In-House Counsel, Litigators

Inside Straight: Doing Business In Corrupt Places

How should a U.S. company conduct business in a country that's corrupt (or perceived as corrupt)? Very carefully, of course.

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Suppose you’re doing business in a country that is perceived as being corrupt. For example, Myanmar, North Korea, and Somalia take the bottom three slots in the 2010 Corruption Perceptions Index.

Okay, let me rephrase that: Suppose you’re doing business in a country where it’s actually lawful to do business, but the country is perceived as being corrupt. Cambodia or Zimbabwe might fit the bill. (On reflection, it strikes me that my own company may actually do business in those two places. If we do, then I, naturally, love the judicial systems in Cambodia and Zimbabwe. If my company is ever in court in one of those places, please don’t hold this column against us. It’s just that terribly unfair perception of corruption that gives you guys a bad name.)

How do you conduct business there?

Very carefully, of course.

As a matter of compliance, your company must implement policies that forbid payments that are customary in the corrupt place, but forbidden by U.S. law. And your company must enforce those policies, perhaps by having a regional group that approves third parties with whom you do business or otherwise strives to comply with the law.

But that’s the front end. What do you do at the back end, if you find yourself in a dispute in the corrupt place?

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Litigation is unpredictable and occasionally frustrating even in places that have fine reputations for honesty, such as New Zealand, Denmark, and Finland. (The United States is number 24 on the Corruption Perception Index, just behind Chile and Qatar.) Litigation can be a disaster in corrupt places.

Suppose you’re smart: You enter an arbitration agreement, so you keep yourself out of the local courts. That’s smart, but not smart enough; you’ll still be in the locality. You pick an arbiter; the other side picks an arbiter; those two agree on a neutral. The neutral inexplicably starts to act a little funny as the proceedings move on, either because of actual corruption or the arbiter’s fear that he will somehow suffer if he rules in favor of the wrong party. When things turn south in arbitration, you will, in some countries, be entitled to an appeal (on the merits, not just to complain about the arbitral process) in a court. But the judicial system may be unlikely to provide much justice, because, for example, some local political figure may call a judge to suggest how he should rule.

You have to be smarter: If you’re doing business in a place that is perceived as being corrupt, have disputes decided somewhere else. Specify that the law of some other country governs your contract (so long as local law permits this). Provide that your arbitration hearing will be conducted somewhere outside of the corrupt place, which will give you a shot at a fair hearing. Specify, if you can, that the arbiters cannot be residents of the corrupt country. If you’re going to permit an appeal, specify the fair, trustworthy tribunal to which the appeal must be taken — not a court in the corrupt country. In short, get out of Dodge.

My proposal may be hard to implement. Much business is done without written contracts, and it takes a contract to impose an arbitration clause. Moreover, local companies may not easily agree that their disputes will be decided by arbitration panels in other countries. Even if the parties are willing, the procedures I’m contemplating can pose challenges of their own.

On the other hand, the alternatives aren’t much better. You could simply stop doing business in the corrupt country, which costs your company revenue and deprives the local citizens of whatever goods or services your company might otherwise provide. Or you could do business in the country and hope that you never end up in court. As sure as you’re reading this, however, your local folks will land a great piece of business with some big, state-owned enterprise. That politically-connected outfit will then either refuse to pay you or will accuse you of wrongdoing. When you’re waiting for the court to issue its judgment, you won’t exactly be feeling comfortable.

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Is there a solution to this? None that’s easy and practical. On the other hand, don’t say you weren’t warned.

Mark Herrmann is the Vice President and Chief Counsel – Litigation at Aon, the world’s leading provider of risk management services, insurance and reinsurance brokerage, and human capital and management consulting. He is the author of The Curmudgeon’s Guide to Practicing Law (affiliate link). You can reach him by email at inhouse@abovethelaw.com.

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