Anti corruption and sustainability regulation and disclosure trends

Global Anti-Corruption and Sustainability Regulation/Disclosure Trends

Toby Webb, Founder, Ethical Corporation and Stakeholder Intelligence. Lecturer, Corporate Responsibility, Birkbeck, University of London

Jakarta Training Workshops April 2012 Session Three

[email protected]

Which are the significant shifts?

• UK Bribery Act 2010

• US FCPA 1977

• OECD/UNCAC

• Dodd Frank Act 2010

• Lacey Act / EU Timber Regulation 2010

• CSR “Laws” / Reporting

UK Bribery Act (2010/11)

• Created Crimes of bribery

• Being bribed

• The bribery of foreign public officials

• The failure of a commercial organisation to prevent bribery on its behalf

UK Bribery Act: "the toughest anti-corruption legislation in the world"

• Maximum of 10 years imprisonment

• Unlimited fines

• Confiscation of property

• Disqualification of directors

• Near-universal jurisdiction, prosecution of individual or company with links to the United Kingdom, regardless of where the crime occurred.

• Weak enforcement so far…

Mabey and Johnson: Fined under UK Bribery Act

US Foreign Corrupt Practices Act 1977

• The “big beast” of anti-corruption enforcement

• Applies to any person who has a certain degree of connection to the United States and engages in foreign corrupt practices

KBR: $579 million FCPA fine in 2009. Chairman and CEO: 30 months in jail. Paid back $11 million to company

FCPA: Not just for US Citizens or Companies

• FCPA makes it “unlawful for a U.S. person, and certain foreign issuers of securities, to make a payment to a foreign official for the purpose of obtaining or retaining business for or with, or directing business to, any person.”

• Since 1998, also applies to “foreign firms and persons who take any act in furtherance of such a corrupt payment while in the United States.”

Intent is what matters with FCPA…

• No materiality. Illegal to offer anything of value as a bribe, including cash or non-cash items

• The US government focuses on the intent of the bribery rather than on the amount

• Companies looking deeper at deals now: E.G. Govt official owned firms, who owns what?

Facilitation Payments Allowed, Sometimes

• Distinction between bribery and facilitation or "grease payments"

• Payments to foreign officials may be legal if payments permitted under written laws of host country

• Certain payments/reimbursements relating to product promotion may be permitted

The Most Enforced Global Corruption Law

Wal-Mart, BAE Systems, Baker Hughes, Daimler AG, Halliburton, KBR, Lucent Technologies, Monsanto, Siemens, Titan Corporation, Triton Energy Limited, Avon Products, and Invision Technologies all prosecuted recently.

Big fines paid.

Wal-Mart in Mexico: Major investigation

The Most Enforced Global Corruption Law

• In 2008, Siemens paid a $450 million fine for violating the FCPA

• Hewlett-Packard currently being investigated over a major case in Russia

• Stronger US DOJ and SEC enforcement increased prominence of the FCPA from 2010 onwards

New cases coming all the time

April 17 2013: “One current and one former executive of Alstom, the French engineering group, were charged by US authorities with allegedly bribing Indonesian officials to win power contracts.”

(Financial Times)

More co-ordination between agencies

• Alstom has faced investigation by the US, UK’s Serious Fraud Office and French authorities.

• 2011, paid €31m to Switzerland’s attorney-general for negligently failing to stop bribery by some employees involving contracts in Latvia, Malaysia and Tunisia (FT)

PT PLN (Persero) Alstom accused of Bribery for contracts

Convention on Combating Bribery of Foreign Public Officials in International Business Transactions

• Passed in 1997 by OECD

Nations

• Nations supposed to implement in national law

• Seeks to make bribery an "extraditable" offence among OECD nations

• Many countries, particularly in Europe, have been slow to implement / enforce

United Nations Convention against Corruption (UNCAC)

• Landmark, international anti-

corruption treaty adopted by UN General Assembly October 2003

• 145 Countries signed up as of 2011

• States obliged to adopt coordinated policies that prevent corruption and designate a ‘body or bodies’ to coordinate and oversee their implementation

• Weak take up, as with OECD Convention

Dodd Frank Act 2010: Section 1502

• The Dodd Frank Wall Street Reform and Consumer Protection Act 2010, includes section 1502.

• Aimed at stopping national army and rebel groups in the DRC from illegally using profits from minerals trade to fund conflict.

• Section 1502: Disclosure requirement for companies to determine whether products contain conflict minerals

• Must carrying out supply chain due diligence

• Must report this to the Securities

and Exchange Commission (SEC).

Source: Global Witness

Dodd Frank Act 2010: Key Aspects for Business

Section 1502: “No penalty if companies cannot determine whether the minerals they use come from DRC or neighbouring countries. The consequence for businesses that find themselves in this situation is that they have to submit to the SEC a ‘conflict minerals report’”.




Disclosure of certain payments made to the federal government or foreign governments by resource extraction issuers – companies engaged in the development of oil, natural gas, or minerals. Resource extraction issuer must disclose payments made to governments if: • The issuer is required to file an

annual report with the SEC. • The issuer engages in the

commercial development of oil, natural gas, or minerals.

Key message: Transparency


• The new disclosure requirements apply to domestic and foreign issuers and to smaller reporting companies that meet the definition of resource extraction issuer.

• In addition, the issuer is required to disclose payments made by a subsidiary or another entity controlled by the issuer.

Key message: Transparency


“The rules define commercial development of oil, natural gas, or minerals to include exploration, extraction, processing, and export, or the acquisition of a license for any such activity.”

Types of payments that need to be disclosed include:

• Taxes

• Royalties

• Fees (including license fees)

• Production Entitlements

• Bonuses

• Dividends

• Infrastructure Improvements issuer.

Source: US Government

US/EU Timber Regulations

• 2008 U.S. Congress passed Lacey Act

• Banning trade in illegally sourced plants and their products — including timber and wood products

• Prohibits all trade in plant and plant products (e.g., furniture, paper, or lumber) that are illegally sourced from any U.S. state or any foreign country

2008 Lacey Act

• Importers to declare the country of origin of harvest and species name of all plants contained in their products

• Establishes penalties for violation of the Act, including forfeiture of goods and vessels, fines and jail time

• “Illegally sourced” is defined by the content of sovereign nations’ own laws

Examples of Lacey Act Violations

• A company in California imports a shipment of wood flooring from country X, made from timber that had been harvested without valid permits in country Y where it was cut

• An exporter purposefully mislabels a shipment to the U.S. as less valuable species to avoid higher tariffs

• A paper company uses pulp sourced from illegal logging practices and exports finished paper product to the United States

• A veneer importer does not identify the correct country (or potential countries) of harvest origin for the species used in his importation.

Source: Environmental Investigations Agency - THE U.S. LACEY ACT: Frequently Asked Questions About the World’s First Ban on Trade in Illegal Wood

Sanctions…

• Criminal felony fine (up to $500,000 for corporation, $250,000 for individual, or twice maximum gain/loss from transaction)

• Possible prison for up to five years

• Forfeiture of goods

EU Timber regulations 2010

• Prohibits the placing on the EU market illegally harvested timber and products derived from such timber

• Requires EU traders who place timber products on the EU market for the first time to exercise 'due diligence'

• Traders obligation to keep records of their suppliers and customers.

EU Timber regulations 2010

• The Regulation covers a wide range of timber products

• Application of the Regulation started 3rd March 2013

• Regulation legally binding on all 27 EU Member States, which are responsible for laying down effective, proportionate and dissuasive penalties and for enforcing the Regulation.

• Degree of enforcement? Hmm

CSR Regulation: Denmark 2008

• Mandatory for the approx. 1,100 largest businesses, listed businesses and state owned public limited businesses to report on CSR in their annual reports on a comply or explain basis.

• Businesses have to inform about their CSR practices or state that they do not engage in CSR.

Denmark: Least corrupt country As ranked by perception (TI)

Denmark 2008

• Research shows that the legal requirement has had a positive effect on CSR

• Majority of the businesses examined are “working with CSR”

• Legal requirement has led to administrative burdens, research says businesses regard it as positive, as it is flexible and they understand its purpose

India’s CSR Law 2012/13

• Mandatory for all companies with turnover of Rs 1,000 crore or net profit of Rs 5 crore to earmark 2 percent of their net profit in the preceding three years for CSR

• Independent director on board charged with the task of CSR

• Separating community and social development and sustainability/green issues

Bhaskar Chatterjee

EU CSR?

• Further mandatory EU company disclosure on CSR issues coming soon?

• Likely to go beyond current EU Business Review requirements

• Key question for the Commission is MATERIALITY

• May be similar to French or Danish legislation on reporting

• Clearer picture during 2013

So what does all this mean?

• Many regulations are new: The impact remains to be seen

• FCPA enforcement appears on the rise

• UK Bribery Act unproven

• Transparency disclosure regulations increasing

“The Perp Walk”: More likely

So what does all this mean?

• Companies ARE being prosecuted under Lacey Act (Gibson)

• Enforcement trends are only going one way

• Publicity and “shining a light” are current methods for change

• BUT enforcement can change quickly

Corruption riots change politics

What can companies do about it?

• Make the business case for ethics management

• Understand it’s not just about code compliance

• Develop world-class ethical management systems (Shell, Siemens)

• Expand them to all areas of the business

Source: PwC

What can companies do about it?

• Do a “culture audit”

• Research suppliers more deeply

• Find out who owns what (Governments)

• Report publicly, and admit mistakes. Be humble

• Partner and collaborate

Thank you!