Category Archives: FCPA

Why is Corruption so Pervasive in Thailand? Could it be the Weather?

A recent article by Reason magazine’s award winning science correspondent, Ronald Baily, describes research that suggests that it could, in fact, be the weather.   He begins:

Greater wealth strongly correlates with property rights, the rule of law, education, the liberation of women, a free press, and social tolerance. The enduring puzzle for political scientists is how the social processes that produce freedom and wealth get started in the first place

Low levels of GDP do correlate with high levels of corruption, although there is a causality problem when arguing that corruption causes poverty or vice versa. But the two are obviously related.  The relationship between low levels of respect for the rule of law and high levels of corruption is almost self-evident; indeed one almost defines the other.  A free press, unencumbered by draconian defamation laws and other restrictions on speech, also challenges corruption. So why is a free press, social tolerance, the rule of law and transparency much stronger in some places than others?

Reason magazine’s article describes research suggesting that differences in the prevalence of disease explains, or at least help explains, this difference.  The article goes on to make a point about the relationship between disease and geography that is of particular relevance to Thailand:

It is well-known that disease prevalence falls the further one gets away from the equator. Hence it is not surprising, Thornhill and Fincher say, that the development of modern democratic institutions began in high-latitude Western Europe and North America.

The entire article should be read, but it is worth highlighting one observation that seems particularly germane to Thailand:

Their central idea is that ethnocentrism and out-group avoidance function as a kind of behavioral immune system. Just as individuals have immune systems that fight pathogens, groups of people evolve with local parasites and develop some resistance to them. People who are not members of one’s group may carry new diseases to which the group has not developed defenses. “Thus,” Thornhill and Fincher write, “xenophobia, as a defensive adaptation against parasites to which there is an absence of local adaptation, is expected to be most pronounced in regions of high parasite stress.”

Thailand’s geography cannot be changed.  Does that mean Thailand is cursed by geography to forever have a high level of corruption and suffer other serious social maladies? No.

Indeed, this theory of political development provides cause for optimism for Thailand.  The article observes:

In any event, as life expectancy across the globe has increased, liberal institutions have spread. The human rights group Freedom House reports that since 1972 the percentage of free countries has risen from 29 percent to 45 percent. During that same time, average global life expectancy has risen from 58 to 70 years.

Thailand has seen even more impressive improvements in life expectancy. The World Health Organization reports that in Bangkok, for example, females have an average life expectancy of 79.7 years while males have an average life expectancy of 75.6 years.  This would have been unimaginable several decades ago.  By other measures as well, Thailand has seen tremendous strides in eradicating or at least reducing debilitating tropical diseases.

Even if this biological theory of political development is true, the tremendous improvements in longevity and overall health Thailand has witnessed over the last several decades will not, in my view, guarantee a reduction in corruption.  It may help explain, in part, why Thailand has a serious corruption problem in the first place, but other changes are needed to eradicate this problem.  I would argue that its not just the change in “attitude” that politicians of all persuasions so often tout as the solution to this problem, but rather a fundamental change to protectionist policies and laws that grant unfettered discretion to officials to act as ‘gate keepers’ to protect Thailand from questionable threats.  There is also a relationship between (a) laws and policies intended to protect entrenched local interests; and (b) corruption. But that is fodder for another post.

A Challenge that Was Inevitable

But I was surprised to see it coming from Thailand.  The motion filed by the ex-TAT Governor, Ms. Juthamas Siriwan, and her daughter, Jittisopa Siriwan (both presumed innoncent), to dismiss a U.S. indictment against them, as reported in this PriceSanond news piece, evidences a reaction to efforts by U.S., and now other countries, to more strictly enforce anti-corruption laws.

As part of an overall effort to enforce anti-corruption laws, U.S. officials are pushing the legal envelope to charge foreign officials who are believed to be recipients of illegal payments in Foreign Corrupt Practices Act (FCPA) cases.  They are using the tools they have, even if somewhat limited, to curb the demand side of international corruption.

In recent years U.S. officials have aggressively pushed the supply side of international corruption on U.S. parties that pay bribes or don’t do enough – in the eyes of U.S. authorities – to curb the payment of illegal payments under the FCPA.  Fines have sky rocketed and people are – as the former head of FCPA enforcement at the Department of Justice (DOJ) said they should – going to jail.  It’s no longer “fun and games”.

Not surprisingly, the U.S. business community has pressed back, complaining that, among other things, the playing field is uneven because their competitors from other countries don’t face anything remotely similar to the FCPA’s tough enforcement regime.   It’s still early days, but other countries are now starting to enforce their anti-corruption laws.  I don’t see that trend reversing itself.

And what about the recipients of illegal payments?  In some cases, bribes are paid to gain an advantage over competitors, but in other cases they are simply paid because they are believed to be necessary to do any business at all (on the facts alleged, this case would not appear to fall within that category).   Not surprisingly, this generates tremendous resentment.  Businesses subject to strong foreign anti-corruption laws ask: why isn’t more being done to prosecute foreign officials that solicit and accept and, in some cases, demand bribes?

It’s a fair complaint and it resonates well not only with the U.S. business community, but with the international business community generally now that foreign anti-corruption laws are starting to show some teeth.  It doesn’t seem fair to punish the payer (supply side) when a foreign official receiving a bribe (demand side) escapes punishment.

Because of limits within the FCPA, it’s essentially impossible to employ that specific law against foreign officials.  So other measures are employed.  U.S. money laundering laws are pushed to their limits, raising the question: could this be a case of bad facts creating bad law?

Other measures are employed:

  • Immigration holds that prevent suspected corrupt foreign officials from entering the U.S.
  • Detaining and searching foreign business people when they pass through U.S. airports.
  • Extraditions from outside of the U.S.
  • A proposed law that would give U.S. companies handicapped by the corrupt practices of their foreign competitors with a civil remedy against those competitors.
  • Rule of law initiatives aimed at strengthening anti-corruption laws in countries where bribes are often paid.

The vast majority of people in countries where bribes are paid suffer the most from corruption.  They are the ones who are most damaged by corruption, although they sometimes don’t appreciate the role corruption plays in impoverishing their society. But that is changing too.  NGOs and more proactive journalists are helping to make the connection between corruption and the harm it causes.  When government officials spend millions, if not billions, on a product or project that doesn’t seem to do anything or is grossly over-priced, it often garners front page news now and questions about which government officials benefitted from the deal.

The pressure on the supply side will continue.  The U.S. may lose a few procedural skirmishes, but the trend to increase pressure on curbing the demand side of corruption will continue.  We may hear cries about ‘neo-colonialism’, but, in the end, those cries will be recognized for what they really are and fall on deaf ears.  Only a very few in countries with corruption problems benefit from corruption; the vast majority are victims.  They pay taxes that are siphoned off to vested interests or sometimes, when safety standards are compromised in an effort to make a profit, they pay with their lives.

It’s still early days – just like it was early days when the DOJ and U.S. SEC started to more aggressively enforce the FCPA in the U.S. in the mid part of the last decade – but we will see more pressure to curb the demand side in the form of enforcement actions and, perhaps, new laws to address gaps in existing laws.  We’ll also see press-back in response to these efforts to curb the demand side of corruption and plenty of skirmishes along the way.

FCPA Compliance Work Just Got Harder in Thailand

Thai laws are not unique in creating perverse incentives that lead to unintended and unwanted consequences.  On 21 July 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) into law. The Dodd-Frank Act primarily introduces major changes in the regulation of the financial services industry, but it also permits “whistleblowers” (click on this link for background on this part of the Frank-Dodd Act) in Foreign Corrupt Practices Act (FCPA) and securities fraud cases to claim a 10% to 30% reward in enforcement actions where the penalties recovered exceed U.S.$1 million.  Was this good policy or not?  I can see arguments on both sides of this issue, but I have major reservations and fear this could be a serious mistake.

We have seen how the Thai Customs Department’s bounty system creates perverse incentives in the enforcement of Thai Customs laws.  Is there something here for U.S. regulators to learn from Thailand?

The bounties from several recent high several high profile FCPA cases would have exceeded 100 million dollars.  As James Tillen, George Clarke, and Kevin Mosley from Miller & Chevalier reported in Corporate Compliance Insights:

If a Siemens whistleblower had been eligible for the 30% reward proposed in the current draft of the legislation, he or she could have received a windfall of $496 million.  In the 2009 case against Kellogg Brown & Root (KBR) and former parent company Halliburton, the DOJ imposed a $402 million fine and the SEC assessed $177 million in disgorgement, for a total of $579 million in penalties.  The windfall for a whistleblower in that case could have totaled $173 million.

By contrast, consider the relatively “meager” incentives the Thai Customs Department offers tipsters.  Consider the results of that incentive system.  Imagine the possibilities here.

In a recent New York Times article, Sean McKessy, chief of the new S.E.C.’s whistle-blower office, said: “The program “will strengthen our ability to carry our mission and it will save us much time and resources in the process.”  Mr. McKessy is quoted in this same article as saying the small agency: “has already received an uptick in quality tips, including lengthy letters laying our elaborate schemes.”  The agency has a new website here with easy to follow instructions on how to submit tips.

If you don’t want to complete the form or if you are concerned about the repercussions of submitting a tip directly, simple Google “FCPA whistleblower” and I am sure you will have no problems finding one of several U.S. firms that will happily help in submitting a tip.  The rewards are great.  I ran this same search several times here in Thailand and each time I found several such firms on the front page of my Google search results.

The United States Chamber of Commerce is not happy about this (please do not confuse AMCHAM Thailand with the U.S. Chamber of Commerce, although I personally sympathize with their concerns on this issue).  According to the New York Times, David Hirschmann, president and chief executive of the Chamber’s Center for Capital Markets Competitiveness says:

In approving this new whistle-blower rule, the S.E.C. has chosen to put trial lawyer profits ahead of effective compliance and corporate governance…This rule will make it harder and slower to detect and stop corporate fraud.

The dig at “trial lawyer profits” is a cheap dig, but he has a point.  It’s early days, but having been involved in several internal FCPA investigations here, having seen how the Thai Customs incentives work in practice and now seeing the early signs of how the whistleblower program is being promoted on the internet, I think its a strong point.  There are other troubling signs.

A whistleblower doesn’t need to report violations internally in order to obtain a reward.  The FCPA Blog comments:

Whistleblowers will run to the SEC whenever there’s a whiff of overseas bribery. They won’t talk about it with their bosses inside the company first. Why should they? That would be like giving away a lottery ticket. And why expose themselves to retaliation? If they go straight to the SEC, they’re immune from corporate discipline. So they’ll go to the feds, taking with them as many internal emails, audit documents, and bank records as they can carry.

I hope I am proven wrong, but my hunch is that this new development will make FCPA compliance work harder, much harder, here in Thailand.  I have seen how things tend to work here and the incredible challenges that foreign companies already face in places such as Thailand.  Stifling the supply side is important, but we really need to see more action curbing the demand side.

Diageo – Victim or Perpetrator?

The Thai press has reported  extensively on the settlement reached between the major multinational alcoholic beverages company, Diageo plc, and the U.S. Securities and Exchange Commission (SEC) after Diageo self-reported violations of the U.S. Foreign Corruption Practices Act (FCPA). Most of the coverage seems to consist of speculation – or perhaps “hints” is the better word – about the identity of the “Thai government official and foreign political official” retained by Diage to provide “lobbying services…in connection with several important tax and customs disputes that were pending between Diageo and the Thai government”.  This is understandable.  The SEC’s Order (in particular, pages 5 and 6) instituting the claim, imposing a cease and desist order and civil penalties provides plenty of hints.  Fingering the ‘bad guy’ makes for simple and exciting press.

But there is another, more fundamental, issue here: why is it that some Thai agencies seem to attract more than their fair share of corruption cases?  “Bribery is particularly concentrated in a few governmental sectors in charge of large financial transactions: the Land Department, Tax and Customs Department, the Transport Department, and the Police Department”, according to the Business Anti-Corruption Portal’s report on Thailand. The Diageo matter involved the Customs Department, and that is not surprising.

The Bangkok Post reports that: “Numerous business surveys have placed the Customs Department at the top of the list of government agencies with serious corruption and transparency problems.”  A large part of the problem at Thai Customs is the incentive system for rewarding tipsters and Customs officials who uncover alleged violations of Thai customs laws.  The Bangkok Post reports:

Previously, officials would get cash rewards of 25% while outsiders would get 30%. However, there were no ceilings. There were cases involving billion-baht shipments where the rewards would be staggering. This led to officials spending too much time trying to find fault with shipments.

Reform in the form of reducing numbers has been the approach, but many question if reducing ‘the take’ rather than changing the underlying policy is really effective. Many also ask why such a system was allowed in the first place; the Bangkok Post reports: “Pornsil Patchrintanakul, the deputy secretary-general of the Board of Trade says the cash rewards should have never existed.”

And why allow any form of pernicious incentive system like this to continue even if the incentives are more modest? Another Bangkok Post article reports: “Even capping the ceiling of each case at 5 million baht might not solve the problem.  For shipments of larger value, officials could simply break them down into smaller cases that meet the 5-million-baht limit.”   The prior Bangkok Post article provides part of the answer about why real reform is so difficult:  “A senior Finance Ministry official said there once was a proposal to abandon the reward system but there was serious opposition from the Customs Department.”

But another, less reported, legal ruling highlights the flaws in Thailand customs law regime: the WTO Ruling and WTO Appellate Body ruling in the Philipp Morris case.  The WTO case concerned the valuation of imported cigarettes, but the fact that the imported products in this particular WTO case were cigarettes should not divert attention to its more important findings.  The rulings by the WTO panel and a WTO Appellate Panel are far more important for what they say about the rule of law in Thailand.

The WTO not only found that Thailand failed to comply with its international obligations in setting values for these imported products for tax purposes, but also that: “Thailand…fail[ed] to publish laws and regulations pertaining to the determination of a VAT for cigarettes and the release of a guarantee imposed in the customs valuation process.”  It is may be hard to garner sympathy for a cigarette producer, but this case was not about protecting the Thai public from cigarettes.  How is any company importing goods into Thailand supposed to do business when its imports are subject to unpublished laws and regulations?

If the subject matter of the dispute, cigarettes, is still a concern, consider this from the WTO: “Philippines challenged the Thai government system under which certain government officials simultaneously served on the board of TTM, a state-owned domestic cigarette manufacturer.”  This wasn’t a public health issue.  It was a trade issue pure and simple.

But even more troubling, according to the WTO’s summary of the case: “[t]he Panel also found that Thailand acted inconsistently …by failing to maintain or institute independent review tribunals or process for the prompt review of guarantee decisions.”  No independent review of decisions made by officials with strong financial incentives to find violations?

This is not about cigarettes or even about the alcoholic beverages that Diageo produces and imports.  It’s about the rule of law.  And the inevitable friction between: (a) legal regimes that permit officials to exercise unfettered discretion when identifying violations pursuant to unclear – or here – unpublished regulations; and (b) and increased enforcement of foreign anti-corruption laws.  Clashes are inevitable.

The U.S.’s FCPA prohibits the payment of bribes to gain a business advantage.  In US vs Kay the fifth circuit held that prohibited payments (illegal bribes) not only include payments to obtain, say, government concessions or contracts, but also include payments made to reduce import duties and reduce taxes if they are made to obtain an unfair business advantage.  But what if they are simply necessary to even do business at all in a particular country?

This feature of the FCPA and other foreign anti-corruption laws puts businesses, particularly foreign businesses, in a very awkward position when they have to deal with less than transparent foreign government agencies.  It often places companies doing business in those jurisdictions with few, if any, legitimate options.  And it is not limited to only the Thai Customs Department.

What might be characterized in the U.S. as payment made to obtain an “unfair” business advantage is often seen as a necessary payment so as even to be able to do business.  It doesn’t provide the business with an unfair business advantage.  It is often simply seen as an unsavory requirement for doing any business at all in some jurisdictions.

This is not a justification for such payments and I am not involved in or familiar enough with Diageo’s situation to say if that is what happened here, but this clearly does happen in practice in Thailand.  More developed countries are more aggressively enforcing their own anti-foreign corruption laws, and this is a positive development.  But the increased enforcement on the supply of the corruption problem must be matched by increased reform on the demand side.

Laws that provide unfettered discretion to officials and provide for little or no independent review on how such discretion is exercised are big part of the problem on the demand side.  As long as local vested interests can use such laws to tilt the playing field in their favor, they will do so.  And in doing so, they undermine local economies, create business environments conducive to corruption and – this is often missed – generate friction with the increasingly robust anti-foreign corruption regimes of more developed economies.  And because these uneven playing fields place foreign companies subject to regulation in countries with robust foreign anti-corruption laws in impossible situations, these same foreign companies will, naturally enough, often press harder for serious enforcement of international conventions and obligations that are designed to level the playing fields.

Aggressive efforts to enforce rights and obligations under the WTO, the UN Convention, the New York Convention and other international treaties and conventions will play an increasingly important role in efforts to level the playing field going forward.   We are now only seeing the early signs of this.

Marked Increase in International Enforcement of Foreign Anti-Corruption Laws

The noose is tightening.  The U.S. has had its Foreign Corrupt Practices Act (FCPA) since the 1970s, but aggressive enforcement is a relatively recent phenomena.  A decade ago there were hardly any active cases, but now there are estimated to be well over 150 cases.  The U.S. used to be an outlier, but now other countries are starting to enforce their own foreign anti-corruption laws, including Germany, Japan and the UK with its new, very strict, anti-corruption law.

Even countries that had ranked low in terms of enforcement (http://www.transparency.org/news_room/in_focus/2011/oecd_progress_2011) are now starting to prosecute foreign anti-corruption cases. The first guilty plea was very recently secured under Canada’s Corruption of Foreign Officials Act. Korea recently indicted two representatives of a logistics company for alleged corrupt activity in China. And now Australia has charged six for allegedly bribing officials in Malaysia, Indonesia and Vietnam to win currency contracts. (http://www.morningstar.co.uk/uk/markets/newsfeeditem.aspx?id=148573656291621)

Perhaps unknown to many, but Note Printing Australia Limited (http://www.polymernotes.org/resources/npasecurency/npa_securency04.pdf) prints bank notes for many countries, including Malaysia, Indonesia, Vietnam and, according to its recent annual report, Thailand. There has been no suggestion that Thai officials were involved in this matter, but this does mean that Australian business persons operating in Thailand can no longer rely on a relaxed anti foreign corruption regime in Australia. The Reserve Bank of Australia issued a press release containing the following:

Over the past several years much has been done to tighten controls and strengthen governance so as to avoid any re-occurrence of the alleged behaviour:

  • Those charged with offences are no longer with the companies;
  • The use of sales agents has ceased;…

“The use of sales agents has ceased.”  The use of sales agents is a common tactic used to circumvent foreign anti-corruption law.

The point of all of this is that foreign corruption laws are no longer a U.S. specific issue.  Other countries are now actively enforcing their foreign anti-corruption laws.  It’s taken awhile, but the playing field is visibly changing and what had been considered “business as usual” is becoming much less acceptable – not only for U.S. companies, but also now for Japanese, Canadian, UK, Korean and Australian companies as well.

Thailand’s 30% Graft Tax

The Thai Federation of Industry (TFI) reports in the Bangkok Post that “businesses can be asked to kick back up to 30% of contract values to state officials”. This is based on anecdotal evidence, but you can’t expect precise measurements on this sort of thing. And that number is not particularly surprising.

The more cynical view would be: “So what? This is Thailand. Live with it or leave.” But I think there is good reason for hope. In that same article: “Dusit Nontanakorn, chairman of the Thai Chamber of Commerce (TCC) and the Board of Trade said Thailand should follow the example of Hong Kong” and went on to say:

If we don’t start today, there will be no map of Thailand left. Can we stop paying respect to those who are rich but cheat, and start to wai those who are poor but honest?”

This is not the first time that we have heard a prominent person in Thailand comment on corruption, but those are strong words.  And he is absolutely right about the corrosive effect of corruption on states.

The article goes on to report:

The chamber recently created a corruption situation index (CSI), which it intends to update every six months to gauge the attitudes of respondents toward corruption and the effectiveness of measures to stop improper practices.

The creation of a local corruption situation index is also new.  Let’s hope the indexing continues.  There is ample commentary in cyber-space on how to tackle corruption and I will add some comments of my own in future blog posts, but one thing seems obvious to me: you cannot even begin to address corruption unless you shine a spot light on the problem and openly discuss it.

Putting numbers on this, particularly realistic numbers (and 30% is realistic), also helps by making the problems created by corruption more concrete.  That basically means that approximately one of three Baht or dollars spent on many public projects is not actually going into the project but into someone’s pocket. This increases the project’s price and, perhaps more important, limits potential participants in the project. In the current environment with stricter enforcement of international anti-corruption laws, more honest and capable businesses simply won’t want to participate in a project with that level of corruption.  And the Thai public suffers as a result.

To put this in historical perspective, it wasn’t so long ago that international organizations shied away from discussing corruption.  Up until the 1990s, corruption was a taboo subject for international organizations.  The US had its Foreign Corrupt Practices Act since the 1970s, but aggressive enforcement of the FCPA is a very recent phenomena.  Last year in the American Chamber of Commerce’s magazine, T-AB, I wrote: “In the prior decade, the Department of Justice (“DOJ”) did not file a single FCPA case until 2002; but last November, the DOJ announced there were more than 130 open FCPA cases. That number is expected to increase.” (www.deaconsbkk.com/knowledge/legal-update-increased-enforcement-of-the-fcpa.php). And that number has certainly increased.

There is no reason to rule out change in Thailand. It will not happen overnight, but I am optimistic that a consensus is developing in the local business community that business as usual is no longer acceptable.

To Give and Not Receive?

When a bribe is paid, someone must pay that bribe, and someone must receive that bribe.  One cannot occur without the other.

On 14 September 2009, Gerald Green and his wife, Patricia Green, were convicted in a U.S. Federal Court of bribing the former governor general of the Tourism Authority of Thailand (TAT), Juthamas Siriwan, to get lucrative film festival contracts as well as other TAT contracts.  They were convicted of, among other things, violating the U.S. Foreign Corrupt Practices Act (FCPA) for paying kickbacks to Juthamas Siriwan.  According to the FCPA Blogsite:

the Greens paid approximately $1.8 million in bribes to the former governor through numerous bank accounts in Singapore, the United Kingdom and the Isle of Jersey in the name of the former governor’s daughter and a friend of the former governor. The Greens received contracts that generated more than $13.5 million in revenue to their businesses.

The FBI affidavit filed in support of the initial charges against the Greens provided a detailed list of the payments.  One would think that the FBI would not provide such a detailed list unless they were sure of their evidence and, sure enough, the Greens were convicted after just a few hours (not days) of deliberations.  Sounds like rock solid evidence that bribes were paid, doesn’t it?

Although the FCPA does not apply to a foreign official who receives a bribe (unless they commit an act within the U.S.), the U.S. indicted Juthamas Siriwan on related charges of money laundering and other alleged crimes.  A copy of the indictment can be downloaded here: (http://www.mediafire.com/?jz3mgylictc).  The U.S. government typically doesn’t go after foreign officials, but they did here.

So what is happening in Thailand to the foriegn official who is alleged to have received US$1.8 million in bribes?   Well, there were news reports that she was threatening to file criminal defamation charges (surprise!) against anyone who claims she received bribes.  (We make no such claim.)  So what are the Thai authorities doing?  According to today’s Bangkok Post:

Methee Krongkaew, the person in charge of the subcommittee, said his panel would forward its findings to the main NACC committee if Ms Juthamas failed to show up to defend herself. The main committee would then decide whether to submit the case to the public prosecutor for indictment.

Anything else?  Well she presumably isn’t planning any holidays in the U.S. in the near future.  

She might want to reconsider holiday plans outside of Thailand altogether.  The U.S. has a tradition of aggressively seeking the extradition of federal fugitives, as anyone who has read a paper in Thailand over the past few weeks will know from the Victor Bout case.  But what they may not know is that U.S. authorities also seek extradition of alleged white collar criminals – even when they are foreign nationals – from foreign countries.   And they can be downright tenacious about it, turning up where you would not expect them.

In one case, a foreigner flying to Australia was detained before he officially entered the country, and forced to leave, in the company of several U.S. law enforcement officials, on the next flight to the U.S. (they were obviously trailing him on his flight to Australia).  So a vacation in Australia is probably not a good idea either.  Where else?  Hong Kong? Singapore? No idea.  And we wouldn’t say even if we had one.