January 23, 2009
Richard Dean, of Baker & McKenzie, TRACE's partner firm in Russia, Azerbaijan and Kazakhstan warns that a little learning can be a dangerous thing in the field of compliance. Many of us have occasionally had the uncomfortable feeling that our training might be used not to deter bribery, but to prevent detection. Dean describes a scenario in which extraordinary vigilance was required to avoid this.
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"We worked on a problem in the Moscow office of a major Western company in the mining equipment business. It became clear that FCPA training - even training focused specifically on Russian corruption risks - had driven the bribery schemes in the office further underground. Specifically, the training had focused on the risk of bribery associated with commercial intermediaries (agents and other third parties). It was made clear during the training that evidence of the intermediaries' services should be provided prior to payment.
Those responsible for the bribes had been invoicing payments to consultants for fictitious maintenance services and using the funds generated to pay off corrupt government customers. Shortly after the training, those responsible for the bribery restructured the scheme to avoid paying intermediaries directly.
The dishonest employees deployed new intermediaries designated by the corrupt officials to purchase products from the company and resell them to the customers at inflated prices. The profit margin of the sham distributor became the pool of funds from which kickbacks were made to corrupt officials, replacing the funds formerly paid by the consultants.
This scheme was more difficult to detect because the illegal payments were no longer on the company's books. We were able to uncover it only after the company finally sent an expatriate accountant to Moscow. He identified pricing and accounting irregularities which made him suspicious. He reported his suspicions to management and a broad investigation followed. Detection of such schemes will always require careful due diligence and monitoring of intermediaries, rotation of key personnel and vigilant internal auditing."