This past week I chaired the Beacon Events Corruption and Compliance – Asia Congress 2013 conference. One of the speakers was Alexandra Wrage, the founder and President of TRACE International, Inc (TRACE). If you have never heard Alexandra speak on anti-corruption, you have missed one of the most dynamic speakers in the industry. Alexandra is Canadian and, in our chats during the event, one of the things that we talked about was the National Hockey League (NHL) championship series between the Chicago Blackhawks and the Boston Bruins. Not only was the series the first championship between two of the Original Six teams since 1979 but the hockey was some of the finest and most exciting played in recent memory. Alexandra noted my somewhat forlorn use of the Houston Astros as a teacher in lessons around compliance and ethics. She also remarked that I had never discussed hockey in any of my blogs so she challenged me to use one of her homeland’s greatest gifts to mankind in a blog post. So here goes.
Last week the Chicago Blackhawks won the NHL’s championship, thereby securing the Stanley Cup, named after Lord Stanley former Governor General of Canada. The six-game series between the Blackhawks and the Boston Bruins was fabulous, in the deciding game, Game Six, the Blackhawks scored two goals in the final 90 seconds to not only erase a 2-1 deficit but win the game and bring the Cup back to Chicago. But here is the compliance angle, this most physical of all sports was played cleanly with no fighting, no cheap shots or dirty checks and no major penalties imposed on the players of either team. It was a great example that the game can be played the right way and done so at the highest level.
This translates into anti-corruption and anti-bribery in the business world as well because as Alexandra put it in her talk to the conference, entitled “Turning compliance into a tool and a strategic asset to drive company performance”, ethical principles are business advantages. She explained that by doing business ethically, not only does a company protect itself for the increasing international enforcement regimes that are being enacted but organizations can protect themselves in a myriad of other ways. If a company agrees to pay a bribe to obtain a contract, that is but one step that puts a company at risk during the entire process and relationship. As Wrage described, when you pay a bribe you are targeting your company for a relationship that can be endlessly changed. It becomes an endless pit of payments from which you cannot extricate yourself. Any government official who accepts a bribe has control over you and the amount that he or she can squeeze out of you going forward. You completely lose control of the negotiating process and indeed the entire contract because there is nothing that you have to enforce. A bribe, even if memorialized in writing, cannot be enforced in any court of law or other legal proceeding such as arbitration.
Wrage also talked about the hidden costs involved in any bribery scheme. An entire set of falsified documents must be created and even alternative corporation structures put in place to set the criminal structure to facilitate bribes. Company employees are not doing their regular jobs when they are engaging in such criminal actions. Indeed, if an employee is willing to engage in bribery, it does not take a long leap for that employee to turn to other criminal activities such as embezzlement. If there is money being syphoned off to pay bribes, it certainly can be routed into an employee’s individual bank account.
Wrage also explained why doing business ethically can benefit companies in the mergers and acquisitions (M&A) context. She talked about the off-cited example of eLandia, where the acquiring company basically had to write off an entire investment because it discovered that the entity purchased had a long running bribery scheme which artificially inflated the value of the company and post-acquisition, when the bribery scheme was stopped, the value plunged.
Wrage also noted that it is well-nigh impossible to get proper valuation on a potential acquisition target if bribery and corruption is occurring inside it. This is because if you take away the business generated from the bribery and corruption, what is the business worth? Put another way, what is your deal worth? Your inquiry needs to extend further than simply into the business as well. You need to understand any target’s sales model and understand how their business partners operate. Additionally, if their sales model is third parties, that is obviously your greatest risk.
Wrage’s thoughts echoed in many ways some of the discussion we saw in last year’s Department of Justice (DOJ)/Securities and Exchange Commission (SEC) FCPA Guidance, where for the first time, there was an extensive discussion about pre-acquisition due diligence, in addition to post-acquisition compliance integration, in the M&A context. The FCPA Guidance related that “most commonly, inadequate due diligence can allow a course of bribery to continue—with all the attendant harms to a business’s profitability and reputation, as well as potential civil and criminal liability.” The FCPA Guidance listed several hypotheticals which discussed pre-acquisition due diligence and that by engaging in such efforts a company may well be able to shield itself from Foreign Corrupt Practices Act (FCPA) liability after the merger occurs.
The FCPA Guidance also presented a fact pattern in its discussions of Declinations to Prosecute (Declination) where a US company was acquiring a foreign entity which was not previously subject to the FCPA. In one example, a US company received its Declination based upon its extensive pre-acquisition due diligence which allowed it to identify and halt the corruption. As there was no continuing misconduct post-acquisition, the FCPA was not violated. The clear import is that if this pre-acquisition due diligence was not performed; a Declination may not be forthcoming.
The bottom line from Wrage is that compliance is good for business. She made clear that ethical principles are a business advantage and not a business disadvantage. Having a strong compliance program in place also builds moral among employees. Lastly, Wrage believes that doing business ethically also builds good reputation with customers. There are numerous stakeholders for any corporation. Wrage has been one of the leading lights to demonstrate that by doing business ethically, and in compliance with anti-corruption/anti-bribery laws like the FCPA and the UK Bribery Act, a company can satisfy many of those constituency simultaneously.
The Blackhawks and the Bruins showed that professional hockey can be played at the highest level without the extracurricular activity that mars so many of the regular season games. So, just as doing business ethically and in compliance with international anti-corruption regimes is good for business, playing great hockey within the rules makes for not only great hockey to watch but improves the entire NHL hockey.
And who says a Texan, or any other Southerner for that matter, cannot fully appreciate hockey?
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© Thomas R. Fox, 2013