Monthly Archives: February 2015

Culture Corrupts: The Impact of Organizational Silence

Culture Corrupts: The Impact of Organizational Silence

Today I welcome Organizational Psychologist Jamie-Lee Campbell to a Q & A. Please note that the interview with Jamie-Lee is quite extensive, so today I am posting a consolidated portion of our discussion, with some minor edits. If you are interested in the entire interview, without edits,  I am pleased to make the PDF available by linking here.

RB: Hello Jamie-Lee, and thank you for taking part in our Q and A. First, perhaps you can share with our readers a little about your background and perspective?

JLC: Hi Richard, and thank you for inviting me for this Q and A. As a psychologist, I’m interested in analyzing and describing abstract patterns of behavior. While you can see and observe individual behavior, you do not see what leads individuals to do this behavior. Therefore, I use the metaphor of gears within the individual that could explain their behavior. Each gear stands for either a particular individual characteristic or situational factor that interlock with one other to result in outcome behaviors. If I can understand which gears an individual possesses, how large the single gears are, and how they are all related to each other, I can get a clearer idea why individuals behave in the ways they do. So instead of sitting on a couch all day long listing to the dreams of people as Freud did, I take a perspective on individual behavior as part of their work (as an organizational psychologist) through experiments and questionnaire surveys. The gears that are interesting in this context include: leadership, work motivation, work groups, and communication, among others.

The last four and a half years I worked on my PhD in the field of organizational psychology at the Julius-Maximilians University of Würzburg in Germany. I analyzed if and how organizational culture influences corruption on behalf of the organization. For this research I conducted a qualitative interview analysis about the characteristics of a corrupt organizational culture (see Campbell & Göritz, 2014), conducted 3 online experiments and one questionnaire survey (see Campbell, 2014).

Besides this research focus on corruption, I’m also a member of the German Chapter of Transparency International for which I hold several expert lectures and co-edited a special issue of their membership journal about psychology and corruption (in German language here ). Together with Johann Streudle, I founded “KorrWiss”, a German network for young corruption researchers that allows them to network and communicate in a better way (also only in German language here).

RB:  Thank you Jamie-Lee, that is quite impressive, and in your introduction you refer to corruption on “behalf of the organization.” Could you explain what you mean by that?

JLC:  Sure. First of all I might share with you what definition of corruption I use. It is the one by Ashforth and Anand (2003) in which “corruption is the misuse of latitude, power, or authority to receive illegitimate or illegal benefits for single employees, group of employees, or organizations”.

Pinto, Leana, and Pil describe in a very good article in 2008 the different types of corruption within organizations. As such, they described a top-down, planned, and reward system which depicts a corruption type that benefits the organization. In such a system, employees engage in corruption in a systematic and collective manner. This type differs from the more “classical” type of corruption, in which single employees enrich themselves at the cost of their organization. I named this last type “classical” because people often refer to this form when they talk about corruption. Even more, most ethical and compliance programs (as well as research), refers mainly to this type of corruption.

RB:  Jamie-Lee, I really have found your paper “Culture Corrupts! A Qualitative Study of Organizational Culture in Corrupt Organizations” (link here) to be a tremendous thought piece in the field of anti-bribery study and compliance. As you state in your introduction “we need to increase our knowledge of the factors that promote employee corruption on behalf of their organization.” Indeed, and I think your work applies to both sides of corruption, inclusive of those who give/offer and who demand/receive bribes.

JLC: Thank you! The aim of this qualitative research was to get a first glimpse of what a corrupt organizational culture looks like. Many researchers refer to organizational culture as one of the key factors that lead to collective corruption. Therefore, I tried to conduct general insights and then to empirically analyze if there is really an increase in corruption when employees work in a corrupt organizational culture.

RB:  And was there a raise in corruption when the organization was “corrupt”?

JLC: Yes indeed. In three experiments with about 1000 German participants, I manipulated different organizational cultures (corrupt, neutral, and ethical). Each participant had to decide whether he or she engages in organizational corruption as a taker. In all experiments at least twice as many participants who worked in a corrupt cultures accepted a corrupt offer compared to participants who worked for other organizational cultures. However, we need to keep in mind; these are just experiments that try to come close to the reality and the reality is more complex.

RB: You state the following: “In institutionalization, organizations use work structures that enable employees to act corruptly in their daily business, such as work routines that involve corruption. These work routines ease some employees into facilitating corruption without always becoming aware that they are doing something illegal.” Can you please explain how this could happen?

JLC: I will use two aspects that might explain why employees become less aware about their own illegal behavior.

  • Institutionalization. Employees often assimilate to the norms of the organization (“we support corruption”) gradually. If single employees cannot stand to support corruption, they will leave the organization before they are responsible for important corrupt tasks. Through this gradual introduction, employees face a rather small aspect of corruption and can then learn to rationalize their own behavior. If they do this successfully they can grade up to the next step (see Ashforth & Anand, 2003).
  • Ethical Blindness. Palazzo et al. (2012) describe a theoretical construct called “Ethical blindness”. The authors describe ethical blind employees, as employees who are unaware of how they engage in unethical behavior. Therefore, employees can engage in actions that contradict their own moral principles. Ethical blindness helps employees to overcome their cognitive dissonance when they engage in organizational corruption. Via collective sense making, employees could find reasons why corruption is good (as described in Campbell & Göritz, 2014) while single employees keep their moral values in private life.

RB: You quote one of your interviewees: “we have to kill to eat …the organization puts executives under extreme pressure to meet earnings targets and it is almost like the fog of war. When you are in the middle of the battle, you are trying to defeat the enemy.” This must be a sales person, as I have often used the “eat what you kill” line in my own career! So, do you think when the sales targets and incentive plans speak to “win above all else” that such “unspoken messages” can create a cocoon of corruption? In other words, how do you see this “win and war” business mentality as impacting corruption in organizations and individuals?

JLC:  The process of normalizing corruption is right now just a theory but a good one! The model describes how it works and that institutionalization, rationalization and socialization causes it. However, there exists no theory about the single steps that lead to a social cocoon. Because of that, here are just a few thoughts about your point (*editors note, I have included only a few of the points, and  for the complete list see the entire pdf interview):

  • The perception to be in a competitive war against other organizations builds a perfect context that employees can shift their perception of corruption. In love and war everything is allowed and most humans will do anything to survive. When employees face this background and the assumption that the end justifies the means it becomes more and more difficult to withdraw from corruption.
  • Corrupt organizations often set goals in the way that employees can only attain them through corruption. This could be seen as a manifestation of the “win above all else” aspect. The unspoken message is “we do not care how you attain your goals, we just want you to do it”. Therefore, the war mindset could raise employees’ acceptance of their goals even if it involves corruption.

RB: You speak of the “employee level” of corruption where your “main findings are the huge pressure employees face to attain their goals and their use of rationalization strategies.” So, Jamie-Lee, if most businesses have some pressure to succeed and grow, what are the alternative models where the business does not support coercion and corruption, but growth through ethical means and practices? Can you please share some best practices that you have seen in your own research? I think this will be very helpful to today’s front-line employees and the professionals who are tasked with helping them to manage corruption risk.

JLC: Well, sorry I cannot answer this question because my research does not focus on anti-corruption. I want to understand how corruption works, and to receive ideas about the possibilities to reduce it. Therefore, I interviewed experts about their insights in different corrupt organizations.

I would assume that it is important not only just to focus on the bottom line of financial goals but also to connect ethical values with financial goals. This goes more in the classical CSR (= corporate social responsibility) direction. However, I’m not really an expert in these terms therefore I can only refer to research on the impact of ethical behavior. Hopefully the following thought pieces could inspire some compliance officers in their work.

  • Craft, J. L. (2012). A review of the empirical ethical decision-making literature: 2004–2011. Journal of Business Ethics, 117(2), 221–259.
  • Treviño, L. K., den Nieuwenboer, Niki A., & Kish-Gephart, J. J. (2014). (Un)Ethical behavior in organizations. Annual Review of Psychology, 65(1), 635–660.
  • Trevino, L. K., & Youngblook, S. A. (1990). Bad apples in bad barrels: A causal analysis of ethical decision-making behavior. Journal of Applied Psychology, 75(4), 378–385.

RB: Thank you Jamie-Lee, I appreciate your sharing those resources. In Organizational Culture and Leadership I think Schein speaks to the “unwritten” rules of behavior and “organizational silence.” Would you mind sharing more of your perspective on this issue?

JLC: “Organizational silence” describes how employees reduce speaking about their work tasks since they receive the feedback that no one wants their opinion (see Wolfe Morrison & Milliken, 2000). The authors describe how superiors do not want to receive any negative information about themselves or their work processes. Because the superiors do not react openly to feedback, employees reduce the amount of task related communication and work related “sense-making” within their work groups.

Thus, not talking about work problems (e.g., ethical questioning of work tasks) becomes an unwritten rule, meaning a behavioral norm shared by a group of people. All group members know this rule and if one violates the norm often, the other members will punish them.

RB: You conclude, “Corruption can work because corrupt organizations implement a corrupt organizational culture that supports employees’ corruption.” So, what might you leave today’s readers with on how to reverse that culture, which presents great peril to all?  (*editors note, I have listed some of these bullet points, but for the entire list please see the complete pdf)

  • Be sensitive! Do not underestimate the impact of organizational culture on the behavior of employees. Try to be sensitive as to what are the values of your organization. What values are connected to the reward and punishment system, what values are reinforced through the goal setting (these are the real values of your organization) and what values are not connected to anything else? Why?
  • Don’t be cruel! You need to take that into account when you want to change the culture with your employees, together. If you want their commitment you need to be cautious when challenging their fundamental assumptions, values, and mindsets.
  • Always look at the bright side (of life)!  Do not always look on the things that won’t work. Also have a focus on the departments/organizations that work ethically. Ask yourself, why are we successful there and try to transfer these conditions in the challenging departments/organizations

RB: So Jamie-Lee you said you are at the end state of your PhD. What are you planning to do next?

JLC: I will have the final exams in May 2015. Afterwards, it would be very interesting to engage in research on the influence of corruption on international security (here a first position paper of Transparency International this time in English language here.

For example,  how military interventions in Afghanistan support petty and structural corruption and in turn finance warlords etc. I think it’s important to know more about how any mission (governmental, non-governmental or military) could involuntarily support corruption within a country. And in turn how such institutions could work safely when they reduce their support of corruption. So we will see where I find a place to have a closer look at this.

RB: Thank you Jamie-Lee

References/ Literature:
Anand, V., Ashforth, B. E., & Joshi, M. (2005). Business as usual: The acceptance and perpetuation of corruption in organizations. Academy of Management Executive, 19(4), 9–23.
Ashforth, B. E., & Anand, V. (2003). The normalization of corruption in organizations. Research in Organizational Behavior, 25, 1–52.
Campbell, J.-L. (2014) Organizational culture’s impact on employees’ corruption. unpublished dissertation Universtiät Würzburg.
Campbell, J.-L., Göritz, A. S. (2014). Culture corrupts! A qualitative study of organizational culture in corrupt organizations. Journal of Business Ethics, 120(3), 291-311.
Pinto, J., Leana, C., & Pil, F. K. (2008). Corrupt organizations or organizations of corrupt individuals? Two types of organization-level corruption. Academy of Management Review, 33(3), 685–709.
Wolfe Morrison, E., & Milliken, F. J. (2000). Organizational silence: A barrier to change and development in a pluralistic world. The Academy of Management Review, 25(4), 706–725.
Anti-Bribery Compliance in Canada: An Interview with Kristine Robidoux

Anti-Bribery Compliance in Canada: An Interview with Kristine Robidoux

Today we welcome Kristine Robidoux, Partner, Gowlings, for a view of anti-bribery and compliance issues from Canada.

RB: Hello Kristine, thank you for joining me in today’s interview, as we try to share some of the issues confronting individual’s and corporations who are subject to Canadian anti-corruption laws. But first, perhaps you share some of your background:

KR: Richard, thank you so much for this opportunity to discuss the latest developments in Canada in respect of the ongoing fight against domestic and foreign corruption “up north”. There is certainly a lot going on in Canada on this front, from policy, legislative and enforcement perspectives, and in terms of the approach to compliance being taken by our clients.

I am a partner with the Gowlings firm in Calgary, where I practice in the area of white collar defence, investigations and compliance. I came to the “Big Firm” practice of law through a bit of a bizarre career trajectory: I started as a criminal defence lawyer in a small firm, then became a General Counsel and then a Director of Ethics and Compliance before I started my own corporate ethics and compliance consulting firm. I joined Gowlings in 2008, and since then, have specialized in the prevention, detection and defence of white collar and ethics cases, both domestic and transnational in nature.

RB: So, what is the current enforcement environment in Canada, and has that changed in recent years?

KR: The enforcement climate in Canada certainly has changed in recent times. Significantly, Canada was one of only 2 countries to improve its ranking (from “Limited Enforcement” to “Moderate Enforcement”) in Transparency International’s 2014 progress report. This probably has much to do with the fact that the Royal Canadian Mounted Police (“RCMP”) has made a concerted effort to increase and better align its resources so that more Corruption of Foreign Public Officials Act (“CFPOA”) cases can be pursued more efficiently, and due to the fact that a couple of major prosecutions have now taken place. For example, Niko Resources was prosecuted in 2011 for bribes paid in Bangladesh (fine: $9.5 million) and Griffiths Energy International was prosecuted in 2013 for bribes paid to the Chadian Ambassador to the US and Canada in 2013 (fine: $10.35 million). As far as Canadian corporate criminal penalties go, fines at these levels are considered significant. Those cases served as a wake-up call for Canadian businesses operating overseas, and they also seemed to give the RCMP a boost of confidence and some recognition by the international community that Canada was starting to take its enforcement responsibilities more seriously. Then, in 2014 we saw another watershed case, where the first individual to be convicted under the CFPOA after a trial (for conspiracy to bribe foreign officials in connection with the Cryptometrics case) was sentenced to a term of 3 years of federal incarceration. Again, a jail sentence of this length would certainly not go unnoticed, and served to reinforce the message that Canada’s enforcement agencies are treating offences of foreign bribery very seriously.

RB: Do you see a focus on individuals, corporations, or both?

KR: The RCMP seems to have stopped its earlier practice of publicly announcing the number of open foreign bribery cases, so it’s hard to say whether the pendulum might swing back, but at this moment, I would say that there seems to be a focus on the prosecution of individuals. As mentioned earlier, the first individual charged under the CFPOA was found guilty after trial and has been sentenced to jail. But there are others. In connection with the lengthy and wide-ranging investigation of Canadian engineering and construction giant SNC-Lavalin, the RCMP has brought charges against five individuals to date in connection with the Padma Bridge project in Bangladesh (although one of those individuals, the former Bangladeshi government official allegedly involved in exerting influence over the bridge project, saw his charges stayed by a Canadian court last year due to lack of jurisdiction over him). The four others are awaiting trial. And in connection with the Cryptometrics case referred to earlier, in addition to the one individual presently serving out his sentence, there are charges pending against three others (the Cryptometrics former CEO, the former CFO, and the former agent… interestingly, they are all foreign nationals). We are continuing to watch with great interest, because notwithstanding the existence of charges against individuals connected with these cases, there have not yet been any corporate charges. I would be surprised if there weren’t charges brought against the companies eventually, but to date there has been no public indication as to whether or when that might occur. Another corporation that may face charges this year is TSX-listed mining company MAG Industries, who just issued a press release on January 29 that the RCMP had conducted a search and seizure at its corporate offices in connection with alleged corrupt payments in the Republic of Congo.

RB: What do you see as Canada’s role in engaging in international law-enforcement and prosecutorial cooperation?

KR: I believe Canada has an obligation to assist in international investigations, and in my experience, Canada appears to work very effectively with its international counterparts. I observed first-hand the interaction and cooperation between Canadian and US investigators and prosecutors on a number of my cases and the relationship appears to be healthy. There appears to be a great deal of communication between the two countries.

RB: Kristine, what about companies? Here is the US, there is much debate about the “rogue employee” script, which the OECD Bribery Report clearly addresses when it demonstrates that in many cases upper level management knew of the bribes. Where is that debate in Canada?

KR: It’s hard to say where that debate is at, frankly. There simply haven’t been enough enforcement cases to be able draw any kind of patterns or conclusions about the attitudes of the enforcement agencies in that regard. But while I do believe that truly “rogue” employees can and do exist, my sense is that companies are not using the “invisibility cloak” to avoid the hard discussion about whether a rogue employee might be out there and what the board needs to do to ensure he or she is not out there. Our law provides that if the offence is carried out by a company’s “senior representative” (which, given its definition in our Criminal Code, may include a company’s foreign country manager – whether “rogue” or not), then the company becomes a party to the offence. As a result, I am seeing Canadian boards of directors and management teams increasingly rolling up their sleeves to effectively and properly discharge their obligations to ensure the business is being run ethically overseas. In the past, there may have been more of a willingness to rely on the in-country management’s verbal reassurances that “everything was OK”, and to stop short of asking the tough questions or verifying compliance externally, but that is not happening anymore.

RB: What are some of the greater challenges facing Canadian companies and their international teams who operate in high risk (low integrity) regions?

KR: One of the greatest risks may be simply that Canada hasn’t had foreign bribery squarely on the enforcement radar as long as the US and so perhaps education levels are still catching up to where they need to be. We are an entrepreneurial culture, and our resource companies (in particular) courageously enter some of the most daunting foreign markets around the world. We are also believed by many to be a very polite, deferential and culturally sensitive people. This can actually be a bit of a dangerous recipe, when you think about it.

If Canadians enter a high risk market and, in an effort to be deferential and polite, simply accept the local jurisdiction’s assertions that “this is the way we do business here”, and they don’t have sufficient education about foreign bribery risks and how to mitigate them, the results can be disastrous. The answer is to continuously promote and communicate the message of compliance and ethics, and for companies to ensure their on-the-ground personnel are well equipped to handle the inevitable requests for cash, gifts and favours.

 

RB: Any other thoughts?

There are three more Canadian developments which may be of interest to your readers, Richard, particularly to those who may be involved in the oil and gas or mining sectors. First, Canada recently passed the Extractive Sector Transparency Measures Act (which is expected to come into force in early 2015) to require resource companies to report on payments it makes to governments, both domestically and internationally, as well as government agencies and similar bodies carrying out governmental functions. The list of payments to be reported is broad. Importantly, after a two-year transition period, the reporting requirement will also extend to payments made to Aboriginal governments in Canada. The Act provides for significant penalties for companies and their officers and directors in cases of non-compliance, so your readers should ensure that they are well informed about the specifics of the reporting obligations.

Second, Canada recently (November 2014) announced its enhanced Corporate Social Responsibility strategy. The strategy reiterates Canada’s commitment to international best practices in CSR, including those related to foreign bribery and corruption, and provides that resource companies that do not comply may lose diplomatic support and financing or other support from Export Development Canada.

And third, of interest to all companies interested in bidding on Canadian federal government projects and procurement, will be the implementation of Public Works and Government Services Canada’s Integrity Framework. (“PWGSC”, the Government of Canada department responsible for coordinating all of the federal government’s managed contracts and real property transactions, including construction contracts, goods and services contracts, etc., wields a very big stick indeed!)The Integrity Framework will essentially debar any supplier from doing business with PWGSC if it or an affiliate is convicted or pleads guilty to an offence, even if the conviction or guilty plea results in a conditional or absolute discharge at sentencing.

These offences apply to acts committed in Canada as well as to convictions received abroad, and “affiliates” include parent companies, subsidiaries and directors, as long as they have control of one another, or if they are under the common control of a 3rd party. In this way, it is anticipated that Hewlett-Packard Canada, one of the leading technology suppliers to the Government of Canada, will find itself debarred as a result of the guilty plea in the US of Hewlett Packard’s Russian and Mexican subsidiaries, notwithstanding the lack of any complicity by the Canadian subsidiary. The debarment period is 10 years from the date of conviction and further, the application of the policy is retroactive: a company can be debarred as a result of a conviction dating back up to 10 years.

Germany-based Siemens has already received official confirmation of debarment by PWGSC. At present, the debarment process does not include discretionary provisions: there is no ranking system of offence and no opportunity to demonstrate that the corporation has undergone restructuring or implemented risk-mitigation strategies, such as a compliance program, to reduce the length of the debarment period. The Framework’s wide reach and severe penalties have not gone unnoticed and have been the subject of lobbying efforts by members the business community. In response, the Government of Canada has recently re-engaged with various stakeholders to address the provisions and application of the Framework. So stay tuned, there may be further changes!

Thank you for this opportunity to connect with you and your readers, Richard. Feel free to reach out anytime for further insights into the ethics and compliance environment north of the 49th!

Q & A with Sarah Chayes: Author, “Thieves of State.” The ‘Odorless Gas’ of Corruption.

Q & A with Sarah Chayes: Author, “Thieves of State.” The ‘Odorless Gas’ of Corruption.

Today is part II of my interview with Sarah Chayes, Author, Thieves of State, Why Corruption: Threatens Global Security (www.thievesofstate.com). This week I am particularly excited about my post, as on Tuesday, February 10th, I will have the pleasure to Sarah’s speaking engagment  at the Jackson Institute for Global Affairs, Yale University.

For those who might have missed the first part of our Q & A (link here), I will repeat the introductory portion of our interview:

RB: Sarah, for those who are not familiar with your background, let me summarize.   An award-winning NPR correspondent, you set aside your journalism career to stay in Afghanistan after covering the fall of the Taliban to “try to make a difference,” as you have put it. Toward the end of a decade on the ground in Kandahar, you were tapped to serve as special advisor to two commanders of the international troops (2009-2010) and then the chairman of the Joint Chiefs of Staff (2010-2011).Now, as Senior Associate in the Democracy and Rule of Law Program at the Carnegie Endowment for International Peace (link), you focus your research on the security implications of severe corruption.

Your Awards include the chairman of the Joint Chiefs of Staff Distinguished Civilian Service medal, Tufts University’s John Mayer Award for global citizenship, the Bulletin of the Atomic Scientists’ inaugural Ruth Adams award for writing in international security, and Oprah Winfrey’s Chutzpah Award.

In Afghanistan, I might add, you worked as an entrepreneur, launching a manufacturing cooperative that produces natural skin-care products for export. (www.arghand.org) That could be the topic for another whole blog: How to Expand Your Business in an Active Theater of War!

So, as the entire focus of my blog is corruption and compliance from the front line, your front-line, let me share, is breathtaking: as a journalist, an entrepreneur trying to run a business in one of the most corrupt environments on earth, and then a high-level government official, seeking to develop strategic anti-corruption policy.. Sarah, that is the front-line of compliance and corruption.

You don’t pull punches, either. You shine a light on realities that many with anticorruption responsibilities would rather not discuss. This is a work that addresses, as you put it, “systemic corruption and all the reasons that can be dreamed up for ignoring it.” Sarah, you don’t pull the curtain back on the front lines of corruption, your book puts an RPG right through it!

In other words, readers, this is the antithesis of the type of abstract, expository text that abounds in the compliance field. This book is down there in the oak-tree-roots of reality.   I hope that today’s Q and A will be widely distributed to those at the front-lines of international business, who deal with these issues in their personal and/or business lives.

My struggle here, Sarah, is where to start. If I were leading an overseas sales team I would require each member to read your work and submit an essay entitled “The Consequences and Implications for our Work of Corruption.”

So, lets dig in to part II:

RB: Sarah, lets talk about the “soft state” where the institutions, laws and rules of state are deliberately weak and confusing. In my own career, I have seen procurement personnel who are poorly paid and inadequately trained which all resulted in dynamic where “weaknesses of the state encourage corruption.” What can businesses do to help those countries where those weaknesses exist and where ethical businesses want to create local value and development?

SC: I have to say, I don’t really think this is primarily a capacity issue. Too often Western officials and businesspeople see it that way. I see the low capacity and weakening of norms and their enforcement as deliberate on the part of corrupt elites, to make it easier for them to steal.   The “soft state” riff in “Thieves” ends with this sentence: “Perhaps corruption was not the result of Egypt’s soft state, but rather its cause.”

That said, what businesses can do is ally with ethical local businesses, and take a united stand. Refuse together to pay the bribes, and suddenly the local officials will have something to lose. I found that when I refused to pay bribes in Afghanistan, if I was adamant enough, I didn’t have to. The trick is to make sure that local businesses can enjoy the benefit of the international investor’s implied protection. It should be a group action, taken together, with real discussion of potential repercussions and plans for mitigating the risks. Also, identify local officials of integrity, and seek to reinforce and protect them.

Such a collective approach may be hard for many businesspeople to contemplate, used as they are to competition, and trained as they are to shun collective action. But these are unusual environments, which call for the development of unusual practices.

RB: In your book you talk about the international banking systems that serve as a “wholesale clearinghouse to transfer national revenue into the hands of elite networks.” Lately, there has been a great deal of enforcement with respect to banking regulations including circumvention of sanctions, money laundering, and tax avoidance. How is the current attack plan on that front progressing in your perspective? If these kleptocratic networks need to get the money out of the country, how do you feel the banking community and the enforcement agencies are doing in cutting off the blood supply? Or, better said if “a stream is muddied from the source,” and the banks are part of that source, are we disrupting the water supply!

SC: I think some improvements have taken place. But I still see much more eagerness to act when the culprit is a terrorist, a tax evader, or a drug dealer, than when the culprit is a corrupt government official. The sanctions legislation enacted in the midst of the Ukraine crisis included great language. But it seems that a regime already has to be a pariah before anyone considers sanctions against its members. The same crimes committed by a ruler who is not yet an official “bad guy” don’t attract the same penalties. Look at Mubarak before and after the Arab Spring, for example. The one good in rem forfeiture case against stolen Nigerian assets was against money stolen by Abacha! He’s four heads of state back, and dead!! What kind of dissuasive signal does that send?

RB: In your final chapter, “Remedies” — which in my view, is the required reading of the required reading — you speak of corruption as “unnoticed, like some odorless gas, it fuels these threats (to world stability) without attracting much policy attention.” Do you think that is changing?

SC: To some extent, it is. There has been more high-level policy attention to corruption on the national security staff, in Congress, and in the Department of State than I ever saw when I was in government. But we are not there yet. We are still at the level of rhetoric and very broad-brush approaches. I have not seen a design for a concerted campaign aimed at a specific kleptocratic network. And when some colleagues and I began working to get a mandatory course on corruption included in Foreign Service Institute training for incoming diplomats, we got nowhere. Can you imagine? No willingness even to train diplomats in these concepts.

I also don’t see any willingness to devote resources to the systematic gathering and analysis of intelligence on the structure and functioning of kleptocratic networks. It reportedly requires 60 intelligence professionals to guide a single drone in the air. But I don’t think we have 60 intelligence professionals working on analyzing corrupt governments across the whole, sprawling intelligence community.

RB: Re-reading “Remedies,” which I could clearly can make as a stand alone Q and A (if I don’t wear out my welcome with this one), let me focus on two: legal and business tools. With respect to “legal tools,” here is a link to recent article in the Wall Street Journal, Risk and Compliance Journal, on the “FBI To Bulk Up Foreign Bribery Efforts.” As the article states “The agents will focus on both sides of corruption, hunting down executives that pay off foreign officials, while also helping other nations recoup funds stolen by corrupt leaders.” Sarah, if you were sitting with these thirty agents on the Anti-Corruption Squad, twenty of which are new to the Squad, what might you share?

SC: A couple things. Note that the focus is on executives who pay bribes. Well let’s get real here. While the U.S. is prosecuting executives for paying bribes, it is bribing corrupt government officials itself. The U.S. does that quite directly, in the form of CIA cash payments, and it does so in a more camouflaged fashion, by using foreign assistance in a kind of “pay to play” bargain with foreign governments. Military assistance to Egypt in return for the Camp David accords was a perfectly explicit version of this form of bribery, and less explicit versions of it are rife. I realize that defining their mandate is above the pay grade of these FBI officers. Still, I would suggest they work hard to use their investigations of bribe-payers as leverage to develop information on bribe-TAKERS.

Secondly, I would tell them to avoid the temptation to go for the easy cases. I would tell them that the objective of their work is to make a real-world dent in a real phenomenon. So they should do intelligence-driven enforcing. That is, they should think of the kleptocratic system the way they would organized crime, and go at it the way they would go after a mafia organization. First map it. Then look for vulnerabilities. THEN choose their targets (bribe-payers) as a function of their likelihood of providing leverage on these vulnerabilities.

RB:  Sarah, thank you again, and I hope we can continue to exchange perspectives.

SC: Thank you, Richard, for the opportunity to answer these thought-provoking questions.

* Photograph provided by Sarah Chayes and not to be distributed without permission.
Oil, Gas and Compliance: The ‘Deep Blue Sea’ of Corruption

Oil, Gas and Compliance: The ‘Deep Blue Sea’ of Corruption

In Thieves of State, author Sarah Chayes (part two of my interview with Sarah will appear next week) defines the ‘resource curse,’ as where “valuable raw materials are discovered in a country lacking robust institutional safeguards, and the “rents” these resources produce rupture any contract between rulers and ruled.” She focuses on the Nigerian example, where as the thirteenth largest oil producer in the world “life expectancy, educational achievement, and average income, taken together, is about the same as that of their resource poor neighbors.” Other countries, such as Algeria, are also referenced where oil and gas “were being scooped up for the benefit of a criminal elite.”

Having gained my own front-line experience in the defense sector, I found this treatment of oil and gas extremely interesting, and wanting to learn more, especially in the context of the recent fall in oil prices, I read The Secret World of Oil (Amazon link here) by Senior Investigative Reporter Ken Silverstein. As Mr. Silverstein states in his introduction a “constant in the energy business is corruption,” adding, “two central figures in this world are fixers and traders.”

 Legitimate and Corrupt “Door Openers”

In the world defense, fixers would also be called agents, third parties and intermediaries, who, as Mr. Silverstein describes, “open doors for corporate clients and arrange introductions to the various potentiates they know.” He adds “they help companies navigate the local bureaucracy, or provide the lay of the land with political and economic intelligence, or point to important people or companies that should be courted or hired in order to curry favor.” Mr. Silverstein’s accurate definition could easily be applied to both legitimate and/or corrupt services, and therein lies part of the challenge, as the mixing of both makes the best-intentioned vetting and due-diligence process all that more complicated. Indeed, not all agents serve “as bagmen to dictators,” as one executive shared; rather, as this same individual stated, “there’s a real art to acting as an agent, and the role differs from country to country.”

Mr. Silverstein explains how “oil company executives are sent overseas to make deals, and they are measured by performance.” Quoting a Chevron Executive, “You’re supposed to be clean, but you’re also supposed to create business.” Wait! I didn’t discover the zero-sum game of “what does management really want, compliance or sales?” As this Chevron executive adds, “That leads to a tension, and a temptation to use middlemen. Let him do whatever he needs to do; I’m not part of it and I don’t’ want to know.”

Blindness at the Front Lines

In my experience, such “blindness” is a commonly embraced attitude that is easy to rationalize at the front lines, while at the same time presenting great legal peril. In addition, what about the complexities of ownership, where in certain countries third party title might be shared among private and state personnel? What of the peril where front-line personnel are “directed” to use certain third parties to hold local contracts (something I experienced in defense), where those entities are owned, wholly or in part, by public officials or their relatives? What happens when they are told if they don’t use those agents they don’t “get the business? Can local registries be a trusted source of due-diligence to provide transparent documentation when it comes to beneficial and/or minority ownership?

As another executive stated, “the businessman has no choice but to do what those guys want. He’s between the devil and the deep blue sea.” As to how that gets done, Mr. Silverstein references traders who speak of “ever more sophisticated forms of payoffs that may skirt the spirit of anti-bribery laws but are often technically legal.” Sounds like a compliance accident waiting to happen!

Reflecting upon the writings of Silverstein and Chayes, and looking at recent events including what looks to be a multi-jurisdictional investigation of Petrobras, among other oil and gas anti-bribery enforcement actions, it becomes clear that the challenges in this market remain strong from a number of perspectives. Also, while Silverstein and Chayes focus on the corruption element that often pertains to exploration rights and production, what of the downstream providers of infrastructure goods and services?

More Licenses and Permits Often Means More Risk

What are the hazards for those multinationals where permits, transportation, local subcontracting and licenses are all a part of legitimately doing business? In this field, issues of trade, including US State Department (ITAR) Controlled goods, as well as permits and licenses for the use and transportation of hazardous goods, all are important project components that can increase the likelihood of corrupt requests. In addition, there is the potential interaction with sanctioned or debarred entities associated with sub-contracts.

Also, what of the risks associated with local immigration requirements when bringing in outside skilled workers? The issue of outside labor would seem to present tremendous corruption risk, where immigration officials hold up permits and work-visas, effectively threatening a work stoppage. If the local population does not have the skill set required to perform those necessary functions, where does that leave providers when such corrupt requests are demanded? In sum, it would appear that all of these components in certain regions would create an environment where requests for small and large bribes are built-in to the procurement and project landscape.

Conversely, reducing production and investment does not seem to be entirely devoid of corruption risk, even if it appears to be a reasonable economic solution. What happens when companies seek to transport equipment and technology back to more secure environments or to other regions? Will those goods be “held up” at the border with requests for small bribes as part of “extort and export?”

The Impact of Market Conditions

Furthermore, when I look at the recent dramatic reduction in oil prices, which will certainly put added financial pressure on exploration, production and infrastructure multinationals, I would think there would be greater temptation for corrupt behavior from a number of perspectives. First, front line business teams will certainly be under pressure to increase sales and to expedite existing projects, in order to compensate for revenue reductions and projection shortfalls. Will management be tempted to “not ask questions” when forecasts are achieved in low integrity regions in the environment of revenue reduction?

As to the demand side, when I asked Alison Taylor, Director Energy & Extractives at BSR, about this dynamic, she responded, “social chaos and heightened security risk in the high-risk (low integrity) oil producing states will become the new norm due to the drop in prices. While Western consumers will enjoy the economic benefits of lower oil prices, this added value is not necessarily enjoyed on the producer side. And as power structures become more fluid, key political stakeholders as well as low level bureaucrats who may be removed or exposed at any moment, might increase their demands for bribes while they are still in positions of authority.”

In addition, as revenue models and forecasts get recalculated based on market conditions, it is inevitable that expense and spending projections will be revisited. Accordingly, will compliance and training programs that are now even more critical in the context of Alison’s comments, now become fatalities in that financial remodeling? When I asked Alison about that possibility, she replied “given prices plunging and profits vanishing, some companies might be tempted to cut corners on regulatory, social and governance risk management, but now is not the time to reduce spending in these critical areas.” Indeed, an environment where corruption risk is greater in terms of supply and demand, is not the place to reduce compliance support.

How all this will impact the existing state of compliance will be of great interest to me when I attend the Inside Intelligence 2nd Annual Anti-Corruption in Oil and Gas for the Americas on March 23-24 in Houston Texas (link here). While I will participate in two sessions with compliance leaders from the industry, reflecting upon my own experiences where relevant, I also look forward to hearing the views and perspectives from the other presentations. It will be valuable for me to listen to, understand, and engage in the discussions where industry leaders will share their own viewpoints and challenges with respect to corruption risk. In the context of these challenging issues and market conditions, it certainly promises to be a resonating and valuable two days.