In Deals Abroad, Grease Payments a Slippery Business

What do former prime ministers Charles Haughey of Ireland, Morihiro Hosokawa of Japan and Silvio Berlusconi of Italy have in common? Here’s a clue: Former South Korean presidents Chun Doo Hwan and Roh Tae Woo are in their company.

No, none of these men won a Nobel Prize for his efforts to stamp out corruption. Quite the contrary. Payment scandals or corruption charges booted Haughey and Berlusconi from office. Hosokawa resigned. And Chun and Roh alone were convicted of taking several hundred million in bribes.

Of course, what often gets forgotten when an elected official is caught on the take is that for every politician who accepts a bribe, there is a CEO willing to pay it.

Naturally, the reputable aerospace, film, music (fill in the blank) company you work for doesn’t engage in such practices. But even well-intentioned executives may become confused about the legality of certain business practices when it comes to conducting business abroad.

Take, for instance, this situation:

The L.A.-based record company you work for wants to peddle CDs of its hottest rap group in Indonesia. But before you can export the disks, the lyrics will have to receive the approval of the Indonesian decency commission.

A low-level official explains the commission has a huge backlog of cases. Pay him $10,000, and he can ensure that your case will be heard this week rather than in six months.

Is it legal if you pony up or would doing so violate the U.S. Foreign Corrupt Practices Act, a federal law stemming from the Lockheed overseas bribery scandal in the 1970s?

Jim Ukropina, a partner at the Los Angeles law firm O’Melveny & Myers and the author of a handbook for corporate clients on the Foreign Corrupt Practices Act, says the payment would be considered lawful under the act.

That act, he says, allows for “grease payments,” sums paid to a lower-level foreign official to carry out a routine governmental action that they were otherwise obligated to perform. However, warns Ukropina, it would violate the act to pay a customs officer to waive through contraband or lift an import fee.

But what if the issue is the lyrics themselves, not the commission’s schedule? Say, for instance, the commission determines the lyrics offend Indonesian religious and cultural standards. Is it still legal to spend the same $10,000 to try to influence the commission’s decision?

No. Ukropina says a payment made to influence a “discretionary act” such as an opinion on local cultural standards would not be lawful under the Foreign Corrupt Practices Act.

Of course, it is not as if U.S. firms are always the patsies of corrupt foreign officials. Hans Schollhammer, chairman of the international management program at UCLA’s Anderson School asks: “Are multinational companies the victims of different ethical standards or are they the culprits?”

For Schollhammer, who considers the widely publicized ethics codes of several prominent multinational corporations to be mere window dressing, the line between who is exploiting whom is often “very, very fuzzy.”

Still, corruption is less tolerated today than it was a decade ago, for various reasons, Schollhammer says. One of them is public scrutiny.

If a newspaper in Bombay or Beijing accuses a multinational firm of bribery, that story is much more likely now to also appear on CNN or in the Wall Street Journal.

“Multinationals face issues globally today that we didn’t encounter before,” says Megan Barry, director of the ethics office at Northern Telecom, a Toronto-based global telecommunications company.

“The law allows you to operate under different standards in different countries,” says Barry, “but that doesn’t satisfy a community, the press, our employees or customers.”

Companies as diverse as Nike, Nestle and Lockheed have discovered that actions they take overseas can harm their reputations at home

“It doesn’t matter whose name is on the door,” says Bob Dunn, president of Business for Social Responsibility in San Francisco. “People will hold your company accountable not only for what you do directly but for what’s done in your name.”

Dunn, Barry and Schollhammer argue that, as Dunn puts it, “Multinationals can no longer afford to draw a line around the U.S. and say we are going to operate one way here and a different way elsewhere.”

One area where multinational companies have historically operated under varying standards is the environment. While Dunn and others argue that companies should adopt one universal standard wherever they do business, many companies find it sufficient to comply with the prevailing law where they are operating. Laws pertaining to the environment in the developing world are often far less stringent than in the U.S., Europe or Japan.

For years, many U.S. firms railed that passage of the Foreign Corrupt Practices Act in 1977 put them at a disadvantage when competing with foreign firms. U.S. companies were no longer competing on a level playing field, this argument went, especially when some governments even allowed their corporations to deduct bribes from their taxes as business expenses.

But there is no evidence that not paying bribes makes a company less competitive, says Richard De George, director of the International Center for Ethics and Business at the University of Kansas.

“The act actually helped U.S. firms,” De George says. “It gave U.S. firms an excuse not to pay bribes.”

Paying bribes doesn’t necessarily work, De George adds. A company can become labeled as a “patsy” and often becomes a target for more and more shakedowns by local officials. The good news, says De George, is that 20 years after passage of the anti-corruption act, the rest of the world is finally ready to take similar steps.