing the state-owned Petrobras had tentacles right at the top of government and led to huge private companies such as Rolls Royce, Odebrecht and Saipem being embroiled in the investigations. For years, engineering executives are alleged to have over-invoiced the size of their contracts with Petrobras, with the surplus money going into their own pockets, and to those of dozens of high-ranking governmental officials. As well as cash, extravagant gifts – luxury watches, call girls and even helicopters – were offered to secure contracts. The scandal is still unravelling, but it brought millions of Brazilians to the streets in protest. The company’s value plummeted, with thousands of jobs being shed. Economists that spent the first few years of this century forecasting great things for Brazil now look at the systemic corruption as one of the main factors that helped tilt the economy into recession, and which made their earlier projections look foolhardy.
In the Indian region of Rajasthan, the principal secretary of mines Ashok Singhvi was unveiled earlier this year as “the mastermind of a mine allocation racket” worth millions upon millions of dollars. It’s alleged that of the 650 mines allocated in Rajasthan in 2014, 400 of them were hurriedly awarded to companies before a new and more transparent auction process, introduced by Narendra Modi’s government, could come into place. While there is no official law banning politicians from having stakes in mining, local media reports that “over the last three decades, the policy of mines allocation has allegedly benefited a large number of politicians, cutting across the political divide. More than 200 present and past politicians are involved in mining”. Again, the lesson is clear: where there is public sector involvement in mining projects, the waters tend to be murky.
To put a trade finance bent on the story, look to Nigeria and the formerly UK-listed oil exploration company Afren, which ingloriously lost its place on the London Stock Exchange in September. The company was established in 2004 and grew exponentially over the next decade, hoovering up assets across West Africa and the Middle East. Administrators were called in in July, after the company revealed pre-tax losses of close to US$2bn. While the company attempted to blame the falling oil prices (which were surely a factor in its demise), there were much darker forces at play.
In 2014, the company’s CEO and COO, Osman Shahenshah and Shahid Ulah, were sacked for gross misconduct “in relation to payments made to them which were not authorised by the board”. The pair, along with a number of other executives, had been siphoning off company profits through a special Bermudan fund, awarding themselves US$17.1mn in bonuses. While the pair were forced to repay the money, the scandal and the subsequent mess it left on the company’s balance sheet saw it frozen out of commodity finance markets. At the time the administrators were called in, Afren had been struggling to cobble together US$300mn to repay a revolving debt facility for its Ebok asset in Nigeria.
Commodity bankers working in the space say that scandals such as Afren, Petrobras and the systemic saga in Rajasthan are forcing them to question their lending to the sector. For one, there’s the reputational risk at stake, but primarily, there’s proof – in the case of Afren – that they may well lose the money they lend, when the proverbial inevitably hits the fan.
“I think banks are nervous generally at the moment, largely because of the huge fines the US authorities have imposed on banks for not having sufficient checks in countries subject to trade sanctions. We’ve certainly seen pretty drastic actions against banks looking to trade legitimately in these countries. It’s a general nervousness that we’re seeing,” Anthony Woolich, partner at law firm Holman Fenwick Willan, tells GTR. The crackdown on trade-based money laundering (TBML) is an example of how regulation, when enforced properly, can quickly change the culture and dynamic of a market. While the excellent work done by organisations such as Global Financial Integrity (GFI) continues to unveil mindboggling statistics on TBML, there is no doubt that banks and companies are now petrified of the consequences of having any part in it. Funds used in bribery are predicated towards money laundering: they don’t go through the system. And yet, the practice continues apace. Only when there are uniform legislations in place around the world will there be a chance of getting a hold on it.
The gold standard
The gold standard of legislation on bribery is the UK Bribery Act 2010, which goes further than any other national law by outlawing the payment or receipt of facilitation payments (long-form for “bribe”). Four years ago, in the early days of the act, this reporter had a conversation with a senior figure at the British Exporters Association (BExA) who griped that UK firms would be at a disadvantage, since companies from every other jurisdiction would be able to tender for contracts on a less ethical basis. The argument has legs: in many parts of the world these sorts of grease payments are seen as the norm. To not pay them, is to essentially cut yourself off from certain business opportunities.
A junior engineer working in Kuala Lumpur at the UK-domiciled consultancy Mott McDonald told GTR that the company has seen the list of tenders it can bid for drastically reduced because of the obvious levels of bribery that would be required in order to succeed.
But rather than complaining about distorting the playing field for British firms, surely the lawmakers should be praised for taking a lead on efforts to eradicate a practice that costs billions every year, and that has real implications for economies small and large? “There’s a dichotomy between regulation and enforcement. Everyone’s looking to see how serious they are. When you look at anti-money laundering, that’s really enforced. Banks recognise they’re serious about that and therefore put the systems in. We as a US-UK company have to follow the rules. So how do we do business where they might ask for facilitation payments? At the end of the day you don’t do it. Be willing to walk away,” Henry Balani, director of innovation at software company Accuity, told GTR in Singapore recently.
There is a huge debate going on in Australia, where one side of the mining sector, largely because of UK parentage, is pushing for similar legislation to the Bribery Act. Looking at the makeup of Australia’s mining-dominated economy and the positions its major trading partners in China, Indonesia and Papua New Guinea hold in Transparency International’s Corruption Perception Index, it’s easy to see why the conversation needs to take place. Perhaps the most interesting and widespread crackdown on bribery and corruption anywhere in the world right now is in China, where Xi Jinping’s “tigers and flies” drive has been bringing down corrupt officials and businesspeople from all scales of society.
Tigers and flies
The situation in China is heavily nuanced. As a culture with 5,000 years of continuity, there are certain things that are ingrained: the idea of showing respects, giving gifts, treating customers and senior people to jollies. The line between what was okay and not okay has always been fuzzy, but the government’s crackdown has led to a serious shift in mindset among those working there. “At first people in business and government thought it was just another campaign, thinking: ‘Let’s keep our heads down and get on with it further down the line’. In a year and a half, Xi came out and said: ‘No this is the new normal, this aggressively regulated environment.’ It’s not just corruption: environmental regulation, food safety, tax, the regulators are starting to regulate now, which is a pretty unique thing in China, where there’s a lot of bureaucracy. The depth of the regulatory enforcement has been surprising,” says Kent Kendl, managing director of consultancy Control Risks, in China.
Tales of pre-crackdown corruption are often brazen enough to be laughable. Stories of officials being given an ATM card and PIN code, plus the freedom to withdraw whatever they wish, in order to secure a concession or licence are common. In 2011, a Chinese blogger dredged Google Images to curate a gallery of low-paid officials wearing Rolex and Cartier watches worth several times their salaries. Bribery is particularly prominent in the healthcare sector, where underpaid doctors are passed red envelopes in order to expedite prescriptions or ensure patients receive quality treatment. “There were so many people engaging in this, it was so rampant, and with a lack of enforcement, people were willing to take more of a chance and didn’t think about the consequences. Employees were brazen and even dared companies to terminate them unilaterally if they threatened arbitration because did anyone really want to go to a public arbitration commission and fight through the evidence of corruption? Was the will really that strong, and did you air too many secrets in the event? So a lot of people would be shuffled out, move to another company and engage in the same activity, knowing they could get a payoff and leave,” K Lesli Ligorner, partner at Simmons & Simmons in Shanghai, tells GTR.
The tide, according to those in the know, has turned. Employees at state-owned enterprises are now fearful of being taken out for an extravagant banquet lunch and prefer to discuss business over a coffee. For foreign companies, the UK Bribery Act was one thing, but the US$490mn fine slapped on GlaxoSmithKline by the Chinese government last year for bribing doctors and hospitals to promote their products was the real moment the penny dropped. People are now beginning to think twice before paying up, or at least reporting such advances in the manner required by the Bribery Act.
In short: only by getting tough on bribery can you ever hope to get rid of it. Some will argue that it will always be a necessary evil in certain parts of the world, in certain industries. The majority of people spoken to for this article beg to differ. Kendl says he has worked in some of China’s most corrupt sectors for 20 years and not once accepted or offered a bribe. “I’ve lost deals over the years because I’ve refused to bribe. But if my orientation going in is that I won’t do it, those deals weren’t possible to me in the first place, I can’t say I ‘lost’ them, I never had them in the first place if I was never willing to do that,” he explains.
In some respects, we could be reaching a tipping point on corruption across the world and it’s perhaps best seen in the ongoing storm engulfing FIFA, football’s governing body. The president, Sepp Blatter, had for years been morphing into a bastardised hybrid of King Canute and Ozymandias. A relic of a leader in complete denial, he watched as the wave of anti-corruption sentiment, and eventually regulators, lapped towards his feet. Still though, he stands defiant: a one-man hegemony of all that was wrong with the world he governed. Now it looks like he will fall, and if regulators can scoop out the rotten core of that most noxious of organisations, then there may be hope for all others.