The Dangers of Letting Bribery Go Undetected

January 26, 2016 | Download PDF

In 2012, The New York Times reported that Walmart routinely bribed public officials in Mexico to facilitate its expansion into that country. Executives at Walmart’s headquarters learned of this activity in 2005, but subsequently shut down an internal investigation despite the existence of a wealth of evidence that illicit and illegal payments had been made.

Added problem: Walmart failed to report these alleged violations of the Foreign Corrupt Practices Act (FCPA) until November, 2011, resulting in a rash of investor lawsuits and federal investigations into the company’s Mexican operations.

Shortly after the public disclosure of these alleged FCPA violations, at least eight of Walmart’s executives in Mexico, India and Arkansas left the company. Internally, Walmart subsequently responded to a US Department of Justice (DOJ) request to improve its internal controls and compliance programs by increasing its compliance staff by more than 30%. To date, Walmart has spent more than $430 million on investigations and compliance programs.

How to Avoid an FCPA Disaster

The US FCPA includes both anti-bribery and accounting provisions. As detailed in A Resource Guide to the US Foreign Corrupt Practices Act, from the Criminal Division of the DOJ and the Enforcement Division of the US Securities and Exchange Commission (SEC), the FCPA makes it a crime for American corporations or their subsidiaries to bribe foreign officials to obtain or retain business.

The accounting provisions of the FCPA require US and foreign public companies listed on US stock exchanges or which are required to file financial reports with the SEC to keep accurate books and records and to maintain an adequate system of internal accounting controls. Additionally, the accounting provisions prohibit individuals and businesses from knowingly falsifying books and records or knowingly circumventing or implementing a system of internal controls.

What Is A Bribe?

What constitutes a bribe under the FCPA? Any offer to pay, actually paying, promising to pay or authorizing the payment of money or something of value to a foreign official to influence any act or decision of the foreign official in his or her official capacity, or to secure any other improper advantage in order to obtain or retain business. Examples of “red flags” of bribery include:

• Attempting to influence the purchasing process;
• Gaining non-public information for bids on business contracts;
• Attempts to evade customs duties on imported goods;
• Commission payments requested for carrying out normal work;
• Invoices that appear inflated in value after a contract is won;
• Requests for foreign travel including family members;
• Unusual request for funds to be transferred to a third-party account or to a different country;
• Exorbitant gifts such as cars, tickets to various entertainment events, travel services, etc., that are asked to be given indirectly to associated individuals;
• Expense reimbursement forms and/or petty cash with insufficient documentation;
• Any commission greater than 15% (i.e., unreasonably large discounts paid to third-party distributors).

Awareness Is Essential to Prevention

Important: Not only does the management team need to be aware of such red flags, it must also keep in mind the following questions:

• What resources are allocated to performing FCPA due diligence?
• What does management’s “tone at the top” say about bribery and corruption?
• How are risks examined at the vendor/agent/third-party level?
• Does the company have a well-communicated anti-corruption policy — especially when dealing with high-risk countries?
• Has the company recently merged or is it in the process of merging with a company that does business internationally?

Accounting Risks

To conceal FCPA violations, bribes are often mischaracterized in a company’s books and records. The accounting provision of the FCPA specifically prohibits companies from concealing such payments and as such a company may be liable if the improper payments are inaccurately recorded. Bribes are often concealed in a company’s books and records as the following:

• Vague descriptions for particular payments (i.e., miscellaneous payments or “consulting agreements that include vaguely described services);
• Miscellaneous accounts that are used to hide improper payments;
• Unrecorded accounts or transactions (i.e., employees who obtain large amounts of cash from cash desks and then transport cash across international borders);
• Improper payments characterized as commissions;
• Improper payments characterized as consulting fees;
• Improper use of travel and entertainment expense account entries;
• Rebates/discounts;
• Intercompany accounts (accounts set up to record transactions between two groups in the same legal entity);
• Unusual or suspicious write-offs.

Detection Best Practices

While with all frauds and acts of corruption, detection often occurs via employee tips or by accident, it is helpful to implement proactive data analysis techniques to detect bribery. Examples of testing and monitoring that can be done include the following:

• Identifying transactions that involve descriptions such as “gift”, “services rendered” or “cash”;
• Identify transactions or payments to entities and/or individuals in high-risk countries;
• Identify individuals with a specified number of round dollar or even dollar expense reimbursements above a specific amount;
• Compare invoice amounts (or amounts paid) to purchase order amounts;
• Test high-risk activities such as payments to agents and high-risk vendors or travel and entertainment expenses involving government officials.

Serious Consequences

Failure to prevent and detect bribery can result in enormous penalties, reputational damage and prison time.

Examples: The recent scandals involving Walmart, Petrobras, FIFA and HSBC Holdings Plc.

Preventive essentials:

• An anti-corruption risk assessment, internal controls for high-risk activities and ongoing transaction data monitoring.
• Investigate potential “red flags” of bribery by conducting your own investigation or hiring an independent third party such as a forensic accountant. Forensic accountants can assist with conducting interviews, transactions records testing and electronic data review with the goal of identifying outliers and potential corruption “red flags”.

Bottom line: Our business environment is constantly changing and so must our FCPA-related due diligence processes. 

About the Author

Sareena M. Sawhney is a Director in the Financial Advisory Services group at Marks Paneth LLP. She can be reached at ssawhney@markspaneth.com or 212.503.6372