'We Have To Fight Corruption, Or It Will Defeat Us'

By Benjamin Kessler

Huguette Labelle, left, is the Chair of the Board of Directors of Transparency International, which calls itself “the global coalition against corruption.” Led by a Berlin-based Secretariat, TI has chapters in nearly 100 countries.

The NGO is well known for its influential Corruption Perceptions Index, an annual ranking of countries based on the perceived corruption of their civil servants and politicians. TI’s initiatives also include helping grassroots organizations fight graft, encouraging corporate compliance, and pressuring governments to enforce existing regulations. 

In addition to her work with TI, Labelle was Chancellor of the University of Ottawa and is a member of the Board of the UN Global Compact. For nearly two decades, she served as deputy minister in various departments of the Canadian government. 

She was kind enough to answer a few questions about fighting corruption. 

Would you change anything about the FCPA? 

The FCPA could be strengthened if it outlawed facilitation payments where a bribe is paid to receive preferential treatment for something that the bribe receiver is required to do by law. [This practice] sets the bar on bribery for everyone else seeking services from the bribe takers. 

How can compliance officers make their companies take corruption issues seriously? 

It is important that employees throughout the organisation know that compliance is a priority, and they will take their lead from the top. So compliance officers should start there and encourage a strong and sustained engagement by the leadership of the companies. Compliance officers should also encourage their bosses to put in place strong protection, and effective channels, for whistle-blowers. At the same time, efficient and trustworthy follow-up mechanisms are necessary to ensure the proper investigation of disclosures. 

A recent post on this blog speculated about possible links between the CPI and the European debt crisis. Low-ranking countries seemed to be hit the hardest. What are your thoughts? 

We noticed that as well. While there are obvious transparency issues about the way budgets have been managed in the past in some countries, corruption in the public sector certainly exacerbated some budget deficits as well. 

Look at the worst-hit country Greece. The size of the black economy there has been well-documented. Our chapter in Greece did a survey that showed how corruption among tax collectors facilitates tax evasion. They estimate the cost for tax arrangements is between €300 and €15,000. You can imagine what sort of money someone must be saving (and cheating the public purse of) to justify that kind of money.

A poor system of tax inspections, helped by an opaque tax code, is the root of the problem, but when individuals and companies can bribe inspectors to evade taxes, you get a problem of epic proportions. Several high profile bribery scandals in Greece did not help the exchequer either. A Greek parliamentary investigation estimated taxpayers lost US $2.7 billion to corruption over the awarding of telecom and security systems contracts for the 2004 Olympic Games in Athens. 

The lesson we must all draw from the last year of crisis is that we have to fight corruption in all its forms, otherwise it will defeat us.

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Benjamin Kessler is an editor and writer for Ethics 360. He can be contacted here.

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This post is part of our series profiling global compliance leaders. Most appear on our sponsor Ethisphere’s annual list of the 100 Most Influential People in Business Ethics.

Smith & Nephew Reaches $22 Million Settlement

U.K.-based medical device maker Smith & Nephew plc agreed to pay $22.2 million to settle Foreign Corrupt Practices Act offenses committed by its U.S. and German subsidiaries.

The company admitted bribing government-employed doctors in Greece for more than a decade to win business.

The U.S. subsidiary Smith & Nephew Inc. paid a $16.8 million criminal fine to the DOJ and entered into a deferred prosecution agreement. The parent company Smith & Nephew plc settled the SEC’s charges by paying $5.4 million in disgorgement and prejudgment interest. The company is required to retain an independent compliance monitor for eighteen months to review its FCPA compliance program.

Smith & Nephew Inc. is a Delaware corporation headquartered in Memphis. It is a wholly-owned subsidiary of Smith & Nephew plc, which is traded on the New York Stock Exchange (symbol: SSN).

The DOJ and SEC began their investigation of the orthopedic implant industry in 2007. Smith & Nephew, Biomet Inc., Stryker Corp., Zimmer Holdings Inc., Wright Medical, and Medtronic Inc. disclosed FCPA investigations after they settled U.S. domestic bribery charges. The SEC and DOJ wanted to know whether the companies bribed doctors employed by government-owned hospitals overseas to use their products.

Doctors at overseas government owned or operated hospitals are considered 'foreign officials' under the FCPA.

In April last year, Johnson & Johnson paid $70 million to the DOJ and SEC to resolve bribery charges related to payments in Greece, Poland, and Romania. In the U.K., Johnson & Johnson's subsidiary DePuy International Limited paid £4.8 million in a civil recovery action.

The DOJ said then that Johnson & Johnson "cooperated extensively with the government and, as a result, has played an important role in identifying improper practices in the life sciences industry." Both the DOJ and SEC said Johnson & Johnson received a substantial discount in the settlement due to its cooperation.

A DePuy sales executive was sentenced to a year in prison in the U.K. last year. Roberty John Dougall pleaded guilty to making £4.5 million in corrupt payments to Greek medical professionals within the state-controlled healthcare system.

Beginning in 1997, Smith & Nephew’s subsidiaries made payments to three shell entities in the United Kingdom controlled by a distributor. About $9.4 million was used by the distributor to bribe Greek doctors to buy Smith & Nephew products.

Smith & Nephew failed to act on numerous red flags of bribery, the SEC said, after employees learned about the payments. The SEC said,

In one e-mail exchange between employees at the U.S. subsidiary and the distributor concerning whether to reduce the distributor’s commissions, the distributor stated, “… In case it is not clear to you, please understand that I am paying cash incentives right after each surgery…”

U.S. subsidiary Smith & Nephew Inc. and German subsidiary Smith & Nephew Orthopaedics GmbH sold orthopedic products in Greece since the 1970s through the Greek distributor. 

The government's investigation into the medical device industry is continuing, the DOJ and SEC said.

View the DOJ's February 6, 2012 release here.

View SEC Litigation Release 22252 and Accounting and Auditing Enforcement Release No. 3363 (both dated February 6, 2012) in Securities and Exchange Commission v. Smith & Nephew PLC, Civil Action No. 1: 12-CV-00187 (D.D.C.)(GK) (February, 6, 2012) here.

Download the SEC's civil complaint here.

Readers Respond To 'Graft And Debt'

Earlier this month, we asked if a country's perceived graft can predict its sovereign debt problems, mentioning that Greece ranks worst in the Eurozone on the corruption perception index. Next for the dunce chair, we said, comes Italy.

The next day, as if on cue, the Dow fell 389 points because of the Italian job.

That brought a few comments our way.

One reader said our correlation between graft and debt was clever, others called it fiddle faddle (we thought of it as clever fiddle faddle, so everyone was right).

But a reader with a more serious turn of mind had this to say:

Regarding graft as a predictor of a country's debt trouble, I think there probably is a relationship with their CPI score. It may be that large amounts of debt and perceived fiscal irresponsibility lead some people to assume the problem is due to corruption (as opposed to mismanagement or bad policy decisions) which then negatively effects their score. More debt leads to more allegations of corruption = lower CPI score. Perhaps the Irish are just more forgiving.

Whether graft causes debt problems, or whether debt just looks like graft, we don't really know. But we say again, corruption is never a victimless crime.

Does Graft Predict Debt Woes?

This may be cheap science. But take a look at the seventeen Eurozone countries according to their rank on the 2010 corruption perception index.

Greece is perceived as the most corrupt country in the Eurozone. Its debt crisis has threatened the EU for months, hammered the international banking sector, and roiled world stock markets.

Just when the Greek debt problem was looking better, attention shifted to Italy. Predictably, it ranks next to last of the Eurozone countries according to the CPI.

Then come Slovakia and Malta -- not yet major economies -- followed by Spain and Portugal. Both are mentioned as the next potential sovereign-debt trouble spots.

Ireland breaks the mold, ranking near the top on the CPI but being a Eurozone laggard.

We're not making too much of this. And it doesn't mean clean countries can't run into debt problems. But perhaps there's a link between regimes perceived as corrupt and a messy handling of their fiscal affairs.

Here's the list of Eurozone countries with their CPI rank in parentheses:

1.  Finland (4)

2.  The Netherlands (7)

3.  Luxembourg (11)

4.  Ireland (14)

5.  Germany (15)

6.  Austria (15)

7.  Belgium (22)

8.  France (25)

9.  Estonia (26)

10.  Slovenia (27)

11.  Cyprus (28)

12.  Spain (30)

13.  Portugal (32)

14.  Malta (37)

15.  Slovakia (59)

16.  Italy (67)

17.  Greece (78)

By the way, Turkey -- a Eurozone wannabe -- ranks 56 on the CPI. That's near the bottom of the list of current members.

Sleaze In The Cinema: Bollywood's Z

Indian anti-graft protesters in April 2011. Photo courtesy of WikipediaOne of the hottest young directors in Bollywood is already planning a movie about India's anti-graft uprising.

Dibakar Banerjee's film -- Shanghai -- is scheduled for release in January 2012.

It'll be based on social activist Anna Hazare's fight against corruption, which Banerjee calls India's 'second freedom struggle.'

"My whole film is about corruption," Banerjee told hdtv.com. "There is a whole wave of corruption in the country because of some corrupt politicians who only work to serve their interests. According to me, it is .001 percent of India's population that is corrupt...but they have caused a mess."

Shanghai will be a remake of Costa Gravas' 1969 political thriller, Z, about abuses by the military junta in Greece.

Bannerjee said he has 'Indianized' it completely.

We saw Z at an arthouse theater a few years after it came out, and loved it.

Here's the trailer.

Other posts in our Sleaze in the Cinema series can be found here.