Sunday, May 8, 2011

Don’t Pay Bribes to Get International Expansion

By Ernst Gemassmer

Expanding into International is both necessary and positive for every company, including startups, but it has some unique challenges, as I have found out personally, like expected “under the table” payments in dealing with other cultures and bureaucracy. Some companies look at this as a “cost of doing business,” but it can easily cost you your reputation and your business.

In a recent update by Thomson-Reuters, the U.S. Justice Department and SEC reported imposing over $1.5 billion in penalties on companies in 2010. In a very recent international bribery case, Alcatel-Lucent decided to pay $137 million to settle charges that it paid millions of dollars in bribes to foreign officials to win and maintain contracts in Costa Rica, Hondurus, Taiwan and Malaysia. The days of a “slap on the wrist” for offenders are gone.

The U.S. crackdown started way back in the late 1970’s with the advent of the “Lockheed Bribery Scandals,” in which the company was accused of paying bribes to foreign governments in order to secure aircraft and equipment orders. The resulted in the U.S. “Foreign Corrupt Practices Act,” which made it illegal for U.S. corporations to make any payments to foreign officials.

Last year, this same type of legislation was adopted by thirty other nations and countries who are member of the Organization of Economic Cooperation and Development (“OECD”), with its much-awaited Good Practice Guidance for anti-bribery compliance programs.

Now all companies, more than ever, need to implement internal controls and directives to meet the current legislation before they go International. As an example, one major public company, for whom I worked at the time, issued the following internal directives:

  • All foreign subsidiaries are no longer permitted to engage ‘expeditors’ to obtain permits, licenses and other permissions from government entities.
  • All distributors are obliged to sign documents stating that they would not use any of their commissions for payments to foreign officials.

For our subsidiary, in one of the key countries of South America, these internal regulations dramatically complicated the task of obtaining various permissions from local authorities. For example, obtaining periodic renewals of business licenses became a very tedious and time-consuming process for the local subsidiaries. These efforts proved to be a major distraction from our main objective, namely sales and service of our high tech products.

Distributors willingly signed the required documents, since they were threatened by corporate with cancellation if they did not comply. However, in reality the U.S. corporation had no opportunity to audit distributor books and therefore could not determine whether a distributor adhered to the letter and the spirit of the document.

After a number of complaints and extensive lobbying from industry, the ‘Foreign Corrupt Practices Act’ was amended. The new regulations now permitted so-called ‘facilitating payments to petty bureaucrats’. In practice that meant that we could once again focus on running our sales and service activities.

Dealing with the bureaucrats for permits and licenses was once again outsourced to expeditors specialized in these areas. Generally the cost for each such transaction was nominal, i.e. less than $200. These costs were small, especially when compared with the predictable outcome, which could be achieved in a timely manner.

In my personal opinion, little progress in simplifying bureaucracies can be expected any time soon, in any country. However, it is absolutely essential to adhere to local laws, rules and regulations. Failure to do so in a timely manner could result in the suspension of a business license, negative articles in the local press, slowing down imports, restricting the outflow of profits or even jail sentences.

Thus, I highly recommend that you take local regulations in each country seriously, and avoid the temptation to resort to bribery. If necessary, you may need to hire a local consultant to help you and your company in navigating complex, and in many instances illogical, rules and practices. The other alternatives are not worth the risk to your reputation and your business.

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Today’s article is presented by one of the founders of our Startup Professionals team, Ernst H. Gemassmer. He resides on the West Coast, and has long helped entrepreneurs there, as well as providing turn-around assistance as interim CEO, and International coaching. You can contact him directly at ernst@startupprofessionals.com.


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9 comments:

  1. Great post once again Marty and we never thought that with bribes one can expand to international business. Business built with weak base will always fail one day or other.
    Shilpi Singha Roy
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