Firms could get caught in Asia as corruption rules tighten

SINGAPORE — Multinational firms trying to get a bigger piece of the Asia growth story face a rising risk of becoming embroiled in corruption scandals unless they enforce stricter compliance norms and new regulations.

The region may have moved center stage in many companies’ growth strategies as developed economies struggle but firms are also scrutinizing projects even more and stepping up due diligence before jumping into new joint ventures and M&A.

The US has ramped up enforcement of the Foreign and Corrupt Practices Act (FCPA), while the UK’s new Bribery Act comes on stream in April.

“There is an awful lot happening in the region when it comes to anti-corruption and multinational companies … are having to do a big review of their compliance procedures” said Kelly Austin, a partner at law firm Gibson Dunn in Hong Kong.

Avoiding corruption in Asia is notoriously tricky given the woeful record many countries have when it comes to tackling bribery. In Transparency International’s league table of the least corrupt countries, China comes in at 78 and India at 87 while Indonesia and Vietnam are languishing at 110 and 116, respectively, out of 178.

Last year, a record number of enforcement actions were brought under the United States’ Foreign and Corrupt Practices Act, which bans payments of bribes to foreign officials.

A big chunk of those 74 cases involved Asia with Alcatel Lucent the latest big name to get caught up. It agreed to pay $137 million last year to settle charges it paid bribes to foreign officials in a number of Asian and Latin American countries.

This step up in enforcement was one factor that prompted law firm Kobre & Kim to open a Hong Kong office last November specializing purely in US litigation — the first of its kind in the city.

“There is definitely a lot of concern in the market place — more intense in Asia than in other areas,” said William McGovern, the former Morgan Stanley lawyer who heads the office.

“US government prosecutors have demonstrated that they expect companies operating in China to adhere to US standards despite the pull of Chinese business norms,” he said.

This sort of cases is set to increase given the United States’ Securities and Exchange Commission has recently opened an FCPA enforcement unit in San Francisco specializing in Asia and California.

But even for companies well-established in Asia with an FCPA-compliance program in place, there’s a new rule looming that is forcing many of them to review their control procedures.

The UK’s new Bribery Act comes into effect in April, applying to any company with operations in Britain, even if the bulk of its business is done elsewhere.

Dubbed the “FCPA on steroids”, it goes further than prohibiting bribery payments to foreign officials. It criminalizes bribes between private businessmen and bans the payment of facilitation payments.

“The new law is incredibly tough — the initial response when we advise clients about it is disbelief,” said Wilson Ang, a dispute resolution lawyer at Norton Rose in Singapore.

Staying clear of these types of bribery cases in Asia is notoriously tricky. Facilitation payments — small sums of money used to speed up routine procedures such as licensing applications — are common across the region.

A British businessman working for an international firm in Indonesia said he can’t move goods long a road in the country without having to make a series of these payments.

“The operator of a port I have used seemed to be very successful and so I asked him if he had any problems with corrupt officials, and he said ‘no, I give them a new Toyota each every year’,” he said.

While this is generally seen as a cost of doing business, the businessman says his company is now unlikely to open a new plant in the country because of the payments.

“If you buy a company that has been engaged in improper payments you are to an increasing degree responsible for that — and we’re doing a lot of work on that,” said Gibson Dunn’s Ms. Austin.

Until recently, rigidly enforce these rules in Asia was extremely tough. But several developments mean cases are now more likely to drop into law enforcers’ laps.

The whistleblower directive in the Dodd Frank Act entitles individuals who report breaches of the FCPA act to between 10% and 30% of any penalty over $1 million.

Added to this is an escalation in efforts by Asian governments to clamp down on bribery. — Reuters