5.1 Introduction

Corruption is one of the world's greatest challenges. According to the World Bank corruption is "The single greatest obstacle to economic and social development in realising public goals."1 It creates economic and social disproportion, and damages the very essence of society. Corruption also has a severe impact on the private sector because it distorts competition and creates obstacles to market expansion. It can seriously harm the reputation of a company and expose it to substantial legal risks. Corrupt practices are also very expensive for businesses: estimates show that corruption adds at least ten per cent to the day-to-day costs of doing business in many parts of the world. The World Bank has stated that "bribery has become a USD 1 trillion industry."2

Corruption has two sides: a supply side and a demand side. The supply side involves parties that provide monetary payments, gifts or any other forms of expressing gratitude for services. The supply side is usually represented by the private sector. Particularly in weak governance zones - countries where law enforcement is poor - the chances of company employees being susceptible to bribery increase. The demand side of corruption is represented by those who accept different forms of payment and consequently provide some form of service or favour in return. Typically, government officials who have a great deal of discretionary power and who operate in those environments where the system of checks and balances is weak or non-existent, represent the demand side.3 The Siemens scandal is a clear example of how costly corruption can become for companies. In October 2007, a Munich District Court imposed a EUR 201 million fine on Siemens due to it having bribed foreign public officials in Russia, Nigeria and Libya. Siemens is also the subject of other ongoing investigations into public corruption in a number of jurisdictions.4 Public corruption refers to illegal acts carried out by private-sector actors with a view to obtaining a favourable decision from public officials, such as civil servants, political authorities or political parties.5 Siemens has also been involved in private corruption.6 This term refers to corruption between business people.7 In May 2007, the Regional Court of Darmstadt sentenced two former Siemens employees to terms of imprisonment on counts of commercial bribery (private corruption).8 It was alleged that these employees had provided improper benefits to former employees of Enel Spa, an Italian telecom company, in order to secure contracts within the telecommunications division. In connection with these court sentences, Siemens was ordered to hand over EUR 38 million in profits. These scandals triggered an investigation by the US Department of Justice and the Securities and Exchange Commission (SEC) into possible violations of US criminal law. Fines could amount to up to USD 2 million per violation, and could under certain circumstances be augmented.9 Moreover, lawsuits have been filed against Siemens for damages because of the decrease in its share price due to the scandals.10 Furthermore, a Mexican governmental control authority barred Siemens Mexico from bidding for public contracts for a period of almost four years as of December 2005. The allegation concerned the non-disclosure of tax discrepancies when signing a public contract.11

Another example of just how costly corruption can be for companies, is the ABB case.12 The SEC prosecuted UK and US subsidiaries of ABB for violating the US anti-corruption act, i.e. the Foreign Corrupt Practices Act of 1977 (FCPA). It was alleged that the ABB subsidiaries had paid bribes to government officials in Angola, Nigeria and Kazakhstan exceeding USD 1.1 million, in exchange for, amongst other things, awarding projects and securing favourable tender considerations and conditions. The illicit payments were made after ABB had become a reporting company in the US: ABB Ltd. American Depositary Shares had been listed on the New York Stock Exchange since 6 April 2001.13 The prosecution of ABB was terminated after a settlement was reached. Two ABB subsidiaries, Vetco Gray Inc. (US) and ABB Vetco Gray U.K. Ltd., each agreed to pay criminal fines of USD 5.25 million plus USD 5.9 million in disgorgement and prejudgement interest. Also, at the end of 2008, ABB booked pre-tax provisions of approximately USD 850 million, part of which is for the potential costs related to the previously disclosed investigations by the US and European authorities into suspect payments and alleged anti-competitive practices, respectively.14 In both the Siemens and ABB cases, the illicit payments were improperly accounted for in the books and records, and were not detected by the directors in good time. This failure to detect demonstrates that both Siemens and ABB lacked internal control systems to effectively prevent corruption. Both companies disclosed in their annual reports and in their sustainability reports that many mistakes had been made and that they were now implementing anticorruption programmes in order to prevent future problems from occurring.

Companies can no longer defend their mistakes by stating that they were unaware of these types of risks. They should be alerted to the fact that a number of the countries or industries in which they operate are perceived as being 'high risk corruption' regions or sectors. Information on country and industry corruption risks is publicly available: NGO Transparency International publishes an annual country Corruption Perception Index.15 Consequently, when doing business in weak governance zones, it becomes increasingly clear that a company should give high priority to implementing in-house compliance programmes with a view to reducing the risk of corruption (hereafter: anti-corruption programmes).

An interesting feature of our digitalised world is that illegal acts will most certainly be uncovered at some point in time due to the enormous amounts of emails that every employee generates. Agreements, services and meetings are usually initiated or confirmed by email, and will thus remain traceable. It has become difficult to circumvent company data systems, which in part explains the increased attention of prosecutors around the globe for corruption.

The question arises whether the act of not putting an anti-corruption programme in place, almost by definition results in misleading financial statements, an incomplete annual report, an untrue 'in-control statement' (see section 5.2) and, consequently, in poor corporate governance. This key-question will be addressed in this chapter.

In section 5.2, the technical aspects of and rules applicable to 'in-control statements' will be examined: to whom, where and when do they apply7 It will be demonstrated how corruption is linked to corporate governance and corporate law. Section 5.3 will describe from a company perspective, the pertinent legal risks connected with corruption: the jurisdictional risks, directors' liability and legal penalties. It will mainly address public corruption and will not address private corruption. A comparative chart of the core elements of anti-corruption conventions and legislation complements this analysis. Section 5.4 will explain why avoiding corruption also constitutes part of a company's CSR responsibilities. Section 5.5 will provide a practical overview of various types of corporate in-house anti-corruption programmes (best practices). Section 5.6 will provide an answer to the key question. It will be argued that relatively new corporate governance requirements, such as the directors''in-control statement' and other, statutory annual reporting requirements, require that a company provides information on its anti-corruption programmes, or the absence thereof. Finally, in this respect, CSR-related programmes and disclosures can also play an important role in the prevention of corruption as they help to develop best practices in corruption prevention on a global scale.