The Evolution of the FCPA: Navigating the Japanese-African business environment

On 28 September 2015 the US Securities and Exchange Commission (SEC) issued a press release stating that the Japanese multinational conglomerate, Hitachi Ltd, had been charged with violating the Foreign Corrupt Practices Act (FCPA). Hitachi agreed to pay USD 19 million to settle the SEC charges which included the inaccurate recording of improper payments made to South Africa’s ruling political party, the African National Congress (ANC).

On the face of it Hitachi’s FCPA violation is nothing new; foreign company with poor internal controls pays politically-connected intermediary to secure contract. According to the SEC, Hitachi sold a 25% interest in its South African subsidiary to Chancellor House Holdings (Pty) Ltd., a company whose ultimate shareholding was held by the ANC. This allowed profits from power station contracts secured by Hitachi – using Chancellor House’s political influence – to be shared with the ANC backed company. Hitachi also paid a USD 1 million ‘success fee’ to Chancellor House which was inaccurately recorded in the company’s accounts as consulting fees. Despite the familiar pattern, both the nature and target of this SEC investigation indicates a changing regulatory focus.

The last ten years have seen a striking shift in tone from the US regulators who have adopted a more aggressive posture with respect to enforcing the provisions of the FCPA. The US authorities continue to target bribery offences committed outside the US through the use of more stringent investigative tactics and increased cooperation with other enforcement agents worldwide. The Hitachi case is illustrative of this new stance; often constrained by needing the relevant local governments to cooperate with them, on this occasion the SEC appears to have overcome the hurdle by enlisting the assistance of the African Development Bank’s Integrity and Anti-Corruption Department.

Moreover, this matter indicates the broadening sectorial scope of US regulatory interest. Previous FCPA enforcement actions have fallen within the oil and gas industry with the majority arising from West Africa; the Hitachi case is a first for South Africa and falls outside the extractive sector. Given that Japanese companies are increasingly involved across Africa, this change also represents heightened risks for their regional operations.

Growing Japanese FDI

Japan is one of world’s leading economies and whilst its progress into Africa has been slow, the country has made remarkable inroads in expanding its presence and influence. In 2014, the Japanese government promised USD 32 billion financial assistance to resource-rich African nations as part of its bid to cement relations with the continent. Japan recently signed a bilateral agreement with Mozambique – the first such agreement it has entered into with a sub-Saharan African country – and similar investment frameworks are in the process of being agreed with other African countries. These should all encourage more investment in the region.

This commitment to Africa is matched by Japanese companies. In September 2015, the African Development bank (AfDB) and the government of Japan agreed a USD 300m loan to support private sector business under a joint initiative named the Enhanced Private Sector Assistance (EPSA) for Africa. Several large trading entities, including Sumitomo and Sojitz, are active across the continent. Construction firms, such as Mitsubishi, Mitsui, and Hitachi, are also involved in various capacities in a number of infrastructure projects in Africa. According to Japan’s South African embassy, in 2013 the number of private Japanese companies in South Africa increased to 115. Direct investment from Japan has also increased in the country, and its cumulative total as of 2012 reportedly exceeded USD 26 million.

Notwithstanding the above, the popularity of Africa as a high-growth market is pushing Japanese companies into riskier investment terrains at a time when anti-corruption enforcement and awareness is at an all-time high. Hitachi is not the first Japanese company to face the wrath of the US anti-corruption regulators; Bridgestone, JGC Corporation and Sojitz have all been charged with FCPA violations in Latin America, Nigeria and Bahrain respectively. But as Japanese companies develop their new market strategies and pursue more opportunities in Africa, it is important that they are cognizant of the regulatory risks.

Establishing Proper Internal Controls

International anti-bribery legislation including the FCPA and UK Bribery Act (UKBA) require companies to make independent assessments of the ultimate shareholders and beneficiaries of their potential partners. Specifically, partnering with public or political figures and using their position in order to gain a commercial advantage is considered an offence under these laws. In many African countries, information that may identify both the political affiliations of immediate third parties and also the ultimate shareholders or beneficiaries of a company is not easily accessible. As such, Japanese companies should look to conduct comprehensive due diligence that goes beyond reviewing financial accounts and litigation files to include a less tangible narrative, which provides the story behind the public records.

Once a local partner is identified, it is important to ensure the necessary skills and expertise are in evidence, and that any fees paid are proportionate to the services rendered. Further to engagement, internal controls should ensure that all payments made to third parties are properly documented and regularly audited.

Although Japan is a member of the OECD, commentators note that its enforcement of domestic corruption laws is weak and there is no criminal liability for corporations under local laws. This is reflected in its position in Transparency International’s 2015 Exporting Corruption report; Japan ranked as having made ‘little or no enforcement’ in making bribery in foreign countries a crime for its companies and nationals. Whilst it may not be immediately obvious why the Hitachi case would fall foul of US regulations, it is important to be aware of the wide territorial reach of the FCPA, UKBA and other anticorruption legislation. Navigating the complex governance and regulatory environments is essential to international business and a particularly notable factor for Japanese firms establishing business in Africa.

Pamela Wadi

Author:

Pamela Wadi is a director of the Africa Global Risk and investigations Practice at FTI Consulting in London. Pamela also recently completed studying for an MA in Corruption and Governance at the University of Sussex.

Note

This article first appeared on http://www.fticonsulting-emea.com/en/insights/articles/navigating-japanese-african-business-environment

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Golf, gluttony and adultery; the curious world of anti-corruption in China

If you’re going to crack down on corruption, then you need to be clear in your mind about what you’re cracking down on. The Chinese Communist Party seems to have interesting ideas in that regard.

The Chinese Communist Party (CCP) has been trying to tackle corruption for quite some time now. Xi Jinping, CCP leader since 2012 and President of the country since 2013, has made anti-corruption one of the cornerstones of his term in power and the issue gets daily coverage in newspaper outlets both at home and abroad. Well over 100,000 officials have subsequently been convicted of crimes that come under the rubric of corruption (see here for a nice analysis of the campaign thus far), as Xi has tried to show that in terms of anti-corruption he really does mean business.

Given that China scores poorly in all of the international league tables of corruption – it was 100th (out of 175) in the 2014 Corruption Perceptions Index (CPI) by Transparency International – it is clear that there is a problem here that needs tackling. But the more you investigate, the more you realise that the CCP’s understanding of what precisely corruption is is, well, intriguing.

For most corruption-watchers corruption is the abuse of a public role for private gain. One can add in titbits around the edges – corruption is always deliberate (no one is ever accidentally corrupt) and it is (nearly) always clandestine – but these are extras around the core process of someone abusing their position of power for private advantage. American political scientist Joe Nye is widely acknowledged as being the first to pin down corruption in this way, but it’s now the definition of choice for a host of international organisations and researchers.

In China, however, the CCP understands corruption in a rather more curious fashion. For a start the CCP doesn’t like to talk of corruption as corruption – it prefers to see a corrupt act as a ‘violation of discipline’. Indeed, China’s anti-corruption agency is called the ‘Central Commission for Discipline Inspection’ (CCDI) and when corruption is reported in the Chinese press it is usually within the context of officials not maintaining the standards of discipline expected of them.

This curious phraseology need not necessarily mean too much if the notion of ‘disciplinary rules’ is a cover for anti-corruption laws, rules and codes of practice. That is the way, after all, that corruption is codified in many other parts of the world. But the deeper one digs, the ever more curious things get.

In mid-October it was reported by the much-respected South China Morning Post (see here) that the CCP had updated the discipline rulebook to include amongst things a variety of crimes concerning the playing of golf and indulging in gluttony. The CCDI even set up a hotline so that people could report officials who had been seen to commit one of nine golf-related corrupt acts; these ranged from holding positions on golf club boards to playing the game with others who they have come across in their work environment (see here for more). “Golf” so it was claimed back on 9th April “is a public relations tool that businessmen use to hook officials”. Quite what the members of the Royal and Ancient at St Andrews make of golf being understood in this way has not as yet been recorded.

The sections on inappropriate sexual relations were also beefed up, something that didn’t actually come as too much of a surprise given that adultery has been mentioned in many of the corruption cases that have come to light thus far. Indeed, in November 2014 a government-sanctioned map was realised that revealed that Hubei was the province with the most senior CCP officials who had been prosecuted for this particular discipline infraction (see here). The fact that the provinces where Xi Jinping and Li Keqiang (the Prime Minister) built their political careers were listed as having no sexual indiscretions at all came as little surprise – China’s anti-corruption drive is nothing if not political, and attempts to uncover incidences of corruption that might lead to those at the top of the political pyramid get nowhere. Ask the New York Times, they tried to look in to how XI’s extended family had become as rich as it has and the paper’s website was promptly blocked from mainland China.

In terms of defining what it understands corruption to be China is subsequently in an odd place. On the one hand, many corrupt acts that take place in the Middle Kingdom are so obviously corrupt that further discussion of whether they meet our definitional criteria hardly seems necessary. Stealing from the state or giving a favoured company a contract in return for a bribe, for example, meet all serious definitions of what corruption is.

In China, however, it looks very much like the focus can often still be on the wrong thing. Corruption is best understood as a process and not an event. A CCP official playing golf with a businessman, for example, could mean nothing more than the two of them like hitting a little white ball around a field together and that they dream of being the Asian Rory Mcllroy. That’s not corrupt.

If, of course, the businessman is buttering up the official to gain some sort of advantage, then that is the area that needs investigation – not whether he does this on the golf course, in the gym or in a café over an expensive meal. If the official has to explain the decisions that he or she makes, and if he/she has to reveal anything that could be understood as a conflict of interest then the chances of corruption will be much slimmer. It’s not, in other words, the playing of golf that is the problem, it’s the lack of transparency in decision-making processes that are the real issue. Only when the CCP does something about that will we know that Xi’s anti-corruption drive really is fundamentally changing things.

Dan Hough

Of nuclear zombie blasters and party funding

Of nuclear zombie blasters and party funding. Reflections on the anti-corruption discourse and party funding reform in Great Britain…

A couple of days ago there was a review on the Global Anti-Corruption Blog (GAB) investigating the recent work done by the Money, Politics and Transparency (MPT) research forum. MPT itself is an offshoot of the Electoral Integrity Project (EIP), headed up by Professor Pippa Norris – and currently hosting the University of Sussex’s very own Miguel Angel Lara Otaola as a visiting researcher. Above all else MPT looks to be an incredibly useful tool for those of us studying money in politics and it really is worth having a poke around the website, they have some fascinating case studies and a few datasets to have a play around with – if that’s your kind of thing.

Amongst all of this they also intend to release an edited volume of initial findings titled Checkbook Elections which contains chapter’s on party finance regimes of eleven different countries supplied by experts in each case (for example, the British chapter is written by Professor Justin Fisher, who – and this is an understatement – is somewhat of an authority on these matters). Prior to its release (sometime in 2016), MPT have released an executive report, a review of which was the main crux of the aforementioned review article on GAB. As the blog outlines the headline findings in the report are as follows:

  1. The limited effects of legal regulations.  “[T]he comparative analysis was unable to establish that the degree of state regulation alone has any significant impact, positive or negative, on long-term societal and political outcomes, including the goals of strengthening political party competition, voter turnout, and anti-corruption.”
  2. The most common reforms in recent years have sought to strengthen disclosure and public funding.
  3. The effects of formal legal reforms are contingent upon enforcement, which in turn depends on regime type, state capacity, and societal cultures. “[L]egal regulations can only prove effective in states with enforcement capability. .  .  .  Even in countries that do have the capacity to enforce regulations, the political will to do so must also be present.”
  4. Mixed policy strategies work best. “[A] balanced mix of regulatory policies to control political finance is probably the most effective strategy, ideally blending a combination of disclosure and transparency requirements, limits on spending and contributions, and public subsidies to political parties.”

The author of the blog, Rick Messick, bemoans that the findings represent ‘thin gruel for reformers hungry for guidance on what works’. Messick somewhat misses the point, however, party funding reform should be seen in very much the same light as we are increasingly seeing anti-corruption reform more generally. We should be wary of the one-size-fits-all panacea which will deliver corruption free party finance, just as we should be wary of one-size-fits-all approaches to anti-corruption. Or to paraphrase Dr. Heather Marquette (who put it rather delightfully if you ask me) in The Guardian this week: there is no nuclear zombie blaster that will eradicate corruption.

This means that to combat corruption in party finance there are a whole range of issues to contend with from ‘regime type [both party funding regime type and actual regime type], state society, and societal cultures’. Therefore, when asking for ‘guidance on what works’ the (sensible) answer is very likely to be ‘well it depends – can I hear a little more about your country specific circumstances?’ This encompasses a wider argument that I have made in numerous places, that state funding has for too long been seen, to those in the party finance reform community in Great Britain, as the nuclear zombie blaster. It is far more helpful to consider not whether a reformed party funding regime will be necessarily less corrupt – but whether it will simply allow for a different type of corruption to become prevalent.

The question of whether state funding is a necessarily less corrupt way of doing things, is something that I have looked at during the course of my research and the answer is (spoiler alert) no. However, there is also the question of whether the current system we have is actually that bad and/or as bad as people think it is? The answer to these questions are (spoiler alert) ‘we don’t really know’ and ‘probably not’. The ‘as bad as people think it is’ question is an important one, and comes up again and again in the transcripts of the public hearings the Committee on Standards in Public Life (CSPL) undertook (I’ve read them so you don’t have to) prior to compiling their 2011 report Ending the Big Donor Culture. The answer, more often than not, is something along the lines of: perception of corruption in party finance is so bad, that something should be done because [strong message here] this perception, whether or not it is true, is damaging democracy.

It is also a position that I see repeated in elite interviews during my own research. These hearings, and in many ways party finance reform itself, is a classic example of perception rather than reality guiding, and forming, the policy process. Indeed, to quote Professor Richard Wyn Jones, when appearing before the CSPL, ‘perceptions shape their own reality in politics’. It is of almost no importance whatsoever whether or not the current system is, or is not corrupt, the public think that it is – policy recommendations are being made on the basis that the public think it is – so it may as well be.

Secondly, and coming back to Rick Messick’s blog post (remember that?), this actually may not be all that effective in tackling perceptions of corruption. Messick notes that for him (and I’m inclined to agree) the most important finding in the MPT report is that ‘the level of state interventionism in the political finance arena is not a significant predictor of perceptions of corruption, voter turnout, or party competition’. So ultimately, changing the party funding regime is unlikely to alter perceptions of the party funding regime – or politicians – as corrupt.

So, is there any point in doing anything? Well, yes. For a multitude of reasons – not least because the current system is largely unsustainable in its present form (just ask any former party fundraiser) particularly, due to recent events, for Her Majesty’s Opposition. Further we can’t (and shouldn’t) expect a simple change in the party funding system to act as the cure for what is ultimately a larger, and more general, anti-political sentiment. The evidence from the world of party funding, ultimately, chimes with a growing realisation in the anti-corruption world articulated by Dr. Marquette earlier this week:

“Our childish, simplistic view of corruption has become, like a youngster’s fascination with zombies, simply a manifestation of our fears. A scary word, yet an essentially vague abstraction that speaks to more general worries about unfairness, impunity, abuse of power and waste of scarce public funds… The evidence seems to be telling us we must now start having [a] different, more grown-up conversation on corruption.”

Sam Power, University of Sussex