Combating corruption in international business is now widely recognized as an essential step in maintaining a sound international trading system and assuring the viability of democratic political systems and market economies. This requires a comprehensive program, directed at bribepayers as well as bribetakers. Corporate codes of conduct are a key part of such a program.

In the U.S., corporate codes of conduct have been used for many years as a way to achieve compliance with legal and ethical rules. The bribery scandals of the 1970s, and the enactment of the Foreign Corrupt Practices Act (FCPA) in 1977, resulted in the adoption of anti-bribery codes by many U.S. companies. Thus there is now almost two decades of U.S. experience with anti-bribery codes. On the international level, the International Chamber of Commerce (ICC) in Paris published Rules of Conduct to Combat Extortion and Bribery in 1977. A number of non-U.S. companies have adopted codes modeled on the ICC Rules. Many other companies were reluctant to adopt anti-bribery codes because they believed that their competitors would continue to pay bribes.

Since the beginning of the 1990s there has been a worldwide epidemic of corruption scandals, including Japan, South Korea and India, Italy, Spain and Belgium, Brazil, Venezuela and Colombia, to mention only the most prominent cases. This has stimulated interest in controlling corruption on a previously unprecedented level.

Transparency International (TI) was organized in Berlin in May 1993, as a non-governmental organization to combat corruption in international business transactions. TI is building coalitions, including business, civic and other groups, which support the development of effective integrity systems. TI has established national chapters in over four dozen countries.

In March 1996, following a year-long study, the ICC revised and strengthened its Rules of Conduct to Combat Extortion and Bribery. The ICC is launching a follow-up program under which its national committees in 62 countries will encourage their member companies to adopt codes based on the new ICC Rules. The important role which corporate compliance programs can play has also been recognized by the Federation of German Industry (BDI) which issued corporate guidelines in 1995, as well as by Hong Kong's Independent Commission Against Corruption.

TI's U.S. Chapter has undertaken this study of the best practices developed by American companies as a contribution to the dialogue on what companies can do to control corruption. The study was chaired by Howard Aibel, who served as general counsel of ITT for more than two decades and is now a partner in LeBoeuf, Lamb, Greene & MacRae, in New York. We hope that this study will be a useful resource to corporations and business organizations around the world.

In the first section of the study, Howard Aibel discusses the reasons why it is in the best interest of corporations around the world to adopt codes of conduct. The second section, written by Jay Singh of Coopers & Lybrand, discusses the steps required to integrate an anti-bribery policy with a company's overall risk-control strategy. The third section, written by Scott Gilbert, General Electric's Counsel-Litigation and Legal Policy, and a former federal prosecutor, describes the key elements for an effective anti-bribery compliance program. The fourth section "Model Corporate Codes of Business Conduct," consists of excerpts of key provisions from corporate policies selected by Don Zarin of Dechert Price & Rhoads, in Washington, D.C., a leading authority on the FCPA. The new ICC rules included among the Model Codes. The final section consists of eight case studies prepared by Don Zarin, dealing with the application of the FCPA to hypothetical, but nonetheless realistic, business situations. These case studies are reprinted from Don Zarin's book, Doing Business Under the Foreign Corrupt Practices Act published by the Practising Law Institute (1995). Many of the issues presented in those case studies are likely to arise in the administration of codes of conduct of companies that are not subject to the FCPA..

Combating corruption in international business transactions is an extremely difficult undertaking. It will require private sector initiatives, as well as actions by national governments and by international agencies. While no single remedy will be decisive, different remedies reinforce each other. The experience of Hong Kong has demonstrated that the synergetic effect of interacting measures can successfully clean up an extremely corrupt system.

Corporate compliance programs are a key part of a comprehensive anti-corruption strategy. They are important in influencing corporate conduct. In addition, they enhance the effectiveness of government actions. The use of corporate codes of conduct in the U.S. has clearly increased compliance with the FCPA. The threat of criminal penalties has strengthened corporate compliance efforts. The adoption of codes of conduct has also been encouraged by the provisions of the U.S. Sentencing Guidelines which provide heavier penalties for companies without compliance programs.

Similar synergetic effects can be achieved in the field of government procurement. By making the use of corporate codes of conduct a condition of eligibility for bidders, procurement agencies will improve the integrity of the procurement process and also encourage wider use of corporate codes.

Progress on the international anti-corruption agenda is being made on many fronts. The Council of the OECD has taken a strong position on ending tax deductibility of bribes paid to foreign officials; the OECD is also making progress on proposals to criminalize bribery of foreign officials. The new Inter-American Convention Against Corruption will make transnational bribery a crime in the Western hemisphere. Additional measures to curb corruption are being considered by the World Trade Organization and by the World Bank. Actions by the ICC and by TI to promote wider use of corporate codes are an important part of a worldwide effort.

Fritz F. Heimann
Chairman, TI-U.S.A.

June 4, 1996

The Corporate Interest In Combating Corruption By Howard Aibel

In the pages which follow can be found examples of corporate codes, policies and practices which are published here as examples of the kind of self-imposed restraints which leading corporations have adopted to govern the activities of their enterprises in export market. The common goal is to end corruption of government officials and other customers as a factor in the process of purchasing goods or services. Why, one might ask, would aggressive entrepreneurial businesses forego using a frequently effective tool -- a bribe -- to secure business? Is there not a responsibility to the enterprise, its stockholders and employees not to lose business to competitors who have no qualms about paying bribes?

In fact, the best interests of the enterprise, its stockholders and its employees are far better served, even in the short run, by resisting the temptation to use corrupt means to get the order. The use of bribes changes the competitive dynamic which is the vital force driving the enterprise into the future. Instead of competing by providing superior goods and services at competitive prices, competition turns on who offers the biggest bribe. Not only do bribes add to the cost without adding value to the customer, procuring business in this way can lead a management to avoid the arduous work of innovation and cost reduction. Bribes may "sell" obsolete and high priced goods or services in a developing market, but the enterprise may lose its competitive edge in all markets as a result.

Toleration of bribery inevitably undermines management control. Because there is a need to prevent disclosure, secrecy and masking book entries are required. How does management really know whether the clandestine expenditures were really made for the asserted purpose? Does some of the money stick to the fingers of the intermediary, or worse yet, to the fingers of the enterprises' own employees?

Consider as well the corrosive effect on discipline in the organization resulting from the blackmail potential created by illicit payments: a manager feels that an unjustified promotion must be provided, or that a nonperforming employee cannot be discharged because the employee has knowledge that corrupt payments were made to secure business. Moreover, it is unrealistic for companies to attempt to operate on a double standard; that is paying bribes in countries where corruption is common and competing honestly at home and other countries where bribery is not considered the norm. Managers administering so called "slush" funds may find it difficult to resist the temptation to use such funds whenever, in their unmonitored and uncontrolled judgment, doing so may help with orders in home markets. Indeed, the corruption scandals of the last five years show that it is often difficult to differentiate between states that are "honest" and those that are "corrupt." The recent news accounts of bribes paid in Italy, Japan, France and England are sufficient demonstration of this proposition. Experience with corporate compliance programs in the U.S. has demonstrated that they are effective only when there is a clear and consistent message. Mixed messages -- corruption in some places is acceptable but not in others -- undermine the effectiveness of the program.

Undoubtedly the most serious adverse impact on the enterprise is caused by public disclosure of corruption. Damage worldwide to a reputation for integrity and ethical behavior, developed through decades of good corporate conduct, is a serious consequence which must be anticipated. Moreover, such disclosure could result in significant risk of loss of the enterprises' property in the country involved. Public disclosure of bribes will trigger enforcement of previously rarely if ever enforced civil and penal provisions punishing corruption. This could result in penalties being imposed on individuals as well as the enterprise. Charges that bribes had been paid can put at risk the completion of projects and payment for work already performed. Experience teaches that threats to the physical security of personnel at the contract site are far from remote possibilities. Realistically, the opportunities to continue to do business in the future in the country involved would not appear to be too promising.

In the past five years, public concern over corruption has increased. There is much less toleration of bribery in the nineties than before. The major reason why toleration of corruption has decreased is the much greater freedom of the press. As political systems have opened up and democratic institutions have expanded, investigative journalists no longer regard high level corruption to be "off limits." Similarly, French judges and Italian magistrates after decades of not doing so have recently gone after even the highest and most prominent political and business leaders. The corruption scandals of the nineties are different from those of the seventies, which mainly resulted from U.S. investigations following Watergate. Importantly, the scandals of the nineties are the result of local investigations. The corporate governance movement has spread from the U.S. to Western Europe. "Whistleblowers" are no longer a species solely indigenous to America. Thus, the risk of getting caught has increased and so have the penalties.

There is probably not a reader of these materials who would not say that the making of corrupt payments is contrary to his or her personal code of ethics. What needs doing in the market place is the putting into practice of these ethical principles. The fight against corruption involves much higher stakes than whether a company gets an order or whether any particular company or government official gets caught. If corruption cannot be curbed effectively, the expansion of market economies and of democratic institutions will be threatened. As President Henkel of the Federation of German Industry has recently put the proposition so eloquently: "The private sector has an immense interest in solving this problem, because corruption not only increases the costs and hinders competitiveness of companies, but corruption can undermine our market economy system and finally even our society."

There is now widespread recognition by international government organizations, by national government and by civic and professional groups that major efforts to combat corruption are needed. Business organizations and corporations should work in support of such efforts. Business must be a part of the solution so as not to be considered a major cause of the problem.

Integrating Anti-Bribery Compliance into Corporate Control Strategy By Jay Singh

Before discussing the specifics of a corporate anti-corruption compliance program, it is important to first lay out the context and environment which make such programs successful. The most effective anti-corruption compliance programs are integrated into an overall business risk management and control framework. An isolated approach, involving a separate infrastructure is likely to be both more costly and less effective that an initiative integrated into an overall business risk management structure. Within a large company, the competition for CEO and senior management attention is intense, and it is important that anti-corruption controls not be perceived as peripheral measures that can be delegated to subordinates.

The Integrated Approach

One integrated framework for business risk management which has emerged as a standard in the U.S. and as a guide to the development of similar standards in other countries is the study published by the Committee of Sponsoring Organizations of the Treadway Commission, commonly known as COSO. Entitled "Internal Control -- Integrated Framework," it offers a common business risk and control language, an integrated approach to managing and controlling risks, and a framework and standard against which organizations can measure the effectiveness of their internal controls.

The cornerstone of the new approach embodied in COSO is CEO ownership of the organization's control functions. While traditional controls focused on accounting and financial controls, with responsibility assigned to the Controller or the DFO supported by the Legal and Internal Audit Departments, COSO makes the CEO the owner of controls. In addition, risk assessment and control functions are embedded in core business process, and all employees share responsibilities for them.

COSO identifies five interrelated components of control:

1.Control Environment: The core of any business it its people -- their individual attributes, including integrity, ethical values and competence -- and the environment in which they operate. Unless the Board, CEO, and senior management set the "tone at the top" and foster an environment that discourages corruption, no anti-corruption compliance program is likely to succeed. To create the proper control environment, senior management should:

Communicate mission, purpose, shared values, and objectives of the organization. When these are not clearly communicated and reinforced, employees lose clarity and focus and may inadvertently make the wrong trade-offs and decisions. To reinforce the importance of the anti-corruption program, senior management should demonstrate its commitment by taking the steps outlined on page 9 below.

Establish clear boundaries of acceptable behavior. Employees need to feel empowered, yet organizations have to place specific boundaries and limits. Members of Senior Management need to exemplify the core values of the organization in their daily actions and interactions. In addition, the organization must issue a clear written statement of policy that articulates the corporation's anti-corruption commitment in the contexts in which the issue may arise. The components of a statement of policy are described on pages 9-10 below:

Select and develop the best people. It is management's responsibility to ensure the competence of its people and organize, develop and motivate them to achieve corporate goals and objectives. Human resource policies, such as, hiring, training, performance appraisals, incentives and compensation, career path planning, etc., play an important role. Performance reporting, promotion and compensation should be specifically linked to risk management and control, including compliance objectives of control.

Establish accountability at all levels of the organization for risk controls. Internal control is everyone's job; each employee must understand his/her role in the integrated process and be held accountable for it. Clearly, roles and responsibilities for an anti-corruption compliance program must be built into process objectives and measurements and must be considered in developing business strategies and business risk assessment.

Create an environment that encourages the free flow of information and concerns throughout the organization. There should be upward, downward, and horizontal dissemination of information about opportunities, risks, and controls throughout the organization. Airing of issues and concerns should be encouraged and vehicles provided to employees for voicing them without fear of retribution. Without such an environment, employees will be reluctant to report possible violations or concerns, so important to the success of any anti-corruption program. See page 15 below:

2. Risk Assessment: Every entity faces a variety of risks from external and internal sources that must be assessed. A precondition to risk assessment is establishment of objectives, linked at different levels and internally consistent. Risk assessment is the identification and analysis of relevant risks to the achievement of objectives, forming a basis for determining how risks should be managed. Thus, identified risks should be prioritized based on the likelihood of their occurrence and the resulting consequences in terms of economic loss, business interruption, and loss of business reputation.

Accordingly, once the objectives of an anti-corruption program have been set at the corporate level, they must be translated and linked to objectives at other levels of the organization (i.e., by business line, by organizational entity, by geography, etc.). Risks to the achievement of the program objectives at each level must be identified, sourced, measured, and prioritized.

3. Control Activities: During the risk assessment process, significant controllable compliance risks will be identified that may be unacceptable at the existing level. Steps must be taken either to strengthen controls already in place or design and implement new controls to reduce risks to acceptable levels. Control activities occur throughout the organization and include a range of activities as diverse as approvals, authorizations, verifications, reviews of operating performance, segregation of duties, etc. A critical element of an anti-corruption program is a set of detailed controls to govern the appointment of sales representatives. Examples of such controls are given on pages 11-13 below.

4. Information and Communication: Pertinent information must be Identified, captured and communicated in a form and timeframe that enables people to carry out their anti-corruption responsibilities.

Education and training must be provided to teach personnel about their responsibilities.

A reporting mechanism should be available for employees to communicate concerns without fear of retribution.

Information systems are needed to produce reports containing operational, financial and compliance-related information that make it possible to run and control the business. Information about the risks within the markets served by the business must be disseminated.

Finally, effective communication by external parties, such as customers, suppliers, regulators and shareholders, must occur.

5. Monitoring: Anti-corruption control systems need to be monitored -- a process that assesses the quality of the system's performance over time. This is accomplished through ongoing monitoring activities, separate evaluations or a combination of the two. Ongoing monitoring occurs in the course of operations through regular management and supervisory activities and other actions personnel take in performing their duties. The scope and frequency of separate evaluations, such as audits or internal investigation activities, will depend primarily on an assessment of risks and the effectiveness of ongoing monitoring procedures. Internal control deficiencies should be reported upstream, with serious matters reported to top management and the board. Once deficiencies are identified, remedial acts must be taken.

The Building Blocks of An Anti-Corruption Program

The specific elements of an anti-corruption compliance program, designed to be integrated into an integrated control environment, are described in the pages that follow. Examples of actual compliance programs are provided in the appendix. They all have the following common themes:

The following is an outline -- a blueprint -- for a corporate anti-corruption compliance program. While there is no single format for an effective compliance program to protect companies from unwitting involvement in corruption, this outline is a compilation of steps that many corporations have considered to be essential to a comprehensive and effective program. Samples of representative elements of compliance programs are attached in the accompany exhibits.

I. Commitment of Senior Management

A. Statement of senior management's commitment to the anti-corruption compliance program.

B. Measurement: the importance that the Company attaches to policy compliance should be reflected in employee and manager performance assessments and compensation reviews;

C. Involvement of senior management in the implementation and oversight of the policy;

1. A senior manager should be assigned "ownership" of the policy;

2. A compliance committee or board may be established to supervise policy implementation and to oversee disciplinary actions.

II. Written Statement of Policy

A. Key Issues

1. Prohibition of bribery: At the heart of the policy should be a clear statement that the company prohibits employees and third parties representing the company from offering anything of value, directly or indirectly, to a government official to influence or reward an action. The company may also choose to extend the same policy to commercial, as well as governmental, customers.

2. Gifts and Entertainment: The policy should permit ordinary and reasonable gifts and entertainment only if consistent with applicable laws and regulations, policies of the intended recipient, and any other applicable guidelines (such as the guidelines of a governmental institution that is funding the transaction). Detailed guidelines should be issued that provide specific guidance for different categories of customers.

3. Travel and Lodging Expenses: The policy should permit Reimbursement of travel and lodging expenses of government customers only if: the expenditures are reasonable and bona fide; the travel expenses are directly related to the promotion, demonstration, exhibition of a product or service or the performance or execution of a contract; the payment of travel and lodging expenses is permitted under local law; the payment is in accordance with customer policy directives or guidelines; and the payment is not contrary to any other applicable law, contract requirement or funding agency requirement.

4. Political Contributions: Laws regulating political contributions by corporation vary from country to country. The policy should require the company to comply with applicable laws regarding political contributions and disclosure. In addition, the policy should clearly prohibit the company and any third party representing the company from making or offering, directly or indirectly a payment or anything of value (such as a bribe or kickback) to any political party, party official or any candidate for political office of a country to influence or reward any governmental act or decisions.

5. Facilitating Payments: The policy may distinguish between bribes, which are prohibited, and "facilitating payments," a narrow category of gratuities to low level officials. Where facilitating payments are permitted, abuse must be prevented by training employees to distinguish between permissible facilitating payments and prohibited bribes and to account properly for any such payments.

6. Internal Controls and Recordkeeping: The policy should require that the company maintain a system of internal controls and recordkeeping that ensures that its books and records accurately reflect its transactions and disposition of assets. An audit committee, composed of independent outside directors, should oversee the structure of internal controls, the internal audit function, and the retention of independent auditors.

B. Procedural Issues

Distribution: the policy should be written in a format that is clear, concise and understandable. Distribution of the policy to every employee -- at every level of the organization -- sends the most powerful message. At a minimum, it should be distributed to every employee who is in a position to expose the company to potential violations of the policy (e.g., employees responsible for managing or appointing sales representative, accounting personnel, marketing and sales employees, employees who interact with political officials).

Translation: Ideally the policy should be translated into the local language(s) spoken by company employees and third party representatives to whom the policy will be distributed.

Acknowledgement: Awareness of the policy statement should be acknowledged by each employee and/or third party representative who receives it and periodically reacknowledged using either written or electronic means. The signing of acknowledgements promotes awareness of the policy and generated a useful record of the Company's commitment to implementation of the policy.

Procedures for monitoring the relationship with sales representatives and other representatives are of critical importance.

Relationships with Third Party Representatives

4. Screening

A process should be implemented to ensure that the third party is qualified and can be expected to abide by the anti-bribery policy

-written recommendation from sales manager documenting commercial need for appointment; duties; goals; verification of qualifications

- written application by third party
- names under which applicant has conducted business;
- names of owners, partners; shareholders;
- principal officers;
- relationship between any owner or employee of the applicant and any government official;
- affiliated organizations;
- description of organization;
- description of people who will be working on behalf of the company;
- background information;
- branch offices
- qualifications of sales persons
- financial references (bank, clients, etc.);
- general references (other firms, including applicant's relationships with such firms);
- financial data (2 years' financial statements);
- litigation history;

- Reputation check from references and other sources;

- Discussion with the third party about the company's commitment to the anti-corruption policy and the necessity of complying with it.

5. Approval by senior management

6. Written agreement

A written agreement should be signed with the third party representative, before the representative undertakes any work for the company. The written agreement generally should contain the following elements:

- Explicit prohibition against illegal payments
- Provision for immediate termination I the event of breach
- Limited term to assess performance
- Explicit representations by third party that no owner; partner; officer; director or employee is or will become an official of any government of a country in which the representative is selling company products without explicit approval of the company
- Agreement to abide by the company's anti-money laundering policy.

B. Compensation

Excessive compensation is one of the principal mechanisms that can be used to fund bribery. Standards should be established that require compensation to be established in light of specific criteria such as services to be provided; past performance; competence and resources to be utilized; complexity of the transaction; prevailing rates in the relevant market. Typically, commission rate schedules should be established for given markets, and any deviations from such standards should be permitted only upon authorization of senior management. A sliding scale for commission rates is appropriate -- reducing the percentage payable as the value of the order increases. For example, a 5% commission on a $1 million order may be appropriate; a 5% commission on a $4 billion order should raise red flags.

Method and place of payment. Permit only forms of payment that leave a record that the payment has been deposited into a bank account held in the name of the third party representative. Payment by cash and bearer instruments should be prohibited. Acceptable forms of payment include check payable to the third party representative and wire transfer to a bank account bearing the third party representative name. Payment should only be made in the country where the products or services were sold or in the country of the third party representative's headquarters. Exceptions to these requirements should be permitted only upon approval by senior management and counsel, together with a written statement providing a bona fide justification for the exception.

C. Monitoring: Red flags

Evidence suggesting that the third party might not adhere to the policy should be vigorously investigated at any stage. Examples of red flags include the following:

- Unusual payment requests;
- Unethical practices, e.g. preparing false documents, false answers to questions;
- Press reports suggesting unethical behavior;
- Comments that hint of bribery;
- Apparent lack of commitment to policies;
- Termination of agreement by other clients;
- Unfavorable reference checks;
- Requests to keep relationship secret;
- Unusually favorable payment terms;
- Lack of concern about product quality, training, warranty;
- Request to split payments into small amounts;
- Request to make payments in a different currency than appropriate for the agreed upon address for such payments;

IV. Internal Controls and Recordkeeping

A. Policies and procedures for approving expenses should require:

That there was independent approval at a higher level that at which the expense was incurred

- Limits should be established for gifts, entertainment, and business courtesies to and from clients, vendors, government officials, and former U.S. government employees

- "High risk" expenses/payments, e.g., ambiguous situations and possible exceptions, should require prior top management approval

- Above a specified amount (say $15), no expenses should be approved without complete back-up documentation, e.g., invoices, receipts, contracts, etc.

That the area processing the payment/reimbursement (such as the Accounting or Accounts Payable department), must verify that proper approval and documentation exits

That there is adequate segregation of duties between the authorization, approval, and payment/reimbursement processes

That there is provision in the company's general ledger to segregate facilitating payments and "business courtesy" expenses

   B.   The company's Accounting Policy should have explicit prohibitions against false or "masking" entries

Records and documentation for payments/reimbursements must be maintained in accordance with a records retention and archival Policy which is consistent with IRS and other applicable laws and regulations, e.g., The Annunzio-Wylie Anti-Money Laundering Act.

Accountability for enforcing these policies and procedures must be Established at various levels of the organization (departments, divisions, locations, subsidiaries, corporate, etc.)

V. Training and Education

A. Who

- New employees should receive training in the policy upon entry into the company; training should be refreshed annually.

- Third party representatives should receive training in the key elements of the policy.

B. What

The most effective teaching tools are those that confront the trainees with realistic situations, such as the case studies prepared by Don Zarin (See Tab "Case Studies," below.)

VI. Reporting Mechanism for Concerns about Violations

A. How

The Company should encourage or require employees to report any possible violations of the Company anti-bribery policy and should provide a variety of mechanism for such concerns to be reported. Examples include:

- A "hotline" or "helpline": a toll-free number for employees to report a possible violation of policy or to get advice concerning the application of the policy to specific fact patterns. Employees should be permitted the option of reporting anonymously.

- An Ethics Office or Ombudsman to whom employees may raise their concerns.

B. Non-retribution

The Company should prohibit retaliation against any employee who reports a violation of the policy.

VII. Audit

Periodically, auditors, either internal or external, should determine whether each element of the compliance program is functioning. Auditors will interview employees and third party representatives, examine "due diligence" files, agreements and other documents associated with third party relationships, and examine accounts pertaining to compensation paid to the third parties. Weaknesses or deficiencies noted should be corrected.

VIII. Investigations and Remedial Action

Upon the discovery of a "red flag" or possible violation of the anti-bribery policy, an investigation should be undertaken under  the supervision of counsel, to determine if any violation has occurred. If a violation is discovered, appropriate remedial action, including disciplinary action and enhancement of procedures, should be undertaken. If the investigation reveals a violation of law, counsel should consult with senior management to determine whether disclosure to law enforcement authorities is warranted.