Tightening up on bribery: changes to the OECD convention

As investors get tough on corruption, what are the implications of OECD enhancements to the Anti-bribery Convention

Institutional investors that belong to the United Nations Principles for Responsible Investment this week began a significant campaign to push 21 major companies to meet the bribery and corruption reporting requirements of the International Corporate Governance Network and the UN Global Compact. It is one a series of interesting developments on bribery and corruption that investors should be aware of. Another major step is that for the first time since the OECD Convention on Bribery of Foreign Public Officials in International Business Transactions came into force in 1997, the working group overseeing the convention agreed a recommendation (the recommendation) in November 2009 containing a series of far-reaching changes with significant implications for the responsible investment community. The convention represents a leading instrument for reducing the supply of funds that firms in the advanced economies may use to bribe governmental officials in developing countries. In the 12 years since the convention came into force, the number of signatories has grown to include 30 OECD and eight non-OECD countries.The backbone of the convention is the criminalization of bribery of public officials undertaken anywhere in the world by persons residing in signatory countries. Enforcement activities by parties to the convention have been limited but have been trending upwards. After more than ten years experience with the convention, the working group formed a consensus on the need to take steps to improve its effectiveness.The recommendation is far reaching in scope. I will focus on three aspects most relevant to corporate governance reviews. The subjects include: (i) reporting acts of bribery, (ii) liability standards, and (iii) anti-bribery compliance. Together the revisions have effectively moved the OECD regulatory regime concerning bribery from a narrowly focused means of prevention by OECD-based firms and actors into a significant addition to the regulatory framework for corporate governance within all 38 signatory countries. The recommendation calls for member countries to take three steps to enhance reporting of suspected acts of bribery. The first involves the creation of easily accessible mechanisms for any member of the public to
report suspected acts of foreign bribery to law enforcement. This element responds to apparent gaps in the domestic enforcement systems within signatory countries that may leave otherwise well-founded allegations unreported. Second, the recommendation requests that member states create mechanisms for public officials of signatory governments, particularly foreign service officials, to report suspected acts of bribery detected in the course of their work. This innovative element seeks to respond to the intelligence foreign service officials gain in the course of overseas assignments. In addition, it provides a vehicle to align governments’ interests in creating a level playing field for the commercial success of national firms with broader anti-bribery enforcement goals. The third element calls for an overall whistleblower protection framework for public or private sector employees who report suspected acts of bribery. This would effectively insert a whistleblower protection feature into the overall corporate governance/compliance framework of signatory countries.
The recommendation also takes up the question of legal person (company) liability. While the convention required states to implement laws or regulations providing for the criminal liability of companies, a number of details remained unresolved. These included the circumstances in which companies as opposed to individuals could be indicted, whether companies could be held liable when the individuals making the bribes are not senior managers, or whether the use of agents to carry out bribery could mitigate criminal responsibility.The recommendation creates two alternatives for how signatories should define liability of companies for acts of bribery. The first alternative provides for flexible criteria that reflect differences in the degree of collective decision making companies employ.

“In the 12 years since the convention came into force, the number of signatories has grown to include 30 OECD and eight non-OECD countries.”

The second option imposes liability as a result of either active senior management involvement in the act of bribery or their failure to supervise employees to prevent them from engaging in bribery. It appears that liability for failure to supervise may be avoided by firms with robust systems of anti-bribery compliance. Among the recommendation’s innovations is the move to specify good practice guidelines for anti-bribery ethics and compliance. This development is noteworthy for a number of reasons. First, for the first time the guidelines will institutionalize organizational compliance practices at the international level; until now those practices have been largely a matter of informal practice rather than legal mandate. In undertaking its review of this matter, the working group took note of the existence of various leading codes and standards, as well as the United States Sentencing Guidelines for Organizations. Second,
it will lead to greater harmonization of such organizational compliance practices across the OECD countries. This element is particularly noteworthy. Historical experience suggests that anti-bribery compliance practices could influence the development of compliance and ethics practices in areas beyond the anti-corruption context. As precedent, one consequence of the United States Foreign Corrupt Practices Act coming into force in 1977 was the requirement that businesses maintain accurate books, records and internal controls. For businesses to be able to comply with these requirements, they had to maintain effective systems across the board. Although the recommendation’s good practice guidance specifically relates to anti-bribery compliance, companies seeking to adhere to its principles may find it necessary to upgrade ethics and compliance practices in other areas of concern for ESG reporting. The guidance anticipates this result by stating that for an anti-bribery program to be effective it must be “interconnected with a company’s overall compliance framework.” In addition to defining standards of practice for organizational compliance, the recommendation calls on signatories to encourage firms to adopt organizational ethics and compliance programs to counter bribery. Signatories are also invited to require firms to disclose the existence of their plans in connection with public disclosure.More rigorously, the recommendation requests signatories to consider giving some form of preference in connection with public procurement to firms that have adopted ethics and compliance programs. While the recommendation has not fundamentally altered the underlying legal requirements of the convention, it has created a new regulatory framework within which company compliance activity will take place. In the words of Mark Pieth, chair of the working group: “the liability standards and compliance framework together seek to get at the issue of corporate culture.” Pieth further observes that by dictating standards of practice for anti-bribery compliance, the recommendation will provide clear criteria by which external actors can monitor and assess corporate anti-bribery activities. Such criteria should facilitate ESG assessments, particularly in relation to companies’ anti-bribery activities. Given the well-recognized negative effects of bribery in developing countries and the recommendation’s likely positive spillover on corporate governance among firms based in developed countries, the OECD has made an important contribution to improving markets, governance, and the rule of law around the world.
Thomas F. McInerney is Director of Research, Policy, and Strategic Initiatives at the International Development Law Organization