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.

3M's Flare Up

Another company joins our list of those with ongoing FCPA investigations.

In its latest SEC filing, 3M said on November 12, 2009, it contacted the DOJ and SEC "to voluntarily disclose . . .  an internal investigation as a result of reports it received about its subsidiary in Turkey, alleging bid rigging and bribery and other inappropriate conduct in connection with the supply of certain reflective and other materials and related services to Turkish government entities."

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Would you believe . . . ? Apparently there's a huge solar flare happening now -- three giant "coronal mass ejections" slamming into the earth and our magnetic shield. Scientist say it can disrupt technology, including power grids, communications systems, and satellites.

Our question: Who will be the first earthling school kid to blame the solar flare for not having his or her homework.

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Be there or be square. We'll be in Houston on March 10. More details here.

ABB Reaches $58 Million Settlement (Updated)

Electrical technology giant ABB Ltd of Switzerland reached a settlement Wednesday with the DOJ of criminal FCPA charges and will pay a fine $19 million. And in resolving civil charges with the SEC, the company will disgorge $22.8 million and pay a $16.5 million civil penalty.

ABB Ltd’s U.S. subsidiary, ABB Inc., pleaded guilty to a criminal information charging it with one count of violating the anti-bribery provisions of the FCPA and one count of conspiracy to violate the FCPA. The court imposed a sentence that included a criminal fine of $17.1 million.

ABB Ltd entered into a deferred prosecution agreement and agreed to the filing of a criminal information charging its Jordanian subsidiary, ABB Ltd – Jordan, with one count of conspiracy to commit wire fraud and to violate the books and records provisions of the FCPA, and agreed to pay a criminal penalty of $1.9 million.

Through ABB Network Management (ABB NM), part of ABB's U.S. subsidiary, it bribed employees at the Mexican state-owned electric utilities, Comisión Federal de Electridad (CFE) and Luz y Fuerza del Centro. It won contracts that generated over $90 million in revenues and $13 million in profits.

Other ABB subsidiaries paid kickbacks to the former regime in Iraq to obtain contracts under the U.N. oil for food program. The bribes generated contracts worth $13.5 million in revenues and $3.8 million in profits.

ABB participated in the oil-for-food program through six subsidiaries: ABB Near East Trading Ltd. of Jordan, ABB Automation, ABB Industrie AC Machines, and ABB Solyvent-Ventec, all from France, ABB AG from Austria, and ABB Elektrik Sanayi AS from Turkey.

The SEC said "ABB's Jordanian subsidiary acted as a conduit for other ABB subsidiaries by making the kickback payments on their behalf. . . . ABB improperly recorded the kickbacks on its books as legitimate payments for after sales services, consultation costs, and commissions."

ABB Inc. said the bribes to CFE were paid through various intermediaries, including a Mexican company. Fernando Maya Basurto was a principal of the Mexican company. He pleaded guilty in November 2009 to a one-count criminal information charging him for his role in the conspiracy. Basurto admitted that while he acted as a sales representative for ABB NM, he conspired with others to make corrupt payments to CFE officials, helped launder the bribes, and obstructed the U.S. investigations.

John Joseph O’Shea, a former ABB NM general manager, was charged in November 2009 in an 18-count indictment with conspiracy, FCPA violations, international money laundering and falsification of records related to his alleged role in the bribery scheme. His trial date hasn't been set.

ABB operates in around 100 countries with 117,000 employees. It had about $31 billion in revenues last year.

ABB Ltd's common stock trades on the NYSE under the symbol ABB.

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View the DOJ's September 29, 2010 release here.

View SEC Litigation Release No. 21673 and Accounting and Auditing Enforcement Release No. 3191 (both dated September 29, 2010) in U.S. Securities and Exchange Commission v. ABB Ltd, Civil Action No. 1:10-CV-01648 (DDC) (PLF) here. 

Download the September 29, 2010 civil complaint in SEC v. ABB Ltd here.

Download the November 16, 2009 criminal indictment in US v. John Joseph O'Shea here.

Download the November 16, 2009 superseding criminal information in US v. Fernando Maya Basurto here.

Download Basurto's plea agreement with the Justice Department here.

Daimler Charged For Bribery [Updated]

Germany's Daimler AG has been charged in a criminal information with Foreign Corrupt Practices Act-related violations involving "at least 22 countries over almost a decade." China, Croatia, Egypt, Greece, Hungary, Indonesia, Iraq, Ivory Coast, Latvia, Nigeria, Russia, Serbia, Montenegro, Thailand, Turkey, Turkmenistan, Uzbekistan, and Vietnam are among the countries mentioned.

The company faces one count of conspiracy to violate the FCPA (18 U.S.C. §371) and one count of violating the books and records provisions (15  U.S.C. §§78m(b)(2)(A), 78m(b)(5), and 78ff(a), and 18 U.S.C. §2).

The 76-page information recounts years of systematic payments and gifts made through third-parties, many of them shell companies, to state-owned customers and government officials, including Changquing Petroleum Exploration Bureau, and Sinopec, both in China. In Turkmenistan, it gave a government official "an armored Mercedes Benz S class passenger car, valued at more than €300,000, for his birthday." Bribes in Iraq also violated the U.N.'s oil for food program.

Daimler's top brass knew about the bribery. The criminal information describes a 1999 meeting of the Board of Management:

[P]articipants in the meeting discussed that adopting such policies (and stopping the practice of making "useful payments") would result in Daimler losing business in certain countries. At that meeting, an integrity code with anti-bribery provisions was adopted. However, Daimler subsequently failed to make sufficient efforts to enforce the code, train employees on compliance with the FCPA or other applicable anti-bribery statutes, audit the use of [third-party accounts], or otherwise attempt to ensure that the company was not continuing to make improper payments in order to obtain or retain government business overseas.

In February, Daimler was reported to be close to settlement with U.S. authorities and ready to pay about $200 million.

The DOJ's filing of a criminal information instead of an indictment usually indicates a settlement has been reached, subject to court approval. A hearing is scheduled for April 1 in U.S. District Court in Washington, D.C.

A Daimler spokesperson said in February: “We are in discussions with the DOJ and the SEC regarding consensually resolving the agencies’ investigations.” See our posts here and here.

The information says before 2005, Daimler -- despite being an "issuer" since 1993 and subject to the FCPA, despite having by then "more than 270,000 employees and 60 affiliates and business units that sold vehicles to governments and government-related entities in many high-risk countries for corruption" -- had a feeble compliance program. There was no head of compliance; legal and accounting people reported directly to sales executives; the audit department was small and chronically understaffed; cash controls were absent -- employees could draw tens of thousands of dollars with little justification or oversight; the selection, use, and payment of agents was largely unregulated; employees received inadequate compliance training, and whistleblower hotlines were decentralized.

The FCPA investigation into Daimler began in 2004, triggered by the firing of an alleged whistleblower from the audit group at DaimlerChrysler Corp., Daimler's former U.S. affiliate.

"In total," the information alleges, "the transactions with a territorial connection to the United States resulted in over $50,000,000 pre-tax profits for Daimler."

Download the March 22, 2010 two-count criminal information in U.S. v. Daimler AG here.

Our thanks to Washington, D.C.'s Marc Alain Bohn for his help with this post.

The Story Of Graft

Transparency International's Global Corruption Report 2009 is here. At 462 pages, it may be the most complete account of global corruption and anti-bribery efforts ever assembled. Reference books like this are both important and fun; you don't need to read from front to back, first page to last. Dive in anywhere -- at the country reports, narrative chapters, footnotes, tables, sidebars, illustrations or research, even the index. It's all worthwhile. Here, from a couple of random dives, is what we mean:

• The Foreign Corrupt Practices Act "established the first comprehensive prohibition by any country against bribing foreign government officials for business purposes. The FCPA bans the use of bribery to obtain or retain business or to secure any other undue business advantage, and imposes strict record-keeping requirements for public companies. While enforcement in the early years was limited, it has increased markedly since the United States ratified the OECD Convention in 1998. From 2003 to 2007 the average number of new FCPA enforcement actions nearly tripled compared to the preceding five-year period."

• "In France, Germany, the United Kingdom and the United States, all major foreign investors and exporters and more than 80 per cent of surveyed executives admitted to ‘not being familiar at all’ with one of the most important legal frameworks in global business, the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Only a third or so of companies surveyed by other polls in the construction and power sector -- industries with high corruption risks -- had training programs for executives on how to avoid corruption."

• "Almost 90 per cent of the top 200 businesses worldwide have adopted business codes, but fewer than half report that they monitor compliance. Although more than 3,000 companies have published CSR [corporate social responsibility] reports in 2007, fewer than a third were verified through independent assurance."

• Enforcement of foreign bribery cases has increased in France, Germany and the United States. "[T]here is still little or no enforcement in . . . Canada, Japan and the United Kingdom." In 2008, France brought 19 enforcement actions and had 16 ongoing investigations; Japan brought one case and had an unknown number of ongoing investigations.

• Globally, nearly forty percent of polled business executives have been asked to pay a bribe when dealing with public institutions. Half estimated that corruption raised project costs by at least 10 percent. Twenty percent claimed to have lost business because of bribes by a competitor. More than a third felt that corruption is getting worse.

• "In developing and transition countries alone, corrupt politicians and government officials receive bribes believed to total between US$20 and 40 billion annually – the equivalent of some 20 to 40 per cent of official development assistance."

• "When corruption allows reckless companies to disregard the law, the consequences range from water shortages in Spain, exploitative work conditions in China or illegal logging in Indonesia to unsafe medicines in Nigeria and poorly constructed buildings in Turkey that collapse with deadly consequences. Even facilitation payments -- the many, often small payments made by companies to ‘get things done’ -- are found to be harmful, as they are funneled up through the system and help nurture and sustain corrupt bureaucracies, political parties and governments."

Transparency International's Global Corruption Report 2009: Corruption and the Private Sector can be downloaded here.

Disclosure: We acted as a peer reviewer for this publication.
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