Investor alert: Bribery risks are rising

Despite government crackdowns and shareholder demands for greater transparency, the risks of bribery will increase as multinational corporations push further into emerging markets.

It's getting tougher for companies to get away with bribery these days. Shareholders are demanding greater transparency in business dealings. Governments are cracking down.

But that doesn't mean the practice is disappearing. As risky as the practice is, the temptation to grease the wheels of corporate deals with cash and other under-the-table gifts is growing as companies push further into underde-veloped nations and competition heats up. That means greater risk for investors in companies with international dealings.

"It's a reflection of the desire to expand into territories that are not highly regulated," says David Holley, senior managing director at Kroll Advisory Solutions, a risk-mitigation company based in New York. "There are opportunities in places where there are less stringent rules when it comes to [using bribes] to get things done."

Bribery can be costly, both in dollars and reputations, for companies that get caught. For Siemens, two years of investigations ended in 2008 when the company paid $1.6 billion to settle bribery charges brought by Germany and the United States in connection with a $1 billion contract to produce national identity cards for Argentina, among other international contracts. Siemens ended up forfeiting hundreds of millions in profits. Eight of its former executives face charges in the US.

The damage begins long before cases come to court. The US and Mexico, as well as Wal-Mart, are investigating allegations that the retailing giant's Mexican unit paid millions of dollars in bribes to get building permits and other favors. Such investigations consume company resources, spark shareholder lawsuits, and create a public-relations mess.

"Wal-Mart is a good corporate citizen … and yet look at the damage to its reputation," says Karen Egger, senior program manager for Transparency International, a nonprofit anticorruption group based in Berlin. "[We hope] that will be a good lesson."

Multinational corporations are making progress but need to do more to battle corruption, a new Transparency International report finds. And the risks of bribery are rising. Half of the 139 multinationals Kroll surveyed in late 2011 and early 2012 said their risk exposure would go up in coming years; only 8 percent expected it to fall.

Although bribery is risky, refusing to bribe someone carries risks, too. In developing nations, locals often expect compensation for moving things along. Payment to corrupt government officials can open doors to significant deals, expedited permitting, and speedy access to essential infrastructure such as ports.

"Sometimes you're operating in a culture where what could be considered bribery here might very well be normal business practice there," says Michael Hoffman, executive director of the Center for Business Ethics at Bentley University in Waltham, Mass. "It's kind of built into their salary structure."

Foreign competition is another driver. Gone are the days when American firms operating overseas faced competition primarily from Western Europeans, whose governments ensured all were held to similar standards. Now they face able competitors based in Russia, China, and other nations that impose no restrictions on how they do business abroad, according to Ms. Egger of Transparency International.

"Companies tell us that they want to do the right thing, but they're competing with companies from countries that don't have the same kind of legislation as exists in the US and the UK," she says. "It's extremely difficult. There's no level playing field."

Another factor: outsourcing. As companies increasingly rely on partners in developing nations, they run the risk that partners might pay bribes on their behalf. In the Kroll survey, companies that see their risks rising cited related factors: more international clients (24 percent), conditions in emerging markets (17 percent), and more reliance on third parties (9 percent).

Because bribery is illegal and therefore hidden, it's difficult for investors to protect themselves. For example, it's impossible to hold up specific companies and say with certainty that they've thrived without turning to bribery, Egger says. Even so, some companies have earned high marks from watchdogs in recognition of transparent revenue reporting practices. Transparency International, for example, gives top scores to Norwegian energy company Statoil and Australian/British mining giants Rio Tinto and BHP Billiton. BHP Billiton introduced a line item in its budget for anticorruption training in fiscal 2011.

Disclosure and training help reduce risk, but they're not foolproof, says Patrick Gnazzo, a McLean, Va., consultant who advises companies on anticorruption practices. As long as some nations punish their firms for bribing abroad while others turn a blind eye to it, the playing field will be tilted, he adds.

"US companies tell their employees over and over, 'We won't tolerate [bribery],' " says Mr. Gnazzo, a former compliance officer for United Technologies. "But they have many employees outside the United States who hear what we're saying and aren't sure if they can believe that we really mean it."