Conflicts of interest are common in many walks of life and can often occur innocently. However, they can also be precursors to bribery or fraud, and can have significant commercial repercussions. Perhaps not surprisingly, such conflicts are frequently found at the intersection where business meets politics and, if not managed properly, can present the compliance officer with a significant compliance headache.
The relationship between business and politics is often a cosy one, and this is particularly the case in Asia. How state governments manage this varies considerably across the region.
For example, South Korea recently decided to take a hard-line approach to conflicts when its National Assembly passed a bill that allowed public officials to be punished for receiving bribes of more than KRW1 million (approximately US$925) in cash or goods, even if not in exchange for favours.
Some have suggested that the anti-corruption bill, which was first proposed by former Korean Supreme Court justice and former head of the country’s Anti-Corruption and Civil Rights Commission Kim Young-ran, might discourage public officials from doing their jobs through fear of punishment. However, Kim successfully argued that the bill would close loopholes that had previously allowed government officials to receive bribes in connection with their work.
Beyond Korea the picture is less rosy. ‘Conflict-of-interest standards in Indian politics are pathetically weak,’ says Milan Vaishnav of United States–based Carnegie Endowment for International Peace.
The Financial Times recently revealed that Indian conglomerate Reliance Industries paid undisclosed monthly legal consultancy retainers to politicians Manish Tewari and Ravi Shankar Prasad before they became broadcasting minister and telecoms minister, respectively.
India’s parliamentary rules do not forbid the acceptance of paid retainers from companies, and commercial arrangements do not always have to be disclosed. As both politicians ceased all commercial legal work upon commencement of their ministerial duties, as per India’s ministerial code, no party is understood to have broken any Indian laws.
And yet, the revelation that Reliance Industries’ owner Mukesh Ambani – India’s richest man – had two senior politicians on his payroll shocked India, and raised questions about political transparency and the perception of potential conflicts of interest.
Professor Jagdeep Chhokar, a former dean of the Indian Institute of Management in Ahmedabad and co-founder of campaign group the Association for Democratic Reforms, told the Financial Times that the revelations were a very serious problem for India. ‘If these contracts are not disclosed, how do we decide whether any person is taking decisions in the public interest, or in the interest of a particular company?’
Hong Kong’s largest graft trial
According to the 2014 World Economic Forum, Hong Kong is ranked amongst the best countries in relation to irregular payments for imports and exports, public utilities, tax payments and the obtaining of favourable judicial decisions. The Special Administrative Region of the People’s Republic of China is therefore often cited as a model example of a sophisticated jurisdiction that has been very effective in overcoming the issue of corruption.
But Hong Kong’s profile took something of a hit towards the end of last year when local property tycoon Thomas Kwok, one of Asia’s richest men, was found guilty of bribing the former head of Hong Kong’s civil service Rafael Hui as he prepared to assume the territory’s number-two government position of chief secretary.
In what was Hong Kong’s largest graft trial, former Sun Hung Kai Properties (SHKP) chairman Kwok was found guilty of conspiracy to commit misconduct in public office. Although a charge that carried a potential jail sentence of seven years, Kwok was ultimately imprisoned for five years.
Hui meanwhile was found guilty of five of the eight charges against him, including three counts of misconduct in a public office. These involved his use of two luxury flats on a rent-free basis and his involvement in a consulting deal with SHKP while he worked for Hong Kong’s mandatory pension fund.
Hui was also found guilty of concealing from the government an unsecured HK$3 million (US$387,000) loan from a SHKP subsidiary when he was chief secretary, and was given seven and a half years’ jail time.
Alcatel-Lucent’s Asia Pacific Head of Compliance Ricky Short said, ‘This is a reminder that this happens in Hong Kong too and that there are serious consequences, not just lip service.’
The ICAC arrested Thomas Kwok and his brother Raymond in March 2012 (Raymond Kwok was subsequently cleared of all charges). By the end of May 2012, SHKP had lost US$7 billion from its market capitalisation as a result of the investigation, highlighting the often underestimated financial cost that results from subsequent reputational damage.
‘For the compliance profession in Hong Kong this reinforces the value of compliance, conflict of interest policies and procedures, and third-party policies, screening and selection procedures,’ said Short.
The investigation into the Kwok brothers also appeared to signal a tougher approach to high-profile tycoons by Hong Kong’s anti-corruption investigators.
Although the ICAC has been internationally praised and is seen as a model anti-graft agency, having successfully cleaned up Hong Kong’s police force from the days of its links to syndicated crime in the 1970s, it had long stayed away from the territory’s tycoons. And it had not been immune from criticism, with some accusing the agency of dragging its feet investigating before charging suspects, using pressure to extract confessions, and carrying out unnecessarily dramatic dawn raids.
Under the Hong Kong Prevention of Bribery Ordinance, individuals (rather than corporations) are typically in the spotlight when it comes to prosecutions. And the Kwok case indicates that the ICAC will not shy away from investigating larger cases. High-profile businessmen should therefore be put on alert that they may be under scrutiny in future if there is any evidence of improper conduct.
Even before the Kwok case unfolded, corporate governance activists criticised SHKP for its inadequate disclosure. For companies that are already engaged in a relationship with SHKP or are considering dealing with the organisation, it would be advisable to seek assurances as to what remediation measures it has put in place and the extent to which it has implemented a robust compliance programme.
Consideration should be given to incorporating right to audit clauses in agreements with SHKP if they are not already in existence, and to drafting standard anti-bribery representations and warranties. Companies choosing to deal with SHKP should conduct thorough due diligence and constantly monitor the relationship. If further red flags are identified, they should give serious thought as to how to proceed going forward.
“In the context that this was a rogue employee,” said Short, “clients should conduct additional work and look into what SHKP is doing to mitigate the risk of this happening again.”
How to manage the corruption risk
If a company decides to continue a partnership with a political figure or someone with political connections, compliance officers should take the following steps:
- Train employees of all levels on how to react when asked for a bribe. Ensure they are aware that complying with the request is not advisable and can land them or the company in a lot of trouble. Also consider raising the issue with senior management at the requestor’s company, and suggesting that they notify their own internal compliance teams.
- Design training scenarios that relate to real-life situations in your industry and conduct role-play sessions to walk staff through how to deal with difficult situations that they could face.
- Turn to specialised compliance professional-services firms for assistance with training if your company is small, does not have an established in-house legal team, or is in a high-risk industry (such as construction).
- Garner the support of senior management for the implementation of a solid whistleblower hotline and other reporting avenues to capture any concerns of improper conduct and ensure that such matters are dealt with swiftly.
No second chance for Avon Products
Avon Products was forced to pay US$135 million to settle bribery allegations from the United States Securities and Exchange Commission (SEC) after failing to address compliance issues that were identified in a subsidiary in 2005. The beauty-products company failed to implement compliance controls to detect and prevent bribes being given to Chinese government officials, while Avon employees and consultants at a subsidiary allegedly gave payments and gifts to officials.
Avon neither admitted nor denied the allegations but agreed to settle the charges as well as parallel cases announced by the United States Department of Justice and the United States Attorney’s Office for the Southern District of New York.
The SEC alleged that an Avon subsidiary in China paid US$8 million in gifts, travel and entertainment to government officials. In exchange, the subsidiary gained access to other officials who had influence over implementing direct-selling regulations in China. Avon wanted to be one of the first companies to test the regulations, and it subsequently received a direct-selling licence in the country in March 2006.
A 2005 internal audit of the subsidiary identified FCPA problems, and Avon management were alerted to the findings. They subsequently consulted an external law firm, ordered reforms to be implemented at the subsidiary, and conducted a follow up; however, no reforms were ever put in place and the improper payments continued until 2008. An internal investigation was launched in 2008 after a whistleblower informed the CEO of the misconduct.
The bribes also protected the company from receiving fines or being subject to the kind of negative media coverage that could have damaged its reputation or jeopardised its ability to win a licence.
The allegations stated that Avon did not have the proper systems in place for payments to be accurately noted in books and records. In some instances payments were filed as business expenses, although the records contained few details.
Companies need to ensure that any identified misconduct is addressed. It is imperative to conduct regular audits and monitor controls. Once controls are in place they ought to be tested for efficacy and be updated and revised in light of any changing circumstances or areas of weakness. Using third-party consultancy firms is an easy way to have professionals with applicable experience help ascertain how to implement a compliance programme. Once the need for reforms has been identified and the new rules decided upon, it is important that companies actually follow through and put them in place. There will otherwise be few mitigating factors if a regulator subsequently learns of the misconduct.
Staff must also be trained on the importance of keeping accurate books and records, not only for accounting purposes but because failure to do so can be a breach of anti-bribery provisions in statue. Compliance staff may be able to enlist the assistance of internal audit staff to audit some of the applicable compliance records, including the gifts and entertainment register and expense claims.
Hong Kong compliance intelligence from IntegraMap
With a population of over 7.2 million, Hong Kong has established itself among the ranks in both economic competitiveness and corruption-free dealings. Previously a colony of the British Empire, Hong Kong’s transfer of sovereignty in July 1997 saw it become a Special Administrative Region of the People’s Republic of China. A mix of British and Chinese culture has influenced the region, and this is evident through the legal, education and economic systems.
The business environment in Hong Kong is very open, with minimal regulation. It is ranked as the freest economy in the world; hence doing business is considered easy in Hong Kong. The judicial system remains highly independent after the return of sovereignty to China. However, media freedom is moderately narrowed as Hong Kong is gradually influenced by the government in Beijing.
From a 1970s corrupt society with the bribery of public officials and payments in exchange for the ignorance of the police force, the region has exceeded expectations on tackling corruption since the establishment of the Independent Commission against Corruption (ICAC). Anti-corruption measures have been deemed very effective during the past few decades and Hong Kong has ranked as one of the least-corrupt regions in the world. Antitrust laws are expected to be implemented in 2015 and trade remains unregulated with little to no exchange controls.
Up-to-date enforcement trends in anti-corruption in Hong Kong and elsewhere can be found at www.integramap.com.