Three Key Questions to Understand Anti-Corruption Compliance in Central America

The purpose of this article is to address the phenomenon of corruption in the business world by asking three key questions. The possibility of building and promoting effective anti-corruption plans and programs depends, to a large extent, on the understanding of the following questions: 1) In what situations does corruption occur? 2) How does corruption actually occur? and 3) Who is usually involved in acts of corruption? This article attempts to answer these questions from the perspective of anti-corruption compliance. Our opinions are based on multiple lessons learned from corruption investigations and prosecuted cases of bribery payments in both local businesses and transnational operations. These include cases that had allowed us to participate and understand strategic efforts to fight corruption in Central America.

Particularly, the analysis of these three questions takes on greater importance in the countries of El Salvador, Guatemala and Honduras, also grouped together as the Northern Triangle of Central America. These countries have historically presented important corruption figures in the region, according to indices such as the World Justice Program Rule of Law Index and Transparency International's Corruption Perceptions Index. According to CSIS (2021), "since the mid-2000s, Central American countries have taken various approaches to combating corruption." Guatemala accepted the presence of the Comisión Internacional Contra la Impunidad en Guatemala (CICIG; International Commission Against Impunity in Guatemala), and Honduras accepted the Misión de Apoyo Contra la Corrupción y la Impunidad en Honduras (MACCIH: Mission to Support the Fight Against Corruption and Impunity in Honduras).¹ In sync with these development and anti-corruption efforts, the U.S. government has also pushed for several strategic actions, including the passage of the "United States-Northern Triangle Enhanced Engagement Act," USAID's Northern Triangle Task Force, and the Strategy to Address the Root Causes of Migration in Central America. Considering the importance given to the fight against corruption, these multilateral efforts should be taken into account, both, when participating in an investigation in the region for a possible corrupt act as well as when designing a compliance and anti-corruption program in accordance with the realities of the region.

In What Situations Does Corruption Occur?

One of the main issues to understand corruption is why, at any given moment, a company decides to engage in a corrupt act. From a corporate analysis, our own experience and existing empirical evidence indicate that, in general, organizations have strong incentives for corruption in five types of scenarios:

• To purchase any law or regulation that may affect the business or industry in which it operates. Typically, this is observed when a company knows that a regulation that may limit or control its participation in a certain industry is being discussed or is about to be issued. The company then decides to "buy" the norm so that the legislator or regulator does not affect its interests.
• To obtain or retain a contract. In general, corruption scandals occur around procurement and the bidding processes. Gaining access to contracts or being favored with concessions often has a strong incentive for companies—and their managers—to secure the contract through illegal payments.
• To evade a fine or penalty. Companies that face some type of financial penalty, either for a regulatory violation or for non-compliance with regulations, usually have incentives to use bribery to buy their way out of a sanction by the regulator.
• To obtain licenses or permits necessary for the operation of their businesses. In many cases, it has been seen that obtaining a license or permit implies for companies an acceleration in their production processes, for example, opening a new store, expanding the factory they have or obtaining the import or export permits that they require. In all these scenarios, companies may perceive that by corrupting they gain a competitive advantage.
• To access economic benefits or incentives, for example, through soft loans or non-repayable loans, which can mean relatively quick and unquestioned profits for companies. This type of scenario is observed, above all, among small- and medium-sized companies that, through illegal payments, ensure their incorporation into this type of programs.

How Does Corruption Actually Occur?

From an organizational point of view, some authors have analyzed how corruption can become a process accepted and justified by entire industries and sectors. But an important question remains that has not been fully analyzed: how does corruption happen in practice? Experience tells us that the corrupt act usually presents itself in six different ways, in a non-limiting way, although often in a combination.

• By means of bank transfers to tax havens. Usually, this type of corruption is associated with large payments of money and is usually used in more or less sophisticated money laundering schemes. They are, when detected, the issues related to the so-called "grand corruption": the corruption of large numbers and public names.
• By means of frequent, relatively small, even budgeted payments that are often disguised as expenses in the accounting of companies. For example, expenses related to sponsorships, donations, travel expenses, professional services fees, advertising, etc. In this way, companies seek to maintain the profits they "buy" consistent and safe.
• By means of gifts. Experience tells us that gifts often have a corrupt intention, that is, to buy the conscience or decision of a particular person who, thanks to his position, can favor a company at a given moment. Gifts can range from seemingly trivial objects to sumptuous gifts. In any case, the recipient of a gift often commits himself to opaque decisions.
• By means of benefits or favors, often through third parties. In a number of cases, it has been observed that bribery does not necessarily take place in the form of money, but in the form of favors, the direct beneficiary of which may not even be the corrupted person. This was detected, for example, on one occasion in which the bribe was delivered through the hiring of the son of a public official by a transnational company that was irregularly awarded a contract. The hiring of the official's son took place in a way that was outside the normal standards of the transnational's business, clearly as payment for the benefit received.
• Through entertainment. Unfortunately, corruption is strongly associated with unethical behavior, both inside and outside the workplace. In several countries, especially in Latin America, it has been observed that criminal groups, linked to human trafficking and sexual exploitation, often attend illegal negotiations that result in the granting of contracts, licenses, permits or any other type of benefits to the companies involved.
• By means of irregular payments triangulated by third parties. This last modality is perhaps the most widely used. In a recent report by the U.S. Department of Justice, it was revealed that 60% of the cases investigated and sanctioned for violations of the U.S. “Foreign Corrupt Practices Act” (FCPA) have been improper payments through third parties. The use of consultants, lawyers, managers or any other type of third party can lend itself to triangulating bribes. Hence, it is important for a compliance program to ensure that the company's suppliers fully understand and comply with internal anti-corruption control protocols.

Who is Usually Involved in Acts of Corruption?

Corruption doesn't happen in a vacuum. If there is corruption, it is because there are people, specific individuals, who reach some kind of agreement and carry out the illegal exchange: some receiving the bribe and others delivering the money, gift or favor required. And in that sense, it is important to clarify who are the people who, from the side of corrupt companies, tend to get involved in these bad practices. Existing empirical evidence points to three groups of corruptors:

• Approximately 10% of bribe payments are directly related to senior or corporate officials. This group represents the top management of companies that, at some point, decide to act corrupt in order to obtain some spurious profit, often even contrary to the corporate policies of the companies to which they belong.
• Approximately 30% of bribe payments are made by individuals who belong to the middle or managerial levels of companies. Less than half of this group of corruptors usually act on the instructions from their superiors, in a more or less conscious and tolerated scheme of management override, but the other half are usually individuals acting on their own initiative. Why do they do it? Experience suggests that this happens especially when the person wants to "solve" a problem quickly and, in this way, gain the respect and admiration of his or her superiors, especially when the bribe to be paid is related to obtaining a permit, license or evading a fine.
• Sixty percent of bribe payments are related to third parties, such as contractors, lawyers, managers, professional service providers, etc. These third parties are often used by companies to handle various matters and procedures. In practice, what has been observed is that these third parties, acting on behalf of and for the benefit of certain companies, often also act as vehicles for paying bribes. As in the case of middle management, there have also been situations in which third parties act on their own initiative, without clearly notifying the company that subcontracts them about the type of arrangements they actually carry out. Why do they do it? There are several possible answers, but, generally, this happens when that third party wants to secure their hiring by the company that requires it.

In the process of identifying who is involved in possible acts of corruption, the United States-Northern Triangle Enhanced Engagement Act created the Corrupt and Anti-Democratic Actors List, also called the Engel List. Officials of any branch of the Northern Triangle countries or any individual identified as corrupt or implicated in crimes have been identified in this list. Since its creation, this list has positioned itself as a source of inquiries to identify with whom in the region business should not be done; in addition, it acts as a wake-up call to possible actors involved in acts of corruption and who could lose their entry visa to the U.S.

Designing and promoting anti-corruption programs in companies is not an easy task. It requires a thorough understanding of the corruption risks that each company faces in its different processes and functions. Designing an anti-corruption program also requires a rigorous analysis of the international standards along with the regional context that will influence the possible risks and operations. These three questions explore lessons learned and empirical practices based on corruption investigations and prosecuted bribery cases that may be useful to designers of anti-corruption programs. When it comes to corruption prevention and detection programs, there are no magic recipes, but any effort will be insufficient if it is not based on a thorough knowledge of the actual corruption situation that is effectively faced, the context from which it develops and the previous efforts that serve as a starting point to create controls, policies and procedures adjusted to reality.

¹CSIS (2021). Navigating the United States-Northern Triangle Enhanced Engagement Act. Commentary by Daniel F. RundeLinnea Sandinand Amy Doring. https://www.csis.org/analysis/navigating-united-states-northern-triangle-enhanced-engagement-act