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San Jose Mercury News, March 13, 2005  

What's a gift, what's a bribe?

U.S. Companies must Follow U.S. Anti-Corruption Law Abroad


Doing business in developing countries can require navigating a minefield of corruption, as InVision Technologies learned last year. The Silicon Valley maker of security scanning technology had just struck an agreement to be acquired by General Electric when allegations of bribery came to light that nearly scuttled the $900 million deal.

 InVision did what more and more companies are doing these days when they think they've run afoul of the Foreign Corrupt Practices Act, a law that forbids Americans from paying bribes to foreign government officials: It went to federal authorities and cooperated in its own criminal investigation. The company, now called GE Infrastructure Security, is back on track after paying the last of $1.9 million in penalties to settle the case last month.

It's a precautionary tale for other Silicon Valley technology companies that make forays into global markets with new products and services.Avoiding the traps of systemic corruption is a challenge when the lines are blurred between local customs, gift-giving and graft. To ward off trouble in the post-Enron era, a company needs to establish stringent internal controls and clearly define its principles, experts say. 

Most major Silicon Valley corporations already have ethics training and compliance programs in place. At Intel and Hewlett-Packard, for example, executives take mandatory ethics training once a year, and bribery is a key topic, along with labor and environmental issues.

``There are always new markets, new business cultures and new governments that expect us to behave in certain ways,'' said Dave Stangis, Intel's manager for corporate social responsibility. ``What could be a gift in one culture is a bribe in another, and that's why we have to set a clear line.''

Companies without a clear definition of principles are at risk, said Jim Balassone, director of the business ethics program at Santa Clara University's Markkula Center for Applied Ethics.

``Sometimes businessmen can get into this winky-blinky stuff,'' said Balassone, a 23-year veteran at IBM. ``They ask themselves whether they want to stay clean, or do they want to get into this market.'' 

Widespread problem 

Newark-based InVision, whose representatives allegedly bribed crooked officials in China, the Philippines and Thailand to help sell the company's bomb-sniffing machines, is not an isolated case. Major technology companies including IBM, Lucent, Accenture and Xerox also have disclosed potential violations of the Foreign Corrupt Practices Act to the Securities and Exchange Commission, placing themselves under scrutiny by the SEC and the Department of Justice's fraud section. 

The bribery scandal jolted InVision, which under the helm of Chief Executive Officer Sergio Magistri, a Swiss engineer, had revenue of about $400 million in 2003. The distraction of the internal investigation took its toll, slicing revenues during the three months ended Sept. 26 by 18 percent from a year earlier. The company's scanners, which airports buy for about $1 million each, use computed tomography (CT) technology to detect explosives. 

``It's hard to say what would have happened if the GE acquisition hadn't happened,'' said Aimee Ahiers, a spokeswoman for GE Infrastructure Security in Newark who had worked for InVision for two years before the merger. ``We've got a great product, but we lacked resources. And GE is so into integrity.'' 

Penalties up to $2 million 

Federal investigators are examining nearly two dozen major U.S. companies -- from Halliburton's operations in Nigeria to Chiquita Brands International's tax practices in Greece -- under the anti-bribery law, which can impose penalties of up $2 million on a company and send corporate officials to prison for up to five years. 

The number of cases has risen sharply in recent years, but that's partly because more corporations are voluntarily disclosing to SEC investigators potential violations they've detected in internal audits. 

Reported new investigations under the law rose from seven in 2002 to 16 in 2004. Among those cases, probes initiated by the company instead of the government rose from two to 11. 

But with competitive pressure on U.S. companies to increase their revenue by expanding sales overseas, more newcomers to the global marketplace can be expected to encounter bewildering demands for bribes, special commissions and kickbacks. 

``The problem is, what are the marketing norms in a particular jurisdiction?'' said Danforth Newcomb, a corporate defense lawyer with the New York firm Shearman & Sterling who publishes an annual digest of FCPA cases. ``The hard part is for American companies that aren't familiar with marketing overseas and that can fall victim to a local intermediary who claims he can fix things if you just put a sum of money in his account.'' 

IBM got entangled in graft in South Korea when local authorities alleged that employees of its subsidiary and a joint venture colluded to rig bids and bribe government officials. Three former executives were convicted by a Korean court in February 2004. One man served a year in prison, the other two were given suspended sentences, an IBM spokeswoman said.

Lockheed scandal in '70s 

The Foreign Corrupt Practices Act dates to the mid-1970s, when Congress reacted with indignation to the Lockheed scandal in Japan in which Prime Minister Kakuei Tanaka and other government officials took kickbacks from the U.S. aerospace company in the sale of passenger jets. Only 34 cases have gone to trial since the law was enacted in 1977. 

Most investigations have been settled out of court with fines and penalties, as in the InVision case. Defendants were sentenced to short prison terms in two cases, but most criminal sanctions involved suspended sentences, community work and fines. 

The anti-corruption law may not have jailed many offenders, but it has created a deterrent effect that has forced U.S. companies to install internal safeguards. The need for guidance on complying with the FCPA has spawned a small industry of lawyers and consultants with expertise on bribery. 

``Because of the threat of legal sanctions, corporate expectations and social expectations are becoming aligned,'' said Aron Cramer, president of Business for Social Responsibility, a San Francisco group that advises its corporate members on ethics. ``Attention to this issue is growing, because bribery and corruption ultimately are a tax on business, and businesses realize that.''