The Netherlands: Tackling Corruption at Home, Challenged Abroad

GUEST BLOGGER

Cathalijne van der Plas
Associate partner at Höcker Advocaten and colleague of ICC FraudNet

Last year, Transparency International released its Corruption Perceptions Index (CPI) 2015, which evaluates the level of endemic corruption in countries across the globe. The Netherlands secured a spot on the CPI as the fifth least corrupt country in the world, moving up from the eighth ranking in 2014 to follow only Denmark, Finland, Sweden and New Zealand in the organization’s annual report.

While the Netherlands’ move toward less corruption signals the country is doing something right when it comes to keeping corruption at a minimum, the CPI’s analysis only covers the public-sector corruption that takes place within a country’s national borders. Its figures do not include corruption by residents of the Netherlands abroad.

The Effect of Out-of-Court Settlements on Perception
It is likely that out-of-court settlements keep a lot of information about alleged corruption out of the public domain. These settlements rarely lead to prosecution of the natural persons responsible for the corrupt actions.

Well-known cases of Dutch companies involved in bribery abroad are SBM Offshore and Ballast Nedam, which both were finalized with out-of-court settlements. Furthermore, in February of 2016, the Dutch Public Prosecution Service entered into another out-of-court settlement with Russian telecom company VimpelCom, headquartered in the Netherlands. It was part of a joint settlement with the U.S. Department of Justice (DOJ), in which VimpelCom and its subsidiary paid $397.6 million to the DOJ and the U.S. Securities and Exchange Commission in fines for bribes paid to a government official of Uzbekistan to win bids for Uzbek telecom providers. More recently, there has been an investigation into the involvement of Shell in corruption in Nigeria.

Improving Enforcement
This highlights what Transparency International in 2015 discovered — that the level of enforcement by the Netherlands abroad can be seen as “limited enforcement.”

In the December 2012 release of its “Phase 3 Report on Implementing the OECD Anti-Bribery Convention in the Netherlands,” the Organisation for Economic Co-operation and Development (OECD) expressed its concerns about the efforts of the Netherlands regarding the active investigation and prosecution of corruption by Dutchmen or Dutch companies abroad.

In its “Follow-up to the Phase 3 Report & Recommendations,” released in May 2015, the OECD noted that the Netherlands has demonstrated significant progress with regard to enforcement, fully implementing 11 out of 22 recommendations and partially implementing six others. Only five of its recommendations were not implemented.

Between the period of December 2012 and May 2015, the Netherlands opened seven new foreign bribery investigations, bringing the total number to 16. Ten of these are ongoing investigations and four have been closed. The remaining two investigations, the cases of the Dutch companies SBM Offshore and Ballast Nedam referenced above, were finalized with sanctions imposed on the defendants through out-of-court settlements. SBM Offshore agreed to a $40 million fine and a $200 million disgorgement for payments in Equatorial Guinea, Angola and Brazil. Ballast Nedam agreed to pay €17.5 million and, in the context of the same case, KPMG Accountants NV agreed to pay a €3.5 million fine and €3.5 million in confiscation for bribery related accounting misconduct.

Nevertheless, the OECD is also aware of 24 other foreign bribery allegations that do not appear to have been investigated.

Changes to the Criminal Code
On January 1, 2015, relevant amendments to the Dutch Criminal Code entered into force. The amendments simplify and harmonize the offences for foreign bribery, including removing the distinction between bribery to induce a violation of official duty and bribery to receive a benefit within the official’s duty. The amendments also increase the maximum sanctions for foreign bribery. Furthermore, the Netherlands has improved the regime of criminal liability of legal persons. However, the Netherlands has not amended its legislation since Phase 3 to increase protections for foreign bribery-related whistleblowing in the public and private sectors.

Enforcement Leads to Improvement
Although the Netherlands is perceived as one of the least corrupt countries in the world, there is room for improvement in its efforts of enforcement against corruption abroad. Stimulating active enforcement will deter from corrupt actions, although the tendency to settle out of court might reduce this effect.

Cathalijne van der Plas is an associate partner at Höcker Advocaten and colleague of ICC FraudNet, an international network of independent lawyers who are leading civil asset-recovery specialists in their respective jurisdictions. Recognized by Chambers Global as the world’s leading asset recovery legal network, FraudNet’s membership extends to every continent and the world’s major economies, as well as leading offshore wealth havens that have complex bank secrecy laws and institutions where the proceeds of fraud often are hidden. 

What Really Causes Corruption? It may surprise you.

GUEST BLOGGER

Mary Breslin, CFE, CIA
President, Empower Audit

I was recently asked to write a book on global corruption from an audit perspective. I am thrilled at the opportunity to share my global experience with other auditors, however while developing the outline I have been spending much time considering the difference between government corruption and corporate corruption. The more I think about it, the clearer the answer becomes: there is no difference. While I have spent the vast majority of my career in large corporations and have only a sprinkling of government in my background, almost all of the corruption I have encountered around the world involved a government official or entity.

If we look at Transparency International’s latest Corruption Perceptions Index, more of the world is labeled as “highly corrupt” than not. So how does an American company abide by the anti-corruption rules and regulations when trying to conduct business globally? 

First, I think we need to better understand the problem. And we need to define “corruption” globally. What Americans, and the Western world define as corruption is not necessarily seen as corruption in other countries. Americans often see corruption in black and white. An act is either allowed (legal) or not (illegal). But what if our lack of understanding, our ignorance of other cultural norms, is causing our belief system to be in complete contrast to those in other countries?

When I first began traveling internationally as an auditor, I saw everything as black and white too. Then I started gaining experience. Consider these scenarios:

1. A division of a company pays $10,000 per month to a local drug cartel for protection at a manufacturing plant.

2. A border location between two African countries pays a “passage fee” to the border agents for every delivery between sites on opposite sides of the border.

3. A government inspector in an Asian country is paid a “fee” to come inspect a site in order to continue production.

In the early years of my career I would have said all these examples are corruption and the company needs to stop participating immediately. But let’s consider some additional information:

1. This plant is in a Brazilian favela (slums) in which a war is raging between two drug cartels. When Brazil cleaned up Rio for the Olympics and World Cup, they cleared out the favelas nearest the tourist areas, pushing the people and the gangs into other favelas. The gang that originally “ran” the favela, a favela’s kind of law and order,has offered to protect our site from the invading gang. We pay, but we also institute a 5 p.m. curfew and immediately begin plans to relocate the production plant. We self-disclose our actions to the SEC and proceed to build the new plant as quickly as possible. What would you do?  Close the plant and fire 500 people who have little chance of finding new jobs? Not pay and put the welfare of every employee at risk?

Let’s look at the next one:

2. This is the only crossing for 350 miles. The border crossing guards carry guns. They know you carry valuable cargo. You need to make this trip three times a week to provide supplies to 500 employees at a remote site who rely on your deliveries, as they have no other option. The alternate route, which would be a 500-mile trip to go 30 miles, is filled with ruthless militants and bandits. The border control guards actually keep the “bad” guys at bay, making this route reasonably safe. So do you pay the guards who ask just a small fee or take your chances on the dangerous un-policed road known to have violent criminals monitoring it?

Or how about the last one:

3. It turns out that in this nation, these government positions are appointed without salary. The inspector is expected to generate his own salary through the “fees” he collects from those he inspects. The inspector and his colleagues are also extremely understaffed and overwhelmed with work due to rapid economic growth in this geographic area. The only way to obtain the legally required inspection is to pay the inspector a fee that we all know goes straight into his pocket. In order to get the inspector there in a timely manner, to obtain the permit necessary, it is necessary to pay him more than everyone else pays him so he makes you a priority. The inspector is a father of three and lives a very modest life. The inspection itself is a fair and honest inspection. Go figure.

The situation is almost always more complicated than is initially assumed. What causes corruption to be so high in some countries? You may have already reached your own conclusion, but let’s look again at the Corruption Perceptions Index. Many of the most corrupt countries are very poor developing nations or have large poverty-stricken populations. Some of these countries do not have the national infrastructure to support solid processes like in the U.S. Without formal government systems to bill and collect funds and then redistribute to employees (inspectors, border guards, etc.), the process becomes streamlined — payment goes straight to the person performing the work. That looks like a lot like corruption, and creates ample opportunity for fraud. When you take into consideration the root causes for some of acts, things become a lot less black and white and a lot more grey. These causes are certainly things to consider and try to understand when working to protect your organization from corruption. I do not have the answers, as this is a large global issue, however I do believe that knowledge is power and understanding corruption and its causes will go a long way in fighting it.  

Fighting ‘Public Enemy No. 1’ in Developing Countries

LETTER FROM THE PRESIDENT

What fraud is common to all nations? Corruption. Corruption schemes comprise one-third of fraud cases worldwide, as reported in the ACFE’s 2012 Report to the Nations on Occupational Fraud and Abuse — with a median loss of $250,000.

Corruption and bribery enrich strongmen but ravage citizens in many nations. This fraud, according to Dr. Peter Eigen, founder of Transparency International (TI) speaking at a TED Talk conference, perverts “economic policy-making … which is the main reason for the misery, for the poverty, for the conflicts, for the violence, for the desperation. …”

We’re honored to present Eigen, a singular fraud fighter, as a keynoter at the 25th Annual ACFE Global Fraud Conference, June 15-20 in San Antonio, Texas.

When he was working as a World Bank director in Africa in the early 1990s, systematic corruption was undermining all his projects. He says the members of the World Bank — including Germany, his home country — thought that foreign bribery was acceptable. “In Germany … it was even tax-deductible. No wonder that most of the most important international operators in Germany, but also in France and the U.K. and Scandinavia, everywhere, systematically bribed,” he says.

He began to speak out against common bribery practices, but the World Bank ordered him to cease and desist because he was “meddling in the internal affairs of our partner countries.” In 1993, Eigen convened a small group of colleagues in Berlin who agreed that corruption didn’t have to be the norm. They began TI — a global, nonpartisan nonprofit with chapters in more than 100 countries — that continues to help governments, businesses, civil societies and individuals fight the scourge of corruption.

You probably know TI because of its Corruption Perception Index, but the organization also works with leaders and citizens to create international anti-corruption conventions, disseminate publications, prosecute corrupt leaders, support national elections for tackling corruption and hold companies accountable. It has begun a global movement with one vision: “A world in which government, business, civil society and the daily lives of people are free of corruption.”

TI’s efforts appear to be bearing fruit. The World Bank recently declared corruption “the public enemy No. 1” in developing countries.

Come hear this inspiring man at the 25th Annual ACFE Global Fraud Conference. Check out all the speakers and sessions at FraudConference.com. 

FCPA Compliance in China

SPECIAL TO THE WEB

By Mark Jenkins, CFE; Sunny Chu, CFE, CPA; and Christopher Meadors, J.D., CPA

As you sip your frothy Cappuccino while basking in the glow of your most recent quarterly report, which shows a dramatic increase in sales in your China division, your assistant busts into your office with a letter from …. the Department of Justice! Hmmm. What could they want?? 

While foreign direct investment (FDI) in China has lost some momentum — it decreased from $116 billion to $111.7 billion from 2011 to 2012 — China still remains one of the most preferred locations for corporate investment. Of course, great opportunities can often precede large frauds. Some multinational companies, such as the British pharmaceutical giant GlaxoSmithKline (GSK), are finding themselves in the headlines faced with allegations of violations of the U.S. Foreign Corrupt Practices Act (FCPA) and Chinese anti-bribery laws.  

When multinationals decide to enter China through FDI, several underlying forces could be a problem: 

• Corruption that has long been the norm in China.
• The Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) is now vigorously enforcing the FCPA.
• The existence of state-owned entities (SOE) that appear to be private entities.

CORRUPTION IN CHINA 

Although China is attractive for FDI, multi-nationals must know with whom they do business and be aware of the inherent risks of corruption. Transparency International’s 2013 Corruption Perceptions Index (CPI) ranks China a relatively poor 40th. (According to Transparency International, zero means highly corrupt, and 100 means limited corruption. To provide points of reference, Afghanistan and Somalia are 8 on the CPI, and Denmark and Finland are 90. Although China isn’t the highest in corruption, it remains a high-risk country.) 

What corruption risk could a multinational expect when doing business in China? In the GSK case, Chinese authorities are investigating the company for colluding with a travel agency to funnel money to government doctors using fraudulent invoices. (See “ GlaxoSmithKline Accused of Corruption by China,” by David Barboza, The New York Times, July 11, 2013.) In 2012, Eli Lilly had similar issues when its sales force employees were submitting expense reimbursements for cash, bathhouse visits and meals they were giving to Chinese government doctors in return for the doctors purchases of Eli Lilly products. 

The pharmaceutical industry is not alone in struggling with corruption in China. In 2012, Morgan Stanley’s real estate and fund advisory managing director, Garth Peterson, colluded with a former chairman of a Chinese state-owned enterprise, Yongye Enterprise Group. Peterson paid the Chinese official and himself “finder’s fees” of $1.8 million that Morgan Stanley owed to third parties. In exchange for the fees and personal interest in Morgan Stanley’s investments, the Chinese official brought business to Morgan Stanley. (See the SEC release, “ SEC Charges Former Morgan Stanley Executive with FCPA Violations and Investment Adviser Fraud.”) 

Read the full article on Fraud-Magazine.com.