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Securency Scandal: Lifting the Lid on Grey Money

November 02, 2010
Finance

​​​​A bribery scandal involving Securency, a subsidiary of the Reserve Bank of Australia (RBA), has caused Australia's central bank to demote its chief banknote salesman, Hugh Brown, and ban the practice of paying overseas' middlemen to win contracts. An investigation by the UK's Serious Fraud Office follows allegations that bribes were paid by agents of Securency – a 50-50 joint venture between the RBA and British plastics producer Innovia Films – to win contracts to produce bank notes in Africa, Asia and South America. The bribes allegedly went to politicians in several countries that bought Securency's notes.

The allegations highlight "a grey area" in international business "around building and maintaining relationships" that urgently needs to be aired, insists Andrew Kakabadse, a management professor at the UK's Cranfield School of Management and a visiting scholar at the Australian School of Business. Kakabadse is an expert in cross-cultural management and co-author of the book Rice Wine with the Minister – Distilled Wisdom to Manage, Lead and Succeed on the Global Stage (Palgrave Macmillan, 2010), written with Nada Kakabadse of the UK's Northampton University. He observes: "What is considered corruption in one region might just be a token of friendship in another."

The Kakabadses recall a salutary conversation with a director of a German multinational that had announced zero-tolerance for corruption. General managers of this global corporation were told they would be responsible for any corrupt actions and not the company. But the board member was a realist. "You have to pay for contracts," he told them. "If a contract is worth 2 billion euros, 200 million euros immediately goes to the people – often government ministers – who can make sure that you get the deal. It's institutionalised corruption. Do I allow one of my field managers to go to prison saying the company had no knowledge of this, when clearly it did?" he asked. In most organisations, the field manager takes the blame, notes Kakabadse. "And this will continue to happen unless these issues are discussed openly."

Bribery and fraud in international business are extensive. Since 1995, the Berlin-based global non-profit organisation, Transparency International, has published an international Corruption Perceptions Index, ranking 180 countries around the world on their levels of public sector corruption. The higher the score, the less perceived is corruption. "The results of the 2009 edition – as every year – are sobering," says Michael Sidwell, spokesman for Transparency International. "No region or country in the world is immune to the damages of corruption, the vast majority of them score below five." Australia achieved a reassuring index of 8.7. But in 2009, a survey by Dow Jones reported that close to half of the senior executives of Australian companies possessed only minimal knowledge of anti-corruption and bribery legislation. Nevertheless, the country has struggled with high-profile cases, including grain marketer AWB paying kickbacks to Iraqi government officials and mining company Rio Tinto's executive Stern Hu being jailed by a Chinese court for stealing commercial secrets and bribery.

How Grey Money Works

Australian companies operating in China "can either bury their corporate heads in the sand or learn how to deal with bribery and corruption", says Andrew Kakabadse, who has worked in different parts of China over many years. He estimates that at some stage of their working lives about 450 million Chinese people will accept a bribe. "Western managers call it ‘grey money' and claim that they routinely bribe, maybe four or five times a week, if they want to do business in China," Kakabadse says. Grey money works simply. A manager accepts a "friendly payment" and then distributes it to the appropriate people. If an executive fails to distribute grey money he ends up in trouble, according to Kakabadse. "This is often why managers are brought to trial for corruption," he says. Another reason is that someone has politically fallen from favour.

And grey money is by no means an Asian speciality, Kakabadse argues. After all, low-paid waiters in the US expect a minimum 15% tip as part of their income and become disgruntled when guests don't pay up. Even tax officials tip waiters knowing that tip will not be declared as income. In the UK and Australia, hotel guests and diners also tip, but in Japan, it's considered an insult. "Tipping is not so different from grey money as both increase the standard of living of working people," argues Kakabadse. "At one extreme, bribery is simply a fee for a transaction." When is grey money a problem? Transactional payments made at grassroots level in organisations may not be considered serious, notes Kakabadse. "But what's serious are the multimillions that are raked off at the top of organisations and governments in two-thirds of the world."

While successful companies boast high ethical standards, it's left to individual employees who sell their commodities to negotiate the realities of local markets and local terms. "The problem is not so much the ‘greyness' of transactions as the holier-than-thou unwillingness to accept their ‘greyness,'" says Kakabadse. If a US waiter can be tipped as a matter of custom, why does the West look askance at the Chinese who have extended the habit of tipping from gastronomy to other industries?

Consider the Difference

Corporate governance regulations differ between regions. The UK Corporate Governance Code (formerly the Combined Code) applies to Britain but means little in Germany or Japan. Sarbanes-Oxley covers those trading in the US. Australian Securities and Investments Commission regulations may seem irrelevant through Chinese eyes. "Anglo-American shareholder culture is contractual," says Kakabadse. "In contrast, the German, French, Italian, Greek, Turkish, Chinese, Indonesian, Mexican and most South American stakeholder cultures are about relationships. There's a mistaken assumption that Western governance puts Western organisations above reproach." But this is quickly shot down by cases such as the UK parliamentary expenses scandal in 2009, Kakabadse points out. He argues that boards need to talk about the "grey areas" and include their top teams in the field in the conversation. Governance issues have to be reconciled with protecting a company's relationships on the one hand and its reputation on the other. "This can only be done with a thorough understanding of a region, its culture, the challenges and how others have succeeded or failed," he says.

There's a high risk in the head-in-the-sand approach. In Australia, stiff penalties apply for bribery of Commonwealth or foreign public officials. The Crimes Legislation Amendment (Serious and Organised Crime) (No. 2) Act 2010 was introduced to counter criticism that Australia has not effectively implemented its obligations as a signatory to the Organisation for Economic Co-operation and Development's Anti-Bribery Convention. Individuals now face up to 10 years in jail and a fine of up to A$1 million. Fines for companies can be as high as A$11 million.

An advisory paper by consulting firm KPMG Australia states: "The challenge often faced is how to do business in a manner that reflects the organisational values and meets regulatory requirements when the perception is that bribes have to be paid in order to conduct business." When designing programs to prevent and detect corruption, KPMG advises companies to understand the risks and implement more controls and oversight by the board and audit committees; to monitor vulnerable operations with third-party audits, internal forensics and whistleblower hotlines to detect trouble at an early stage; and to implement accountability and disclosure protocols to ensure issues are being dealt with effectively and damage to the company's reputation is minimised.

But, as cases of corruption are investigated and exposed, Kakabadse sees a further risk that corrupt activities may go deeper underground. "This activity will be outsourced to some sort of agent and the money will be classified as consulting fees, marketing costs or network development," he says. "Everyone will know it's used for corruption, but nobody will talk about it." Instead, Kakabadse says what's needed is concerted action from major global third sector organisations – the United Nations, the World Health Organisation and UNESCO – to bring the issue into public debate so governments can encourage corporations to discuss bribery and corruption more openly – "without frightening the life out of hard-working and – basically – honest managers who are placed in an almost impossible situation".​

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