Government procurement contracts: some principles of deterrence in public extortion situations
by BRUCE HOROWITZ Paz Horowitz, Abogados
This article is intended to help private commercial sector representatives improve their chances of successfully getting what they need from extortionist government functionaries without submitting to the extortion demand. This article does not deal with the unsolicited bribery of public sector officials.
Main points
•Anti-corruption compliance minimizes a company’s risk, but it does not make all extortionist government functionaries disappear.
•Also apply your due diligence investigations to your host-country lawyers and accountants.
•The statistics are in: you can improve the success rate of ethically negotiating with extortionist government functionaries without paying bribes.
•Successful and ethical strategies and tactics can be found through ’positive deviance’ methods, and by understanding and using the secondary effects of the present international anti-corruption system.
•Negotiating with extortionist government functionaries is part commercial, part barricade and part suicide negotiation.
Government procurement contract work can mean interactions with extortionate government functionaries[i] Once you have reached anti-corruption compliance with internal controls and due diligence, you will have lowered your exposure to criminal prosecutions, harm to reputation, costs and fines, and shareholder class-actions.
However, none of these safeguards will shield your enterprise from all hit-and-stick extortionist government functionaries as you investigate leads, answer request for proposals (RFPs), negotiate terms, finalize and carry out public contracts.
Beyond compliance
Let’s assume that you and your worldwide staff, agents, joint venture partners and even your foreign distributors have internalized the rules, and that none of you will ever pay, promise or offer bribes to gain or maintain business for yourselves or others. You understand that a bribe can be anything of value that is offered for an improper advantage. You keep accurate and complete books and records that do not hide bribe payments. You know the ‘red flags’. You know that ‘lack of materiality’ of the bribe amount is no defense, and you do not stick your head in the sand when it comes to questionable practices and intermediaries. You have a ‘zero tolerance’ policy in place. Your internal and external due diligence is top notch. Your motivation to comply comes from both your own ethics and the knowledge that your country and other countries are fining companies many millions of dollars, dragging corporate names through the mud resulting in shareholder class-action lawsuits, putting the kibosh on mergers, landing colleagues in prison, leading to resignations, and even suicides. Everyone in the organization knows when to say ‘no’ and how to walk away from an extortion demand.
Having a reputation for saying ‘no’ to extortion in the government contract arena seems to decrease the number of times you get hit for a bribe.[ii] However, saying ‘no’ to a bribe, during a government procurement process, may not be enough to move that process forward — with you still in it. It tends not to bring you closer to signing a government procurement contract and getting paid, or much further away from extorted modifications to the contract once you have signed it.
Why not just go to the police, file a complaint, take it to court, or make a big stink? Of course you can, and maybe some day you may have to take one or all of those actions; but, as stated in a recent article, republished on the IACCM website: ‘You simply can't get effective law enforcement in these countries’.[iii] As Richard Nielson has written, ‘… this situation is common in many developing countries where the press, the police, the military, and the government are all part of the corruption’.[iv]
Actually, saying no and walking away, or making a big stink, are just two of about a dozen tactics that people use when confronting extortionate government functionaries and other road-blocking bureaucrats.[v] Do any of these tactics actually get you what you need from the government without having to submit to extortion?
Until about three years ago, we only had anecdotal evidence either way. Then, a study on public corruption in Peru showed that extortionist government functionaries are neither omnivorous nor omnipotent. That is, these extortionists do not eat all of their potential victims all of the time. In fact, of the 21 percent of the people who refused to submit to extortionist functionaries in the preceding year, one out of three of them claim to have received what they needed from the government. Let us add a poetically just cautionary note -of the 79 percent who paid bribes, one out of four of them did not get what they paid for.[vi] We now have evidence on a much smaller scale that lawyers and paralegals who deal on a regular basis with public officials may have an even higher probability of success for their clients when they reject extortion demands.[vii] Clearly, some people are saying ‘no’ in a way that creates a successful negotiated outcome.[viii]
Using local agents
Sending ‘home office’ staff overseas to handle government extortion situations can be very expensive, and potentially counter-productive due to a lack of understanding of the culture or of the local power hierarchies. However, it may be even more expensive in the end if you think that it is easy to keep local host-country agents in your pocket while they negotiate with extortionist government functionaries. We have found that many local agents and intermediaries (and this can include even lawyers, accountants and lobbyists) are good at serving foreign corporate clients, and just as good at signing Foreign Corrupt Practices Act (FCPA) certification clauses, while still hiding bribe payments. Good faith record-keeping and due diligence, by themselves, will not avoid a scandal, nor will those efforts eliminate criminal and civil fines, nor stand in the way of your forced retirement (as apparently occurred in part of the Siemens cases) <www.spiegel.de/international/spiegel/0,1518,455234,00.html>.
To deal with the risk of bribery and extortion you should hire local intermediaries with the highest reputations for honesty, with experience in dealing with government officials, and with an in-depth understanding of negotiations.
Negotiation theory and practice
I say ‘negotiations’, because once you get past ‘no’ with an extortionist government functionary, you are negotiating. As far as I know, while a lot has been written on negotiating with difficult people — with Hitler, the Devil and even three-year olds — very little has been written on negotiating with extortionist functionaries. (For some readings on this topic, see endnote 9).[ix]
In fact, at the middle and higher levels of government, extortionist functionaries are no more difficult as negotiators than anyone else. At these levels, extortionists may be very personable negotiators, because they often want to create an ongoing business relationship with you (that is, you bribe them, you get this contract and many more in the future, as well as kick-backs, and quality-cutting, profit-boosting, expense-inflating side agreements). In other words, it can be an easy negotiation as long as you are willing to accept a private side-agreement with extortionist government functionaries and their extortionist hierarchy. This is what the private-sector/government corruption business is all about. The most difficult part is how to reject these side deals, and still sign the procurement contract, complete your work, and get paid and taxed appropriately.
If you can picture it, negotiating government extortion is a combination of theories and practice in commercial negotiations, hostage negotiations, and suicide negotiations. For normal commercial negotiators, it can be difficult to ignore one of the main principles of commercial negotiation, which is that when the other party asks for something of monetary value you are supposed to counter-offer with something more than zero, otherwise, your interaction may not even rise to the level of a negotiation. However, in the case of a negotiated agreement anchored to a bribe request, your final counter-offer must always be nothing.
Using positive deviancy
If your best monetary offer is nothing, and you want to stay in the negotiation, you will need to ‘expand the pie’ for a ‘corrupt official’. Do you even want to be near such a person? Is there any way to ethically make a bigger pie? At this point, we still do not know if you will be a corruptee or an ethical person. This is where positive deviance theories and experience come in. Positive deviancy is about finding social anti-bodies in sick human communities.[x] Positive deviancy theory and practice originated in international public health and nutrition studies, and relies heavily on statistics; but its purpose is to find answers to apparently intractable human problems. Instead of studying what is overwhelmingly wrong, morbid, sick or (in our case) corrupt in a community in order to kill it or cut it out, the positive deviancy approach tells us to seek out the few healthy individuals in a sick community, and learn from them how they have stayed healthy by deviating from the negative norm — hence, ‘positive’ and ‘deviancy’.
Jerry and Monique Sternin, the founders of the Positive Deviance Initiative at Tufts University, have been working in this area since at least the early 1990s, and their methods have now extended from rural health and nutrition, to lowering death rates in hospitals, improving education, stopping human trafficking and female genital mutilation, improving productivity and morale in industry and, most recently, deterring government extortion of individuals in the private sector. We have been using certain positive deviance concepts and methods in Ecuador since 2005 with lawyers, paralegals, law students, anti-corruption professionals and business clients. In the spring of 2007, I had the honor to work with the Sternins and with Deb Grammicione of TRACE International[xi] for a short American Bar Association workshop on using positive deviance methods to successfully and ethically get past extortionist functionaries. As the Peruvian census bribery statistics have shown, there is a small minority of people who not only refuse to submit to extortion, but who also get what they need from the government without paying bribes.[xii] These workshops almost always uncover viable and proven strategies and tactics.
Do you turn into a corrupt person if you take your extortionist to lunch to explain why you cannot pay a bribe? Do you become one of them if your company buys furniture for their government office which will allow the public to sit comfortably while waiting for government permits? What if you join with other companies to pay for gifts, raffle prizes and productivity bonuses for an entire government office, in order to increase staff morale and efficiency, and thereby improve services to the public? Do you violate anti-bribery laws, by paying for travel and tuition for government officials? What if you donate to an extortionist’s favorite charity or help build a potable water system in an area where a large and vocal minority is trying to cancel your service-and-supply contracts with the government? The list goes on.
NOTE: These are not rhetorical questions. Do not try any of these things unless you have a favorable opinion from experienced anti-corruption compliance lawyers in both your home country and in your host country.
There are some things you can do to make it less likely you will commit a corrupt act. First, all payments and purchases must be on the books and recorded with real references. For instance, if you buy soccer shirts for the staff team of the local Immigration Bureau, then record it as such. Do not record it as a marketing or work-uniforms expense. Make sure the check is made out to the soccer shirt retailer. Make sure, and put in writing, that the soccer shirt retailer, wholesaler and manufacturer are not related to the director of Visas, or to anyone else in that hierarchy. Read down your list of ‘red flags’, avoid them, and write down how you avoided them.[xiii]
There are many ways to get scorched in these situations, but the good news is that there are also some ways to create a trusting and honest relationship with a ‘palms-out-under-the-table’ government official, get the procurement contract, complete your work, and get paid, all without paying bribes.
Using the Deus ex Maquina[xiv]
When the local system of justice and the government hierarchy does not punish public corruption, you need leverage from outside that system to convince the functionary on the other side of the desk to drop the extortion demand. I am not talking about going to the INTERPOL. Instead, take a great internal leap, and see the extortionist as a person who needs your help to get down from a ledge. Let them know, even though foreign anti-bribery laws and international treaties may not threaten them directly, that the active implementation of those laws and treaties are causing a sea-change in how international companies are regarding foreign officials who are involved in corrupt practices. One general difference between low-range and high-end government officials is that the latter tend to move back and forth between government and industry. They may, for example, work as industry lobbyists, business brokers or own companies that need foreign capital. More and more major foreign companies are doing their homework, and are not hiring these kinds of lobbyists. Fewer companies are acquiring, investing in, or guaranteeing loans to, companies owned by corrupt foreign officials.
The World Bank’s Voluntary Disclosure Program may be creating a ‘Prisoner’s Dilemma’ for all bribe-payers and receivers. Well-funded long-term investigative reporting of corruption is on the rise. Websites with names, dates and amounts of corrupt payments are appearing on the internet. There are now mandatory information exchanges and more technical assistance between countries on corruption and laundered money. Again, the list goes on, and in this negotiation, you hold the levers of information asymmetry while the extortionist is lost in self-denial about the changes that are happening in the world. You have just been given the rare opportunity to help save someone from himself or herself.
Using repetition and redundancy
In addition to spreading the results of positive deviancy, and the lessons of court cases and Justice Department clues, we have seen that knowing what to do and say is different from actually doing or saying it when you come face-to-face with the extortionist government functionary. In our workshops, we have moved into repetitive practicing of physical and verbal approaches and responses to the Bridge Ogre —the government functionary who would eat you for breakfast. We expect the participants to have a greater ability to ethically and successfully handle extortion and potential-extortion situations..[xv]
When it comes to big money and bribery, it is always good to remember that it is hard to trust anyone. Negotiating with extortionist government functionaries can be dangerous, which is why the negotiation needs the right tone and openness of dialogue.[xvi]
Conclusion
The best anti-corruption compliance programs and efforts in the world will not prevent a bribe demand from a government functionary. This is a one-on-one situation. When the best obtainable negotiated agreement continues to include a bribe amount, you have to take your best alternative to a negotiated agreement, which means walking away from the negotiation. Extortionist government functionaries have been, and can be, persuaded or influenced to get out of the way between you and the government goods, services or recognition that is rightfully yours. There are ’positive deviance’ negotiation methods from within and beyond the local culture that can improve your chances of getting what you need without paying bribes.
Bruce Horowitz,
Paz Horowitz, Abogados,
Quito, Ecuador,
bhorowitz@pazhorowitz.com
www.pazhorowitz.com
ABOUT THE AUTHOR
BRUCE HOROWITZis a founder and the Managing Partner of the Quito, Ecuador law firm of PAZ HOROWITZ, Abogados. He has been studying negotiations and public corruption issues since 1985, and has advised international corporate and individual clients on how to comply with foreign corrupt practices legislation since 1989. In 2005 he began training lawyers, paralegals, law students, clients and others in Ecuador and the US on how to use Negotiation and ’Positive Deviance’ principles and techniques when facing extortionist government functionaries.
PAZ HOROWITZ, Abogados is the TRACE International representative in Ecuador (www.traceinternational.org).
Bruce is Senior Advisor to the ABA International Section’s Committee on US Lawyers Working Abroad, Vice-chair of the Latin America and Caribbean Committee, and an active member of the ABA International Section Anti-corruption Committee.
1. This article refers to ‘extortionist government functionaries’ rather than to ‘corrupt officials’. ‘Corrupt official’ is an emotionally loaded term, and is too broad for this article. There are many types of government ‘corruption’. This article discusses how to prepare for, and respond to, a bribe demand, that is, ‘extortion’. It refers to ‘functionaries’ rather than to ‘officials’, because in some countries, ‘officials’ only refers to the higher levels of a government structure, while ‘functionaries’ refers to anyone who can extort a bribe in exchange for government goods, services or recognition.
2. The first somewhat reliable example that I found in the literature comes from Richard P. Nielson’s The Politics of Ethics: Methods for Acting, Learning, and Sometimes Fighting, with Others in Addressing Ethics Problems in Organizational Life, Oxford University Press (1996), involving extortion by government tax inspectors. ‘The bank … has found that at least one American bank does not make the payments. That bank refused to pay the bribe the tax inspectors requested, and for a while was regularly inspected, which was time-consuming and expensive. In addition, the bank thought that it had to pay higher taxes than competing banks. However, the tax inspectors have stopped asking for bribes and stopped putting the bank through unusual inspections’ p 176. We have heard many similar stories in private interviews and at conferences. Recently, Alexandra Wrage, the Executive Director of TRACE International told IACCM ‘that companies simply saying ‘no’ is meeting with increased success.’ http://tcummins.wordpress.com/2008/02/27/ethics-regulation-global-realities.
See, also, Horowitz, B ‘Negotiating with extortionist government functionaries, Part 4’, The Negotiator Magazine(January 2008), http://www.negotiatormagazine.com/article409.html.
3. Evans, Simon ‘Despite high-profile scandals, many British multinationals remain blissfully unaware of the fraud dangers lurking overseas’, The Independent: England. 21 October 2007. Found in www.IACCM.com under Articles on Risk Management, ‘International Contracting: Corruption Risks’.
4. Nielsen, p 50. 5. According to survey results of Miller, William; Grodeland, Ase; and Koshechkina, Tatiana Y A Focus Group Study of Bribery and Other Ways of Coping with Officialdom. University of Glasgow working paper, www.nobribes.org/rc_survey.htm. 1999. the strategies that private participants use when dealing with these functionaries include:
acceptance (that is, giving up, and walking away without getting the public thing to which they are entitled);
persistence (for example, sitting in the functionary’s office all day or coming back every day with the same request);
arguments based on the law and their rights;
threats;
appealing to another functionary higher in the hierarchy;
bribery (this is the alternative most often mentioned in the surveys);
using the influence of someone outside the formal hierarchy;the formation of protest groups;
pertinent laws and legal materials;
learning the ropes;
being nice; and
using sexual attraction.
6. Hunt, Jennifer and Laszlo, Sonia Bribery: Who Pays, Who Refuses, What are the Payoffs? McGill University, Toronto. 31 January 2005. pp. 13–14 and Table 2. For more information on this study, see Horowitz, B, ‘Bridge Ogres, Little Fishes And Positive Deviants: One-on-one deterrence of Public Functionary Extortion Demands’, February 6, 2006, which can be found at http://www.positivedeviance.org/projects/law/.
7. Horowitz, B, ‘Bridge Ogres, Little Fishes And Positive Deviants — above note..
8. Ury, William The Power of a Positive No: How to say no and still get to yes, Random House, Inc (2007) is a very good place to start on negotiating when you must reject the other party’s main position.
9. See, The Negotiator Magazine:Subject Matter Index, under ‘Negotiating with
Corrupt Officials’ http://www.negotiatormagazine.com/subject_index.shtml. . Also,
listen to the IACCM Ask The Expert Call: ‘International Negotiation and
Deterrence of Government Functionary Extortion - Recording‘, Speaker:
Bruce Horowitz, Added: 24 May 2007. For those who read Spanish, and who
are interested in the theoretical basis for successfully and ethically negotiating
with extortionist government functionaries, you may contact the author of this
article for a copy of his post-graduate short thesis: Horowitz, Bruce Ganar-Ganar con el Ogro del Puente: La aplicabilidad, para los abogados,
de la teoría y técnica de las negociaciones en situaciones de extorsión
pública,2005, Universidad Católica, Quito, Ecuador.
10. Perhaps the best place to quickly learn about positive deviancy is to
browse the www.positivedeviance.org website.
11. TRACE International ‘is a non-profit membership association of
multinational companies and their commercial intermediaries committed
to the highest standards of transparency. The goal of TRACE is to provide
anti-bribery support for companies and commercial intermediaries across
all industries and regions.’ (Taken from http://www.traceinternational.org).
TRACE works closely with IACCM.
16. As Nielson says in The Politics of Ethics, p 50, ‘single-loop forcing
methods’ can be dangerous when mafias are involved. One example of
a single-loop forcing method is simply standing on principle, shouting no,
and threatening punishment. More open types of negotiation/ dialogues
minimize the danger to you. This would require another article.
