20 January 2018
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Keppel scandal holds lessons for Singapore Inc

Business Times
05 Jan 2018
Tan Hwee Hwee

Singapore Inc's rejection of corruption in business cannot be anything but unequivocal, yet the realities of operating overseas in markets and sectors where such lines are not so clearly drawn pose real challenges for local companies, observers say.

Nothing illustrates this more clearly than the recent hefty US$422 million fines imposed on Keppel Corporation's offshore and marine unit, Keppel Offshore & Marine (KOM), for making corrupt payments in Brazil.

The US Department of Justice, which led investigations, said KOM had engaged in a scheme from 2001 to 2014 to pay US$55 million in bribes to Petrobras officials and the then governing political party in Brazil, the Workers Party of Brazil. Court documents stated that the bribes were paid to win 13 contracts with Petrobras and Sete Brasil. In total, the company earned US$351.8 million through the bribery scheme.

In theory, there should be courage, at both the corporate and individual level, to walk away from doubtful deals - even when the opportunity cost is huge. There should also be strong oversight and controls, to ensure that things are done the right way. But, as industry insiders pointed out, and proven by the saga, it's often easier said than done.

In KOM's case, it was operating in a sector and market that are known to be among the most graft-riddled in the world.

Verisk MapleCroft's Corruption Index rated Brazil with a high-risk score of 2.6 out of 10 for the fourth quarter of 2017. Of Latin American oil and gas producing countries, only Venezuela performed worse. The global oil and gas (O&G) industry landed in the worst quartile when Transparency International published its Bribe Payers Index in 2011.

In an article published before Keppel's case came to light, Alixpartners managing director Charles Laurence said graft in the industry partly stems from the fact that most O&G resources reside in the most corrupt places to do business.

Mr Laurence said the appointment of a third-party agent is often a necessary evil for foreign companies when doing business in Brazil, so ensuring these parties keep to prescribed corporate governance standards becomes a challenge. In Keppel's case, a Brazilian consultant facilitated the corrupt payments to win O&G contracts.

The published DOJ statement of facts also indicated that executives and employees of Petrobras with responsibility over the bidding of certain large projects, as well as politicians and political parties in Brazil, had engaged in a scheme to secure such corrupt payments equal to a percentage of a contract's value from companies awarded those projects. It was graft on a large, almost institutionalised scale.

On the other hand, complicating matters for companies with business interests in Brazil is the "entire economic group" concept, under which a group will be held responsible for wrong-doing committed by any company owned by it, according to Verisk Maplecroft's head of Americas politics research, Jimena Blanco. This can pose serious risks to companies in Brazil because the country's legal framework does not clarify what constitutes an economic group, she said.

But for O&M players, Brazil is a market hard to ignore, with its world-class oilfields. In Keppel's case, that market accounted for the most significant contracts in its order books before the corruption probe surfaced. So many believe that even after the hefty fines, Keppel will be inclined to continue operations in Brazil, if it could.

Leading floating production contractor, SBM Offshore, which has been subject to an equally high-profile corruption probe, has pressed on with its pre-existing projects there.

But how can Keppel, and other Singapore companies operating in similar conditions, address the stark question of graft? If the norm is to pay bribes to secure contracts, what are their options?

To Robson Lee, partner at US law firm Gibson Dunn, there is really no question. He pointed out that Singapore authorities have consistently demonstrated that it will not tolerate any company - big or small - that seeks to gain a business advantage by corruptly influencing foreign agents or government officials.

"The common refrain that 'this is simply how business is done overseas' (as in the case for O&G industry) is no defence; just as jaywalking in Shenton Way as a common phenomenon does not exonerate an errant pedestrian," he says.

Observers noted that legislators have to move swiftly to punish companies and individuals caught in corrupt acts because Singapore's hard-earned clean reputation is one of the pillars on which the nation and Singapore Inc were built.

Around the world, there is also concerted action against graft in business, facilitated in part by the long arm of cross-border laws, including the US Foreign Corrupt Practices Act and the UK Bribery Act.

While the temptation may be to do as others do and try not to get caught, corporate governance advocate and NUS Professor Mak Yuen Teen warned that Singapore risks damage to its reputation. "If our companies start behaving like others, we will be treated just like others."

The pertinent question to ask, according to Prof Mak, is this: "How do we do business legally in a country or a sector where corruption risk is so high?"

He said it is a fallacy to assume that "every company that operates in corrupt countries will pay bribes". "Often, it is more expedient to pay bribes and more costly if you do it properly, but it is still possible; when it is absolutely not, then you have to be prepared to walk away."

Commenting broadly on the issues, TSMP Law Corp's joint managing partner, Stefanie Yuen Thio concurred: "If there is no way to do business in a country without paying bribes, then don't do business there."

She added though there may be "ways to participate in an emerging economy's growth without putting business boots on the ground" such as "supplying parts or services to companies who do conduct business there, without taking part in corrupt business practices that would be necessary if the Singapore company were to have a business establishment there".

She acknowledged however, that dealing with the moral complexities of a corruption-ridden emerging market remains a challenge for Singapore businessmen used to business done according to the rules.

Still, some Singapore companies have strived to achieve that fine balance. Privately-owned box ship owner-operator Pacific International Lines has been operating in emerging markets for half a century now. PIL's managing director SS Teo said: "While PIL has upheld standards as a Singapore-based company, we understand that it is not a level playing field out there."

Yet, in order for PIL to thrive and not just survive, Mr Teo said it is imperative to "monitor what our competitors do and respect local customs. He named "gifting for festive seasons in some countries within a reasonable limit" as one custom PIL observed, but his bottomline is: "We will not infringe the law."

Verisk Maplecroft's Jimena Blanco said that in navigating the cross-border legal landscape, "corporates must be able to demonstrate strict due diligence to avoid penalties, in Brazil or abroad". "The inclusion of special guarantees in contracts would also allow companies to shield themselves from future criminal or civil penalties," she suggested.

One key question is how such a lapse can occur at Keppel, a Temasek-linked company, and with many corporate governance accolades to its name. And how could such a scheme take place over so many years without the knowledge of the board of directors and senior management?

Considering both Keppel and SBM are often rated the "best-in-the-class", another question to ask is: what drove executives to approve bribes for projects when they are in a good position to win tenders in the first place? Were they under enormous pressures, from corporate headquarters, to deliver?

To Prof Mak, the buck stops with the board and senior management.

A managing partner of a corporate law firm that BT spoke to also noted that by law, the senior management team and board of directors are held responsible for ensuring compliance. But she also pointed out that "it is impossible for the board to have actual knowledge of every transaction".

She considered it necessary however, "to foster a corporate culture that does not tolerate misfeasance, that rewards those who volunteer information that will make the organisation a better one, and that never accepts 'that's just how the game is played' in this market as an excuse for corruption."

Prof Mak also made a point about Keppel's disclosures, noting that when such cases occur, companies should proactively put forward all relevant information to investors.

He noted that Keppel's first statement, while flagging the US$422 million fines and other actions, did not include, for instance, the US$8.9 million in financial sanctions imposed by KOM on 12 former or current employees as part of its disciplinary actions, even though that information was in the plea agreement made public by DOJ.

In response to BT, a Keppel spokesman said the current board of directors for both Keppel Corp and KOM were not aware of the illegal payments. The agreements with the authorities also have specific restrictions regarding public statements by the company. He reiterated that for legal reasons, Keppel is unable to comment on the agreed statement of facts released by the investigating authorities or on the identities of individual employees.

With Singapore authorities still investigating some of the individuals involved in the case, Keppel's Brazilian saga is not over. As Keppel counts the cost of what had happened, Singapore Inc too, should be tallying up the lessons to be learnt.

Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.