Investor alert: Bribery risks are rising

It's getting tougher for companies to get away with bribery these days. Shareholders are demanding greater transparency in business dealings. Governments are cracking down.

But that doesn't mean the practice is disappearing. As risky as the practice is, the temptation to grease the wheels of corporate deals with cash and other under-the-table gifts is growing as companies push further into underde-veloped nations and competition heats up. That means greater risk for investors in companies with international dealings.

"It's a reflection of the desire to expand into territories that are not highly regulated," says David Holley, senior managing director at Kroll Advisory Solutions, a risk-mitigation company based in New York. "There are opportunities in places where there are less stringent rules when it comes to [using bribes] to get things done."

Bribery can be costly, both in dollars and reputations, for companies that get caught. For Siemens, two years of investigations ended in 2008 when the company paid $1.6 billion to settle bribery charges brought by Germany and the United States in connection with a $1 billion contract to produce national identity cards for Argentina, among other international contracts. Siemens ended up forfeiting hundreds of millions in profits. Eight of its former executives face charges in the US.

The damage begins long before cases come to court. The US and Mexico, as well as Wal-Mart, are investigating allegations that the retailing giant's Mexican unit paid millions of dollars in bribes to get building permits and other favors. Such investigations consume company resources, spark shareholder lawsuits, and create a public-relations mess.

"Wal-Mart is a good corporate citizen … and yet look at the damage to its reputation," says Karen Egger, senior program manager for Transparency International, a nonprofit anticorruption group based in Berlin. "[We hope] that will be a good lesson."

Multinational corporations are making progress but need to do more to battle corruption, a new Transparency International report finds. And the risks of bribery are rising. Half of the 139 multinationals Kroll surveyed in late 2011 and early 2012 said their risk exposure would go up in coming years; only 8 percent expected it to fall.

Although bribery is risky, refusing to bribe someone carries risks, too. In developing nations, locals often expect compensation for moving things along. Payment to corrupt government officials can open doors to significant deals, expedited permitting, and speedy access to essential infrastructure such as ports.

1 | 2

Next