The effectiveness of the OECD Convention in curbing bribery of foreign officials would be undermined if foreign subsidiaries of corporations based in OECD states can be used to pay bribes. The status of foreign subsidiaries is on the agenda of the OECD Anti-Bribery Working Group, with a recommendation scheduled for consideration at the May 1999 Ministerial. This memo will first state our starting premises; second, review the relevant legal and business considerations; third, discuss policy objectives and priorities; and fourth, outline a recommended action program.

I. Starting Premises

A. Anyone experienced with risk-management in multinational enterprises knows that it would be irresponsible to ignore the behavior of foreign subsidiaries. The issue is not whether the conduct of foreign subsidiaries should be covered, but how this should be done under the Convention.

B. The priority objective should be to prevent parent companies from using their foreign subsidiaries as intermediaries for paying bribes. This is of greater practical importance and will be easier to deal with than independent acts of bribery by foreign subsidiaries. The convention provides an adequate legal basis for preventing the use of foreign subsidiaries as conduits for paying bribes. Thus the focus should be on assuring effective enforcement, not on amending the Convention.

C. Independent acts of bribery by foreign subsidiaries in non-OECD countries will be more difficult to deal with under the Convention and should be considered as a separate issue requiring different treatment than bribery with parent company involvement.

D. Applying corporate compliance programs to foreign subsidiaries is potentially the most effective way to curb bribery by foreign subsidiaries, including those located in non-OECD countries. Corporate self-regulation would greatly enhance the effectiveness of government enforcement. Even more importantly, it could influence corporate conduct in ways which transcend what can be achieved by legal measures, particularly in countries where the rule of law is weak.

E. The OECD monitoring program must make sure that countries take consistent action with respect to foreign subsidiaries. Parties to the Convention should be encouraged to pass effective implementing legislation and to conduct strong enforcement programs. On this, as on other issues under the Convention, failure by major exporting countries to enforce consistent rules would create disincentives to compliance and enforcement and lead to a lowest common denominator approach.

F. The scope of the OECD Working Group should not be limited to issues of criminal law enforcement. The conduct of foreign subsidiaries is an important part of the development of acceptable rules for a global economy. The evolution of norms of corporate governance, corporate ethics, and international accounting standards may well be more influential than the development of legal rules. OECD recommendations relating to these areas would contribute to the development of sound rules for the global economy.

II. Relevant Legal and Business Considerations

A. Provisions of Convention.

The legal basis for preventing the use of foreign subsidiaries to circumvent the Convention is provided by Article 1, paragraph 2. This provides that "each party shall take any measures necessary to establish that complicity in, including incitement, aiding and abetting, or authorisation of an act of bribery of a foreign public official shall be a criminal offence." This provision establishes an effective basis for prohibiting OECD-based companies from using their foreign subsidiaries as intermediaries for paying bribes.

With respect to independent acts of bribery, foreign subsidiaries located in signatory countries would, of course, be covered by laws implementing the Convention enacted by such countries. The Convention does not cover independent acts of foreign subsidiaries located in non-signatory countries, if such subsidiaries do not engage in any activity in a signatory country.

B. Provisions of National Laws.

Foreign subsidiaries are widely regarded as (a) separate legal entities from the parent companies, and (b) nationals of the state where they are incorporated. There has traditionally been considerable reluctance to "pierce the corporate veil" and hold parent companies responsible for independent acts of subsidiaries. Parent companies have, been held responsible for the acts of their foreign subsidiaries based on concepts Such as authorization and complicity. How such concepts are applied varies considerably from country to country.

Nationality jurisdiction is used by many but not all OECD members to control the conduct of their nationals who serve as directors, officers or employees of a foreign subsidiary. While all use territorial jurisdiction, it has been applied in different ways. Some require only minimal physical contacts, e.g. a phone call or a fax, to establish jurisdiction. Others require that major elements of a crime take place on their territory. Some states apply dual-criminality requirements rigidly, others do not. The Commentaries to Article 4 of the Convention provide that territorial jurisdiction should be interpreted broadly, without requiring an extensive physical connection (Commentary 25), and call for some flexibility in applying dual-criminality requirements (Commentary 26).

C. Changing Role of Foreign Subsidiaries,

The relationship between parent companies and their foreign subsidiaries is changing in response to the development of a global economy. In the past, foreign subsidiaries were commonly responsible for national or regional markets in which the parent companies did not compete directly. Subsidiaries often operated with substantial autonomy, performing in their markets all or most of the functions conducted by the parent company in its home market.

To compete more efficiently in global markets, parent companies and their subsidiaries are now increasingly working together as part of a single integrated corporate system. To facilitate such integration, the coordinating role of the parent company expands, and the autonomy of the subsidiary declines. Also working in this direction is the trend toward regional or international brand identity. The use of a single brand leads the parent to exercise more control over the subsidiary to protect the image and integrity of the brand.

The foregoing describes a general trend which has been evolving for more than a decade. Companies are at different stages in the integration of their corporate systems. Depending on how far such integration has gone, it becomes increasingly difficult for parent companies to avoid allegations of responsibility for improper acts by their subsidiaries based on authorization and complicity. While traditional legal doctrines regarding corporate separateness remain intact, the underlying relationships to which they are applied are changing.

Major international companies also recognize that it is dangerous for foreign subsidiaries to use different ethical standards from those used by the parent company. Bribery by foreign subsidiaries can create severe political and public relations problems for the parent company, even though the parent was not involved and has no legal responsibility. The corporate governance movement is encouraging boards of directors of parent companies to assure responsible management of the entire corporate system, including subsidiaries.

Ill. Suggested Objectives and Priorities

A. Focus on Parent Companies,

The principal objective should be to assure that OECD-based parent companies do not sanction bribery by their foreign subsidiaries. Failure to bar the use of foreign subsidiaries as intermediaries would create a dangerous loophole for evading the Convention. This objective is legally and practically achievable.

• Article 1, paragraph 2, of the Convention provides a clear basis for controlling bribe payments by foreign subsidiaries where there has been authorization or complicity by the parent company.

• In view of the trend toward closer integration between parent companies and subsidiaries, parent company involvement is increasing, particularly in major procurement projects. Large bribes for such projects are unlikely to be paid by foreign subsidiaries without parental knowledge or involvement.

• Focusing on OECD-based parent companies would avoid objections regarding extraterritorial applications of the Convention which are likely to be raised by efforts to curb independent acts of bribery by foreign subsidiaries not based in OECD states.

B. Independent Acts of bribery by Foreign Subsidiaries,

Independent acts of bribery by foreign subsidiaries in non-OECD countries are considerably more difficult to deal with under the Convention. Several ways of addressing them should be considered:

• Parent companies should be encouraged to apply corporate anti-bribery policies and transparent accounting practices to their subsidiaries.

• Parent companies should also be encouraged to include anti-bribery provisions in joint-venture agreements.

• Signatories should be encouraged to apply nationality jurisdiction so that their nationals serving as directors, officers or employees of foreign subsidiaries would be subject to prosecution.

• Additional countries should be encouraged to adhere to the Convention. The OECD's outreach program is pursuing this objective.

• The OECD should use its influence with other international organizations to promote more effective enforcement of anti-bribery laws in non-OECD countries. As the leader of the effort to curb foreign bribery by industrialized countries, the OECD is well positioned to ask others to do their share. Moreover, the extensive expertise developed by the OECD Working Group would be extremely useful to other agencies. Joint workshops and other forms of technical assistance to organizations such as the WTO, the OAS and APEC would be particularly helpful.

C. Creating a Supportive Environment,

The establishment and enforcement of consistent rules governing foreign subsidiaries by all signatories is essential to create an environment in which companies will be motivated to comply voluntarily. Most governments will be reluctant to apply stricter rules to their companies than are applied to their competitors. Similarly, companies will be reluctant to curb their foreign subsidiaries if the subsidiaries of their competitors are not constrained.

There is increasing recognition by business leaders around the world that consistent rules prohibiting foreign bribery are an essential element of a properly functioning global economy. They recognize from their experience in managing their own companies that failing to control the practices of foreign subsidiaries would be dangerous and irresponsible. The application of consistent rules would draw broad business support.

IV. Recommended Action Program

We suggest that consideration be given to the following recommendations. They are consistent with evolving trends in corporate practice and do not require major changes in accepted legal concepts or in the terms of the Convention. They would effectively deter the use of foreign subsidiaries to pay bribes on behalf of parent companies. They would also help to curb independent acts of bribery by foreign subsidiaries in non-OECD countries to the extent that this can practically be done within the scope of the OECD.

A. Consistent and Effective Application of Complicity and Authorization

Because Article 1, paragraph 2, provides the principal legal basis for preventing parent companies from using their foreign subsidiaries as conduits for bribing foreign officials, it is important that its requirement--that each party "take any measures necessary to establish that complicity in, including incitement, aiding and abetting, or authorization of an act of bribery of a foreign public official shall be a criminal offence"--will be effectively and consistently implemented and enforced. The OECD monitoring program should specifically check to make sure that this is done.

In addition, we urge the Working Group to examine the critical issues presented by Article 1, paragraph 2, and develop guiding interpretations to promote consistent and effective application. Support for the Convention would be damaged if some countries used narrow interpretations of key terms, such as "authorization" and "complicity", while others used broad interpretations. The Working Group could make a major contribution developing guidelines which provide the business community with reasonable predictability and assurance that their competitors would operate under consistent rules. The sooner this can be done, the better.

Representatives of the business community, such as BIAC and the ICC, should asked to identify issues of general concern. Two possible examples, the term authorization" should not be applied narrowly to apply only where the board of director the parent company had specifically authorized a subsidiary to pay a bribe. Similarly, 'J term "complicity" should be clarified to reflect a practical knowledge standard.

B. Extension of Nationality Jurisdiction

All signatories of the Convention should be encouraged to apply nationality jurisdiction in cases of bribery of foreign officials. This would serve to cover nationals serving as directors, officers or employees of foreign subsidiaries. Countries which rely primarily on territorial jurisdiction, commonly apply nationality jurisdiction to matters of serious international concern, such as crimes against humanity. By its very nature bribery of foreign officials is an international crime. Extending nationality jurisdiction to cases ~ foreign bribery would represent appropriate recognition of the serious damage done b, international corruption. It would be an effective step, because with the increasing integration of parent company and subsidiary relationships in international trade, the management of foreign subsidiaries commonly includes nationals from the home country of the parent.

It is worth noting that the U.S. legislation implementing the Convention provides for the application of nationality jurisdiction. It passed the Senate unanimously on July 311 and is expected to be taken up by the House of Representatives in September.

C. Broad Application of Territorial Jurisdiction

Commentary 25 to the Convention provides that "the territorial basis for jurisdiction should be interpreted broadly so that an extensive physical connection to the bribery is not required." The OECD's monitoring program should make sure that national governments apply territorial jurisdiction broadly. The trend towards greater integration of parent company and subsidiary relationships in international trade makes narrow applications of territorial jurisdiction increasingly anachronistic. This is another area where the Working Group can make a useful contribution by developing interpretive guidelines to promote the development of effective, consistent and predictable rules for the global economy.

D. Promote Adoption of Corporate Compliance Programs by Parent Companies.

Parent companies based in OECD states should be encouraged to adopt corporate compliance programs, including codes of conduct and transparent accounting practices, designed to assure compliance with the prohibitions of the Convention. Such compliance programs should be applicable to the parent companies and to all controlled subsidiaries.

When the Convention enters into effect many companies can be expected to adopt' corporate compliance programs in their own best interests. That was the common practice of U.S. companies after the adoption of the FCPA. Parent companies are likely to apply their anti-bribery policies to their subsidiaries, for the reasons discussed in Sections Ill-C -above.

The principal subjects which corporate anti-bribery policies should cover are succinctly laid out in the Rules of Conduct published by the International Chamber of Commerce. The ICC Rules were developed by a committee, which included business executives, lawyers and scholars from over a dozen countries, chaired by Francois Vincke, the general counsel of Petrofina, the Belgian oil company. The process by which a company conducts its compliance program must be tailored to the organization structure and management practices of each company. There is extensive literature describing the key elements of compliance programs. The OECD should consider sponsoring a workshop in cooperation with the ICC.

Governments can encourage companies to adopt compliance programs by a variety of steps. One effective technique is to offer more lenient penalties to companies which adopt compliance programs, as is done in the sentencing guidelines followed by the U.S. court system. The objective should be to require companies to exercise reasonable diligence in implementing compliance programs. For example, parent companies should not be held responsible where employees of a subsidiary disobey the rules and pay bribes, notwithstanding a diligently conducted compliance program. On the other hand, corporate responsibility should apply where there is a corporate culture that encouraged or tolerated non-compliance.

Other ways to encourage the adoption of corporate compliance programs are to make their use a requirement for bidding on major government procurement projects and for obtaining financing and other forms of assistance from national and international agencies. The Working Group should discuss the use of such requirements with the OECD's Development Assistance Committee as well as with the World Bank and other multilateral financing institutions.

The argument is sometimes made that corporate compliance programs may be appropriate for large corporations, but would be unduly burdensome for smaller companies. This ignores the fact that the complexity of compliance programs will vary with the size and organization of the company. A small company selling one product line and using one or two foreign subsidiaries can have a very simple compliance program.

For a company in an OECD state to require foreign subsidiaries in non-OECD states to follow corporate compliance programs based on the Convention's prohibitions against foreign bribery should not raise objections alleging extraterritorial application of national laws of the parent company. The key distinction is that the prohibitions of the Convention represent the codification of international standards, not the law of a single state.

E. Private-Sector Consultation.

The OECD Working Group should consult closely with BIAC, TUAC, the ICC and Tl to assure that rules relating to foreign subsidiaries will be workable and will have widespread support. This is particularly desirable because self-regulation, through 1 corporate compliance programs, should play a key role in preventing the use of foreign subsidiaries to pay bribes.

Fritz Heimann
September 4, 1998

Mr. Heimann can be contacted as follows:
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Phone: 203-373-2086
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