Corruption in the west

When dirty business comes to mind, many think of dictator-led regimes. But Canada, the US and other countries engage in dastardly deeds too. The question is, are they different?

It was 2009 and Bob McDonnell, Virginia’s attorney general and a Republican candidate for governor, had one goal: job creation. In the midst of the economic carnage that followed the Lehman Brothers collapse, McDonnell’s mission was to rekindle growth. As he told voters, “Bob’s for Jobs.” Jobs were Bob’s brand.

McDonnell’s mission brought him into contact with many businesspeople, including Jonnie Williams, CEO of Star Scientific, which made nutritional supplements. Williams met McDonnell during the campaign, and offered the candidate the use of his private plane.

After winning the election, McDonnell and his wife, Maureen, dined one night with Williams and his partner in New York. “The conversation,” according to court documents, “turned to Mrs. McDonnell’s search for a dress for the inauguration, which led Williams to offer to purchase a gown for her.” McDonnell’s counsel suggested the governor reject the gift. Williams kept calling, asking the governor to get the state’s public universities to fund research on the benefits of his products.

Over the next several months, Williams and Maureen McDonnell communicated regularly: he took her on a US$20,000 shopping spree, during which she regaled him with tales of her family’s financial woes. He offered more financial help. She returned the favour by arranging more meetings with him.

In August 2011, during a luncheon at the governor’s mansion, Williams distributed cheques for US$25,000 to several invited scientists, offering the money to encourage them to prepare funding proposals to test his pills. By then, McDonnell was not only using the pills himself, but talked them up as a product that state employees should use. By May 2012, Williams had transferred a total of US$175,000 in gifts and loans to the governor’s family. Eventually, the FBI came calling.

OLD AS MONEY ITSELF

Corruption is not a new phenomenon: the misuse of money is as old as money itself. Whenever greedy individuals and businesses exercise unchecked control over large sums of cash, some will fall prey to the temptation to bribe, fix prices, defraud consumers or use their wherewithal to gain unfair advantages.

Yet in an era of mass global trade, many people today tend to associate widespread state and corporate corruption with totalitarian regimes or kleptocracies where fraudsters can operate with impunity. According to Transparency International (TI), Asia, Africa, the Middle East and Latin America score low on its “perception” index. Canada, New Zealand, Australia, and northern European and Scandinavian countries rank highest. Leading economies of the Organization for Economic Co-operation and Development (OECD) such as the US, France, Spain and Italy rank between 18th and 60th.

In a 2012 report, TI also noted that central European nations have rolled back anticorruption protections. The economic fallout in the post-2008 period exacerbated the temptations. “The links between corruption and the ongoing financial crisis in these countries can no longer be ignored,” the report says.

Such assessments, however, offer a self-congratulatory picture that disguises the prevalence of corruption in wealthier nations. Case in point: in 2014, the most recent year for which data is available, Canada’s Anti-Fraud Centre recorded 42,200 reported complaints of fraud nationally, with losses totalling nearly $75 million.

While many of these cases involve anonymous fraudsters working out of boiler rooms, there are plenty of examples of high-profile executives and trusted multinationals engaging in dodgy conduct. Over the past three years, revelations have surfaced about a secret plan by Volkswagen to rig computerized pollution monitors in its diesel vehicles to show low emissions. Last December, just months after the US Environmental Protection Agency hit VW with a US$15.3-billion fine, the company’s Canadian division announced a $2.1-billion compensation plan for 105,000 VW or Audi owners. Volkswagen AG, the parent firm, has so far paid more than US$10 billion in fines and legal settlements, The Globe and Mail reported.

In the VW case, no executives went to jail, and the legal costs will be absorbed by shareholders. Likewise, the aftermath of the 2008 credit crisis, precipitated by speculation in asset-backed securities, produced no jail terms, even though the crisis was traced to predatory mortgages.

But other companies and executives have come in for harsher personal penalties. In February, the vice-chairman of the Samsung Group was arrested and charged with paying US$36 million in bribes to a close associate of South Korea’s president. In Canada and the US, meanwhile, shareholders have lost vast sums to various investment schemes perpetrated by figures such as Bernie Madoff, Livent’s Garth Drabinsky, Viacom’s Sumner Redstone, and Conrad Black, all once respected corporate titans who ended up in jail.

Since the Texas energy trading giant Enron collapsed in 2001, regulators have clamped down on stock scams, money laundering, tax evasion and even grey-area practices, such as aggressive transfer pricing schemes.

The narrative around corporate cheating has also shifted in the 20 years since OECD members, Canada among them, approved the convention for combating bribery.

In recent years, according to University of Toronto forensic accounting expert Leonard Brooks, prosecutors in the US, the UK and some other European nations have come down hard on multinationals caught bribing officials to win contracts or operating licences in the developing world.

At the same time, stepped-up demands in western democracies for greater transparency and accountability increasingly jostle with pressure from large corporations keen on finding ways to influence decision-makers.

Herewith are four types of corporate corruption that dog western democracies.

POLITICAL PALM-GREASING

When FBI agents arrived at the McDonnells’ doorstep in 2014, they charged the couple with fraud and extortion. Curiously, though, the story ends unexpectedly: while a lower court threw the book at McDonnell and his wife, the US Supreme Court overturned the conviction last year, arguing that he hadn’t made official decisions in exchange for the payments. While no one now contests the fact that a lot of money changed hands, the meetings, the court ruled, didn’t meet a key legal test.

The story reveals how narrowly written laws can situate evidently dodgy conduct on the right side of the line. But it also reveals the way corruption can begin in election periods by those who are hoping to position themselves to have special access to a newly elected decision-maker.

While many Canadian jurisdictions have tight restrictions on third-party advertising and campaign contributions, we shouldn’t conclude our system is corruption-proof, says Duff Conacher of Democracy Watch.

He cites a telling example: in late 2006, Parliament passed the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, which was part of Canada’s ratification response to the 2003 UN convention on corruption. While the convention recommended that signatory nations include the names of elected and government officials and their families on a national anti-money-laundering registry (such as the Financial Transactions and Reports Analysis Centre), the legislation only imposed this requirement on foreign officials. Ottawa didn’t remedy this loophole until 2015. “That’s suspicious in and of itself,” says Conacher.

It’s difficult to determine whether the dearth of high-profile Canadian cases like McDonnell’s is a result of inadequate policing or good behaviour. What is clear, however, is that public and media attention in recent years on so-called “pay-to-play” party and campaign fundraising efforts has amplified the debate about how money can buy access, and whether those relationships between donors and officeholders cross the line that separates influence-peddling from outright corruption.

York University political scientist Robert MacDermid, who tracks political donations, says the policy environment has improved with prohibitions on corporate and labour funding for political campaigns. “Does that mean wealthy people don’t influence government policy?” he says. “Of course it doesn’t.”

Indeed, media revelations about how Liberal governments have offered donors private access to key cabinet ministers in exchange for large contributions have prompted calls for reform. Earlier this year, Prime Minister Justin Trudeau announced that the practice would be stopped following revelations that he’d spent time on a private island owned by the Aga Khan.

What hasn’t changed, however, is that federal parties still have to find ways to fill the budgetary gap created when the Harper government discontinued the long-standing Party Allowance, a form of public funding for parties; however, other forms of public funding are still available.

Moreover, recent contributor restrictions haven’t halted traditional work-arounds, says Conacher. “Wherever [those reforms] have happened and people have looked into it, they’ve found funnelling” — the practice of companies laundering contributions by transferring sums to executives, their family members and other employees. He points to the 2012 Elections Quebec investigation of rumours of funnelling. The agency turned up $12.8 million in donations, ranging in size from $2,500 to $15,000, that likely originated with corporations. “No one’s ever been charged,” he says.

Both MacDermid and Conacher also point to British Columbia as an outlier. There, the Liberal party is allowed not only to raise money from corporations, but also to provide funds to officeholders. Premier Christy Clark’s annual take was $50,000, above her salary and expense account, until she announced in January that she would no longer accept it. As The New York Times noted, BC’s ethics commissioner signed off on the practice, but that endorsement raised eyebrows because the commissioner’s son is a deputy minister in Clark’s government. “In any country without a political donation law,” Conacher says, “that would be called bribery. It’s a system of legalized bribery covered up by the fact that we have a political donations law.”

COLLUSION

One of the precepts of capitalism is that companies compete to win customers. But while most western nations have policies to encourage competition and discourage excessive concentration, companies in some sectors are tempted to collude in order to fix prices, rig bids or show artificial profits.

In the early 2000s, currency traders at banks such as Barclays, USB and the Royal Bank of Scotland began secretly colluding to rig the Libor rate, a benchmark overnight lending rate set in London every day. The Libor, which determines trillions of dollars of loans around the world, is based on an average of daily submissions by several major banks. But traders figured out how to manipulate those submissions, often conspiring with one another to gain advantage and show artificially inflated profits.

The manipulation went undetected until the post-2008 aftershocks, when numerous international financial regulators began investigating some major banks. According to an analysis by the Washington, DC-based Council on Foreign Relations (CFR), the banks implicated in the Libor scandal face aggregate fines of more than US$35 billion; dozens of traders and executives were fired and a few even faced jail terms. The fallout undermined public confidence in global financial institutions. “The efforts of authorities to increase the oversight and accountability of the Libor system have spurred debate over whether reforms go far enough,” says the CFR.

Rigged currency trading is just one instance. In 2013, Canada’s Competition Bureau began an investigation into price-fixing in the Greater Toronto homebuilding industry, with the regulator alleging that large contractors had agreed not to compete while keeping out upstarts, according to documents obtained by the CBC.

Competition regulators in the US and Canada have also succeeded in cracking a bid-rigging conspiracy involving a cartel of Japanese auto-parts suppliers. “The bureau’s investigation relates to a series of alleged conspiracies and bid rigging agreements or arrangements among various motor vehicle component suppliers,” says a federal government statement. “These components were used [in the] manufacture of motor vehicles in Canada and elsewhere.” As of 2016, the Canadian government has levied fines exceeding $70 million.

European competition watchdogs are investigating similar bid-rigging allegations that truck manufacturers fixed prices by secretly agreeing to delay the introduction of new emissions technologies; European Union regulators are considering fines of US$1.8 billion. “The looming penalty,” noted The Economist, “provides the latest evidence that policing price-fixers, once an enforcement backwater, has become a priority for trustbusters.”

PROCUREMENT

The construction, development and public works sectors have traditionally been vulnerable to corruption. In Ireland, for example, it was discovered that former Irish prime minister Bertie Ahern had accepted US$276,000 in secret cash payments from builders while in office, while other government officials were found guilty of soliciting payments during an inquiry that released its findings in 2012. Two years later, Tony Mack, the mayor of Trenton, New Jersey, was convicted of accepting tens of thousands of dollars in bribes from a company seeking permission to develop a parking garage.

In November 2015, Quebec justice France Charbonneau released a report that exposed the complex web of relationships between construction firms, organized crime and well-known politicians involved in tendering multimillion-dollar works contracts. The Charbonneau commission, established by former Quebec premier Jean Charest, exposed the bid-rigging that had been rumoured for years and detailed by journalists.

The revelations led to the resignation of mayors in Montreal and Laval, and included details of a secret $22.5-million payment by an agent of SNC-Lavalin to the head of the McGill University Health Centre in exchange for a $1.3-billion contract to construct a huge new hospital.

Since Charbonneau released her recommendations in late 2015, the Quebec government has taken steps to root out corruption and intimidation in the construction sector. Her report called on the province to establish whistleblower protection and other penalties, as well as a central agency with a mandate to vet the ethical standards of businesses that seek to win public contracts. To be deemed eligible, firms need to have a certificate of integrity, says Natalie St-Pierre, a tax practitioner in Montreal. “If you don’t have the certificate, you can’t bid.”

Yet St-Pierre says these reforms may be having unintended consequences. Companies of all sizes are now required to submit a range of information, including financial statements and legal judgments, to regulators, even though much of this data exists in government databases. “The idea is good, but the implementation is an issue,” she says. The requirements “can really create a bottleneck for companies and entrepreneurs. We hear [this] especially from newcomers to the industry who are not well aware of the rules.”

Nedgy Augustin, who works in the tax and government sector in Montreal, also points to a wrinkle with tax appeals. If a company seeking to bid on public-sector contracts has an ongoing tax assessment appeal, the application to receive a certificate of integrity will be denied until the case is resolved. “They’re using a bazooka that’s not designed correctly, and are doing a lot of collateral damage,” says Augustin, citing the case of a client that wanted to bid on a contract for a new nursing home but missed the request for proposal deadline because it couldn’t obtain the certificate. “This is all before you get the business.”

FOREIGN CORRUPTION BY WESTERN COMPANIES

Last fall, American and Dutch authorities slapped the Swedish-Finnish telecom giant Telia with a US$1.4-billion fine for distributing huge sums to corrupt Uzbek officials as part of the company’s bid to win cellular licences. TI noted the case as an example of how multinationals from countries with sterling ethical reputations at home engage in questionable conduct abroad.

Telia is hardly the only international firm to maintain two sets of ethical ledgers, one for jurisdictions with strict rules and another for regions rife with bribes and secret commissions. In recent years, investigators have swooped down on multinationals such as Siemens, GlaxoSmithKline and Canada’s SNC-Lavalin, which is facing charges that officials working for the company’s overseas divisions bribed local officials in Libya. (A trial is set for next year.)

In 1977 the US Congress passed the Foreign Corrupt Practices Act, which empowered the Department of Justice to go after American firms that greased palms to win international business. A more global approach, however, didn’t surface until 1996, when the US government persuaded the OECD to adopt an anti-bribery convention.

The OECD convention, and subsequent developments — the 2003 UN convention on bribery, and anti-corruption laws in the UK and Canada — have led to high-profile prosecutions, giant fines, and even jail terms for executives. Some national governments and multilateral agencies, such as the World Bank, have passed policies disqualifying companies with these sorts of convictions from accepting public contracts.

Yet multinationals in some sectors, particularly natural resource extraction, continue to operate in an ethical gray zone, says Manuel Balan, a political scientist and international development expert at Montreal’s McGill University. He cites examples where governments in developing countries will proactively ease environmental rules or selectively regulate in order to attract investment.

Corporate social responsibility (CSR) programs may also facilitate a form of corruption that passes muster with law-enforcement officials and investors. Instead of bribes, international mining companies build clinics or schools or make financial contributions to officials in communities where these firms are looking to secure an operating licence.

Is that corruption? “It’s a very complex story,” Balan says. In some cases, the benefits are real and long-lasting. But in others, they’re not viewed positively because the mining activity creates environmental damage. “In Latin America, many people see CSR as the root of all evil.”

Canadian prosecutors are still playing catch-up when it comes to clamping down on domestic firms that bribe foreign officials, says trade law expert Glen Jennings, national leader for the white-collar defence and investigations group for Gowlings WLG. While Parliament made the practice illegal in 1999, lax policing by the RCMP prompted the OECD in 2011 to publicly condemn Canada.

Since then, Jennings says, a handful of cases have led to charges for some Canadian companies and employees of firms with offshore business. Prominent among these is the 2014 conviction of Nazir Karigar, an Ottawa executive of CryptoMetrics. He was sentenced to three years in prison for a $450,000 bribe paid to Indian government officials involved in purchasing equipment for Air India planes. “[That case] definitely has the attention of big business,” says Jennings. “There’s no doubt that Canadian companies are taking [the risk of prosecution] more seriously.”

While even stern rules won’t purge corrupt corporate activity, increased attention from organizations such the OECD and the UN sends a signal that such practices shouldn’t be banned in one place but tacitly tolerated in another.

Yet for such policies and laws to be effective, voters need to consistently back honest politicians who support regulations and institutions that block corruption and hold corporations to account for their conduct. “Corruption is about someone failing to understand their role in public office,” observes MacDermid. “It comes back to the question, who does this person represent?”