A guest post today from Owen Hawkes, a partner in KPMG’s forensic practice in Singapore.
Professor Koehler’s recent post “When A Government Customer Does Not Pay” examines FCPA enforcement actions where payments were made to foreign officials to expedite the receipt of liabilities from governments.
The post brought to mind a recording quoted in the media coverage of PT MAXpower Group (“MAXpower”), an Indonesian-based gas-fired power plant operator, which was alleged to have made corrupt payments to officials in Indonesia. The quote, from a recording of a meeting of Directors in 2015, reads:
“I kind of feel like extensions are really critical stuff, we use an adviser. But for like getting paid on a regular basis, f — it. Enough is enough. […] We’ll find some other way. I mean, take them to karaoke, take them golfing, take them to Singapore, I don’t care.”
(StanChart faces US probe into alleged bribery in Indonesia, Financial Times, 27 November 2016).
MAXpower would hardly have received the coverage that it did were it not for the investment held by the private equity arm of Standard Chartered PLC, a British bank subject to US deferred prosecution agreements. But the exasperation expressed by the attendee above reflects the genuine frustration many businesses in Asia experience in getting paid for work they have performed. The quote above suggests an apparent willingness to pay officials merely in order to get paid themselves. It was this that struck a chord in Professor Koehler’s post.
Some governments in Asia can be very slow paymasters. Only Korea, Taiwan, China, Japan and Singapore score above 50 out of 100 for “Payment of Suppliers” in the World Bank’s Benchmarking Public Procurement Report 2017, with 12 scoring less than 50. The World Bank also notes that, unsurprisingly, longer delays in payments are associated with economies with higher perceived rates of corruption (Doing Business 2017, Annex: Selling to the Government).
Vendors in some countries in South East Asia will be surprised to learn that they are apparently paid in 30 days or less by their governments. But that is because the index does not tell the whole story: partly because it excludes government-owned or-linked companies. Additionally, governmental targets for payments to suppliers, even if met, tend to start measuring from receipt of an agreed invoice. Quibbles can arise over anything from requests for only tangentially related documentation, such as workers’ visas, to documented approvals of variation orders – which are often never provided, with contractors being encouraged to press on in the expectation that formal approvals will eventually follow. These can add months, and in extreme cases years, before the clock starts ticking.
Companies faced with recalcitrant government or government-linked clients in the region have a limited range of unappealing options.
The most common is simply to chase in the hope that their counterparty will ultimately relent and pay. Needless to say, this is not always effective. A client recently recounted that his company had been asked by a financial controller at a government-owned natural resources company, “Why would I pay you when you haven’t even sent a lawyer’s letter?” It is unlikely that the financial controller wanted his company to be sued; but his default approach is apparently to pay invoices only once under real pressure from a contractor.
Another unappealing option is actually to commence such proceedings. This is problematic for three reasons. First, while suing clients is obviously a last resort, suing a government may lose a client representing the major portion of a company’s business, if not all of it. Second, there is genuine scepticism about the effectiveness of litigating where one party is the government in some jurisdictions; given that some governments in the region have expressed reservations about the concept of judicial independence, such scepticism is perhaps understandable. Third, there is the fear – justified or not – of consequences unrelated to the transaction in question, whether commercial or otherwise.
The last of the (legal) frequently used options is to work through networks, such as local contacts or business forums, to try to unblock payment by escalating the delay to a higher authority. Whether this is feasible is dependent on the country and the relationships open to the supplier; it will almost certainly be a challenge for companies that are not well-established in a market. Worse, if not handled very carefully, such intervention can in itself leave a company open to solicitations for or accusations of corruption.
Yet one of the counter-intuitive results of the current focus on corruption is that government officials are often reluctant to release payments, especially penalty payments for breaches of contract or tax refunds, for fear of falling under suspicion of having been corruptly induced to do so. Similarly, it is not uncommon for government departments and government-linked companies to avoid releasing final progress payments for as long as possible because unwelcome scrutiny may result should a problem arise with the project in the future.
This can lead to the peculiar situation where legal proceedings are, far from being genuinely adversarial, used to enable payment by the government department in question. For example, we have previously been approached to provide expert evidence on quantum in an arbitration where the amount owed as a penalty was agreed but the government department wanted an arbitral award to give them the requisite cover to pay.
Companies finding themselves unpaid have delivered goods and services; they have incurred the costs of buying raw materials, hiring subcontractors and incidental expenses. Not least, they have staff salaries to pay and suppliers that depend, in turn, upon being paid for their own financial survival. It is this that drives some companies to take the least appealing option of all: pay a bribe to secure something to which they are already entitled. In fact, many governments have legislated obligations to pay within a particular timeline (such as the Prompt Payment Act in the US). In which case, the company is not just entitled to payment, it is entitled to expeditious payment.
Ultimately, bribes offered or given for payment can range from an outright bribe to approve payments that are unearned on the one hand to a shakedown by the official responsible for approving payment on the other. Companies facing the latter situation are faced with a dilemma: do they exercise patience and hope their cash flow does not dry up while they chase, do they sue, or do they pay the bribe?
If companies do pay, they can expect officials to fish for a repeat favour next time they deal with them. In addition, while the FCPA may provide a defence for payments “to expedite or to secure the performance of a routine government action by a foreign official”, local anti-corruption legislation may provide no such exception.
It is often suggested that there has historically been too much focus on the “demand side” of bribery and that this focus should be shifted to the “supply side.” In reality, there is a need for both private and public sectors to play their part. Professor Koehler’s post highlights an under-addressed area where the demand side’s role is vital in reducing both the incentives to bribe for suppliers who have secured and delivered their contracts legitimately and the opportunities for officials and employees to seek bribes.
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