08-05-03 As Mobil negotiated for a slice of Kazakhstan's prize oil field in 1996, executives probably did not worry too much about paying a $ 51 mm "success fee" to the government's adviser. The field -- Tengiz -- was thought to hold more than 6 bn barrels of oil, making it one of the biggest finds in decades. The deal itself was valued at more than $ 1 bn.
Today, that comparatively meagre fee is starting to look a lot more costly. James Giffen, the US consultant who received the money and represented the Kazakh government, has been arrested and charged in what could be the largest ever violation of the Foreign Corrupt Practices Act, the US law banning bribery of foreign officials.

In total, authorities have accused him of taking more than $ 78 mm in commissions and fees from Mobil and other western oil companies and then illegally funnelling them to senior Kazakh officials. More ominously for the company, today known as ExxonMobil, US prosecutors have also filed charges against J. Bryan Williams, the former executive who negotiated the deal. At Mr Giffen's arraignment last month, prosecutors spelt out their intent, stating that ExxonMobil itself is now the subject of their investigation.
If prosecutors charge ExxonMobil and it is found guilty of violating the FCPA, the company could be fined tens of millions of dollars. Individual executives could be sentenced to up to five years in prison. In theory, the US government could also bar ExxonMobil from public contracts, withdraw export privileges and suspend investment protection abroad. Just as damaging, such sanctions would almost certainly encourage Kazakh officials to re-examine the terms of the Tengiz deal.

The legal noose is tightening around companies suspected of bribery. Under new legislation in the UK and around the world, companies could face stiff penalties if they do not look carefully at what their executives are doing to win business abroad. Thirty-five nations have now adopted the anti-bribery convention drawn up by the Organisation for Economic Co-operation and Development, under which they undertake to make foreign bribery illegal in their countries.
After much foot-dragging, Britain complied with the convention by inserting some last-minute wording into the Anti-Terrorism, Crime and Security Act rushed through parliament in the aftermath of the September 11 attacks. A new UK Corruption Bill, expected to become law next year, will formalise the UK law's international grasp.

To complement the OECD convention, other international institutions -- including the Organisation of American States, the European Union, the Council of Europe and the United Nations -- have passed or are negotiating rules against bribery in business transactions.
"People who have been making these sorts of payments without thinking too much about it need to sit up and take notice," says Will Kenyon, forensic services partner at PwC. "They could find themselves going to prison if they fall foul of the new laws."

The change in attitudes toward bribery of foreign officials has come about largely as a result of US diplomatic pressure. Since the FCPA was passed in the aftermath of the Watergate scandal, US companies have complained that it places them at a disadvantage against companies from other countries that pay bribes to win contracts.
The US Commerce Department estimates that between May 1994 and April 2002, the outcome of 474 contracts worth $ 237 bn may have been affected by bribery. It claims US companies lost 110 of these contracts, worth $ 36 bn.
In 1995, James Woolsey, then CIA director, said that detecting instances in which foreign companies had corrupted the bidding process had become a primary role of the intelligence services. The US would then use diplomatic muscle to put pressure on governments to reverse tainted deals.

A report commissioned by the European parliament found that the US used such tactics to scupper a $ 6 bn deal for passenger jets with the European consortium, Airbus. The contract was awarded to theUS rivals Boeing and McDonnell Douglas. Similarly, the French company Thomson-CSF is reported to have lost a major weapons contract to its US rival, Raytheon, after US intelligence passed on evidence of corruption from its electronic eavesdropping.
Those moves infuriated the French government and sparked angry accusations that the US engaged in industrial espionage. Writing in 2000, Mr Woolsey was unapologetic. "That's right, my Continental friends, we have spied on you because you bribe. Your companies' products are often more costly, less technically advanced or both, than your American competitors'. As a result you bribe a lot."

Despite the US protestations, some claim that the rules simply force US companies to bribe more dexterously. A survey last year by Transparency International, the anti-corruption campaign, found that senior international business executives ranked US companies ahead of rivals from France and Germany in their propensity to bribe. Fifty-eight per cent of respondents also said that US companies gained an unfair advantage by enlisting diplomatic or financial pressure, including the tying of foreign aid to a successful result.
The World Bank has identified corruption as "the single greatest obstacle to economic and social development", hitting the poor and least politically connected the hardest. Other international financial institutions such as the International Monetary Fund have blamed corruption for economic crises from Asia to Argentina.

Bribes can add substantially to the cost of public works programmes in developing countries. Businesspeople often speak of 10 % as a standard "commission", but a survey by Control Risks, the consultancy, found that more than a third of business managers thought it was higher.
Bribes also result in major projects being awarded to contractors that are unable or unwilling to do the job properly, at even greater cost to the public purse. Across the developing world, crumbling motorways, malfunctioning power stations and other sub-standard infrastructure projects stand as testaments to the damage wrought by such corrupt bidding processes. Such white elephants are paid for with public debt -- one of the contributing factors to the collapse of many economies in recent years.

Despite this evidence, there has been far less focus on the international companies that fuel corruption by paying officials to win business. The talk has been of bribe-takers rather than bribe-payers.
In part, that is because catching companies in the act of bribing is extremely difficult -- both sides in the transaction have a powerful incentive to cover it up. And even if a suspect payment can be identified, it is often difficult to prove that there had been aquid pro quo.
Corruption cases tend to be even more difficult to pursue overseas because of the difficulty of gathering evidence. In the Giffen case, for example, not only did the Kazakh government withhold documents, but it has also vigorously lobbied the Bush administration to intercede to end the probe. The case came to light only because of tips from authorities in Switzerland, where the alleged bribes were ultimately deposited.

Largely because of the difficulties, there have been relatively few prosecutions under the FCPA since its inception in 1977 -- about four dozen in all. Nevertheless, experts say that such cases still act as a powerful deterrent.
"It does make an impact on how US companies behave," says John Bray, an expert on corruption issues at Control Risks. "You don't need many cases to give people a wake-up call."
Contrary to popular belief, authorities seldom build bribery cases based on dramatic tips from competitors or frustrated government officials. The FCPA, in addition to banning bribery, also calls for companies to keep accurate accounting records so that authorities can determine whether a violation has occurred.

The idea owes its existence largely to Stanley Sporkin, who was watching the Watergate hearings one evening when he was the head of enforcement atthe Securities and Exchange Commission in the 1970s.
"It was just dumb luck that I happened to be watching television one night," says Mr Sporkin, a retired federal judge. On display were a number of US companies that had made campaign contributions to President Richard Nixon and other politicians, which was illegal at the time.
"What tweaked my interest was: how does a company make illegal payments?" he says. "How do they cook the books to do that?"
Mr Sporkin, who was also trained as an accountant, asked his staff to examine the issue. They discovered that companies had created off-the-books slush funds to make illicit payments, including bribes to foreign leaders.

The SEC launched a full investigation and quickly brought dozens of cases. It became so overwhelmed that it was forced to create a volunteer amnesty programme under which more than 400 companies came forward and admitted making questionable payments to foreign governments in excess of $ 300 mm. (In one related case, Hugh Hefner, the publisher of Playboy, was found to be improperly charging the cost of his bed sheets to his company.)
Congress soon took an interest in clamping down on bribery and called on Mr Sporkin for advice. He convinced them that the centrepiece of any new law should be a statute calling for companies to keep accurate and honest books -- something they had not previously been required to do. Mr Sporkin argued that if companies were relying on bribes -- even small ones -- to win business abroad, it was a material fact that they should disclose to investors. The new book-keeping regulations would force them to keep a record of such payments.

Even today, the Justice Department and the SEC still focus on accounting flaws when they look for bribery cases, something the OECD convention seeks to emulate. "We're always looking to see what there is in a company's files to support a questionable expenditure," says one US official.
The paper trail appears to have been crucial in the Giffen case. The indictment cites the speedboats, jewellery, fur coats, snowmobiles and direct cash payments Mr Giffen's company, Mercator, made to Kazakh officials. "These payments were sometimes disguised on Mercator's books as loans, but no loan documentation was ever created," the government said.

Companies convicted of violating the FCPA can face heavy fines. In 1995, Lockheed paid a $ 21.8 mm fine and a $ 3 mm civil settlement in connection charges that it paid a $ 1 mm bribe to an Egyptian politician. (Lockheed was also involved in a similar scandal in the 1970s.)
Even more damaging can be the impact on a company's reputation. The World Bank maintains a list of offending companies on its website, which it bans from bidding for future contracts. "The collateral damage is potentially far more serious than the penalty itself," says Mr Kenyon.

Some investors, too, are taking up the issue. ISIS Asset Management, a UK investment fund, said in a recent report that companies operating in corrupt environments "face heightened legal risks" since the official adoption in 1999 of the OECD anti-bribery convention. Despite those dangers, bribery has hardly been stamped out, even in the US.
This was vividly demonstrated during the bidding in 1998 for last year's winter Olympic Games in Salt Lake City, Utah, when two members of the local organising committee were charged with plying members of the International Olympic Committee with cash, free holidays, college tuition and other gifts to land the games.

The government's Enron task force is also investigating whether the failed energy company relied on bribes to win foreign pipelines, power plants and water concessions often awarded without competing bids. One US businessman who crossed paths with Mr Giffen in Kazakhstan sums up a prevailing view about doing business overseas: "Everyone paid fees in that part of the world. It was just standard."
That comment raises perhaps the greatest weaknesses of anti-bribery laws. The statutes will not be truly effective until they are spread so widely that legitimate companies look to them as a benefit and not a source of competitive disadvantage. It also remains to be seen how aggressively governments will enforce their new laws.

Another difficulty in stopping bribery by companies is that the distinctions between what constitutes a bribe as opposed to a legitimate gift or a commission are often muddled. At parliamentary hearings in Britain two years ago, senior executives from BP, the oil group, and Unilever, the consumer products giant, admitted making "facilitation payments" to officials in countries where that is viewed as "normal practice". They denied that these payments constituted bribes, saying they were only made to speed up things that officials should have done anyway.
The UK's new law makes no such distinction. And while the FCPA does make an exception for facilitation payments, they are illegal in most of the countries where they might be paid.
"The US distinction, whilst understandable, is ultimately unhelpful," says Mr Bray. "It creates more problems than it solves."

A similar confusion surrounds the use of middlemen to pay bribes. Many businesspeople mistakenly believe that if you employ somebody and pay them commission, it is their business what they do with it. However, both the FCPA and now UK law require companies to perform due diligence on the people they use as intermediaries -- a service that corporate security consultants such as Control Risks and Kroll are competing with accounting groups to provide.
Mr Giffen's case could send the clearest signal yet to companies about the importance of vetting consultants and other intermediaries that help broker deals in foreign countries. ExxonMobil has denied knowledge that any improper payments were made.

There are, however, at least two features of Mr Giffen's contract with Mobil that raise questions about the purpose of the transaction. For one, the company agreed to pay Mr Giffen's $ 51 mm success fee on top of the agreed purchase price even though he was nominally representing the government in the transaction.
Further, the criminal indictment against Mr Giffen claims that Mobil paid him $ 10 mm of the fee months before the Tengiz deal was even completed.
"It is only a matter of time before there is a similar case in Europe," says Brian Stapleton, managing director for Kroll in Northern Europe. "Companies need to take action to ensure it isn't them."