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Cashless corruption: Crooks get creative as anti-graft laws bite

Source: Thomson Reuters Foundation - Wed, 18 Jul 2012 17:57 GMT
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By Stella Dawson

Gone are the suitcases of cash. As anti-corruption laws have spread globally over the past decade, government and corporate officials have become ever more inventive and sophisticated in how they exercise corruption. 

Graft is disguised as contract requirements for local content obtained from suppliers who are in cahoots with government or corporate officials. It’s done by steering business toward shipping agents who inflate the import/export fees and divvy up the excess gains. It’s the little matter of excessive charges billed for hospitality.

Those are just a few examples cited by lawyers at a conference this week on anti-corruption compliance in high risk markets, held in Arlington, Virginia by the American Conference Institute.

“Cash payments are close to extinction but that does not mean that businesses are not engaged in bribery,” said Irina Lazieva, regional ethics and compliance counsel for the former Soviet Union and Europe at Weatherford International, a global oil and natural gas services company.

She warned in particular against intermediaries such as shipping and payment agents, or customers acting as distributors or suppliers, who in reality are siphoning off contract money.

In Brazil, cash bribes are a problem restricted primarily to the municipal level, said Pablo Bentes, director of international trade and investment at the Washington law firm Steptoe & Johnson LL. 

Brazilian corporations and government officials doing business with international companies, in contrast, generally have been trained on the reach of the U.S. Foreign Corrupt Practices Act, and they have learned that entertainment and gifts have their limits.

But Bentes told the conference that in business culture there is the concept “Jeitinho Brasileiro” – or the Brazilian way, namely that for friends there is always a means of bending the rules. For a business colleague, rules can be overlooked, illegal payments made, expenses fiddled or bids rigged.

As for anti-corruption legislation that the Brazilian Congress is considering, which would make it a crime for a corporate official to offer a bribe just as it is for government official to accept one, companies have not yet focused on its implications, he said.  

Meanwhile, the U.S. Department of Justice is scrutinising company dealings in high-growth sectors of the Brazilian economy including energy, engineering and infrastructure, especially in view of the World Cup and Olympic Games bringing large construction projects to the country over the next few years, he said.  

Cash remains a powerful currency in Russia, says Sergei Volfson, partner at the law firm Jones Day (Russia). Other common forms of corruption are that government officials offer to act as paid consultants on a deal; or requests are made for shares in the company.

An increasingly common practice is for a special company to be set up specifically to serve a contract and become a funnel for illicit payments. Volfson said the number of registered companies involved in only one transaction grew to 66 percent in 2011, and they often are used for what he called “creative customs duties”. 

Another panelist recommended getting a list of vendors from the U.S. embassy to avoid these companies.

A Global Economic Crime Survey released by PricewaterhouseCoopers LLP in November and distributed here found a 13 percent increase in fraud since its last survey in 2009.  Misappropriation of assets remained the most common form of fraud globally, with 72 percent of the 3,877 respondents in 78 countries saying they were its victim in the past 12 months, up from 67 percent two years ago.

Tying for second place was accounting fraud, and bribery and corruption at 24 percent, down from 38 percent and 27 percent respectively in 2009.  A new entrant on the list in third place at 23 percent was cybercrime, against 1 percent two years earlier.

PwC surveyed executives in publicly listed companies, government, state-owned enterprises and large cooperatives and non-profit organizations. Financial service companies said external fraudsters were the primary threat, while for engineering, pharmaceutical and manufacturing, internal fraudsters were the major source of economic crimes.

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