Damage Control: Fighting Fraud & Corruption in the Wake of a Natural Disaster
The last two years have underscored the need for disaster preparedness.
From volcanic eruptions to earthquakes and tsunamis, Mother Nature has dealt significant blows to global trade and commerce. Well before the most recent spate of disasters, companies already understood the importance of planning for the worst-case scenario: the events of 9/11 taught all of us that the unimaginable can in fact happen.
Modern businesses no longer look to “disaster recovery plans” to help them get back on their feet — today’s corporation understands that it must continue to operate even through the worst natural or man-made disasters.
An effective business continuity plan will help corporate crisis managers relocate people, protect facilities, and secure critical data. For those companies that depend on a complex supply chain, a sound business continuity plan will require the identification of alternate vendors and suppliers.
Of course, much has already been written about the importance of business continuity planning, and the Internet is full of reports and checklists for companies to use. Rather than add to the already existing literature, this article will focus on an important aspect of post-disaster planning that deserves significant coverage: the threat of bribery and corruption.
Politicians, regulators, and law enforcement agencies around the world have stepped up their efforts to investigate and hold accountable companies that run afoul of new anti-bribery and fraud legislation. Preventing bribery and fighting corruption are now at the top of many government agendas.
In the U.S., federal prosecutors have dramatically increased their investigation and prosecution of alleged violations of the Foreign Corrupt Practices Act.
On May 1, 2011, China’s Foreign Bribery law, an anti-corruption law similar to the U.S. FCPA, took effect. It punishes the giving of any money or property to any foreign public official or official of an international public organization in order to obtain an improper commercial benefit.
The law applies to any person or entity operating in China as well as any Chinese citizen or legal entity organized under Chinese law but engaging in bribery elsewhere in the world.
The U.K.’s Anti-Bribery Act took effect on July 1, 2011. This act is more comprehensive than any anti-corruption law currently in place: while the law applies to corporations with a U.K. presence, it covers corrupt conduct occurring anywhere in the world. Unlike the U.S. FCPA, the U.K. version provides for a private cause of action against corporations that engage in bribery. Likewise, Mexico has just enacted its Federal Anti-Corruption Law. Similar to both the U.S. and U.K. anti-bribery laws, Mexico’s initiative applies to individuals and companies that engage in unethical behavior in or outside Mexico in connection with a government contract.
Why should directors be mindful of these latest developments when thinking about post-disaster continuity planning? Beyond its effects on people and property, a catastrophic event can also significantly impact government operations and the rule of law. Companies looking to quickly restore operations in a disaster area may be faced with requests for payments and other favors that clearly run afoul of anti-corruption laws. The same holds true for companies looking to enter a region in the wake of a disaster to provide disaster-related services, or simply take over the work previously performed by another competitor.
Officials at all levels of a government may look to foreign companies for a handout following a major disaster. Or, these officials may simply see a disaster as an opportunity to extract additional benefits from companies in the region. In the most extreme cases, the message may be sent that continued operations in the affected area will depend on the payment of a bribe.
Regardless, even in the wake of a natural disaster, companies must be vigilant. Business continuity plans need to include solid compliance measures to protect against these situations. To the extent that a company transfers new or additional personnel to a disaster area, those individuals must understand and be prepared to implement the relevant internal compliance programs. While offering humanitarian assistance may not necessarily be illegal, it is critical for companies to understand the difference between help that is legal and assistance that crosses the line into bribery.
Bribery and corruption are not the only concerns. The U.S. Dodd-Frank Act’s conflict minerals provision also raises another concern. Drafters of the Dodd-Frank Act added this section in an attempt to combat the violence and exploitation associated with conflict minerals in the Congo and neighboring countries. Trade in these “conflict minerals” has been directly linked to the region’s dire humanitarian situation.
Under this provision, which the SEC is expected to adopt in the latter half of 2011, covered companies will have to file an annual report (which will also need to be published on their corporate web site) indicating whether any materials used in the production of goods came from the affected region. Companies will also need to describe what steps were taken to ascertain this information. While this may sound easy enough in theory, in practice companies will have to significantly increase their due diligence efforts. So-called “conflict minerals” are used in industries ranging from electronics to jewelry to health care. Because these minerals can, and often are, melted down and even mixed with other products, it may be difficult to detect their presence and track their origin.
In practical terms, this means that in order to comply with the new reporting requirements, companies will have to carefully scrutinize their supply chains and create policies for verifying information provided by their suppliers. A natural disaster could complicate the reporting process significantly. As companies work to find alternate vendors or suppliers to restore their supply chains, Dodd-Frank’s reporting requirements will likely not be high on the agenda. Given the need to move quickly, the conflict mineral reporting requirements only highlight the importance of advanced planning. To deal with this potential problem, companies should ensure that their alternate vendors and suppliers are also in compliance with Dodd-Frank’s conflict minerals provision.
Disaster can strike at a moment’s notice. A company’s quick reaction time in the wake of any such catastrophe is critical. Nevertheless, the decisions that a company makes in the short term must be carefully measured against the potential harm in the long run. After the dust settles, the last thing a company will want is to be investigated or, worse still, prosecuted.
Carlos F. Gonzalez, a partner at Miami-based Diaz Reus & Targ, LLP, is a trial and appellate lawyer who concentrates his practice on civil, commercial, and criminal defense matters.