Baltic Briefing Paper: Shipping and the problem of facilitation payments

In an ideal world, bribery and corruption would not exist – and in shipping, no one would demand a facilitation payment in exchange for a service a person has a legitimate right to anyway.  Even if you had received such a demand, you would be able to report it to the authorities without fear of incrimination.  The authorities in the jurisdiction where the offence was committed would then promptly catch the perpetrator and prosecute them for depriving (or interfering with) the person with legitimate rights.

This is precisely what happened in 2014 in the case of a rogue surveyor at Vopak Terminal Banyan Jetty in Singapore[1].  The Bangladeshi surveyor, who worked for Pac Marine, had identified some spurious high-risk defects, which would have prevented the Singapore-registered ship from entering the terminal until they had been rectified.  The Russian master argued that they were in fact minor defects would could easily be fixed and not prevent entry into the terminal.  On asking how this could be resolved, the surveyor confirmed that money would make the high-risk defects disappear from the inspection report.  This was paid and the defects did indeed “disappear” from the report.  The master reported the incident to the Singaporean authorities.  A sting was organised where the same ship arrived a couple of months later to the same terminal and was faced with the same surveyor and demand – but this time with actual high-risk defects that should have been reported. They were not reported and the surveyor was duly arrested, charged and sentenced.

Unfortunately we do not live in an ideal world. The international nature of shipping and the consequent exposure it has to such demands is well known.  And because of the lack of progress in combatting the demand for bribes, the OECD Convention[2] also places the blame on payers of such bribes.  Many jurisdictions, including the UK, extrapolate this principle to payers of facilitation payments, even where it is the result of depriving a person with legitimate rights in exchange for the bribe.  The UK’s Bribery Act 2010 goes even further to criminalise UK companies where facilitation payments have been made outside of the UK by those with no UK connections, unless the UK company in question has “adequate procedures” to prevent such bribery. 

Already there has been judicial comment on such demands in shipping, within the English High Court judgment of Venetico Marine SA v International General Insurance Company Limited and Nineteen Others [2013] EWHC 3644 (Comm).  The case concerned claims against the hull policy for an actual or constructive total loss of a ship which had suffered damage on its voyage from Oman to India.  After the casualty, the underwriters engaged GL Noble Denton to inspect and report on the casualty.  There had been a question of whether the ship could have been towed to Mumbai to carry out underwater inspections.  The documents disclosed during the trial revealed that GL Noble Denton employees had discussed the possibility of “greasing the authorities” to allow this to happen. The judge took a dim view of the fact that GL Noble Denton employees had discussed the possibility of others paying bribes.  To his mind it raised questions about GL Noble Denton’s adequacy of its anti-corruption policies and procedures – even though no bribe had in fact been paid by either the shipowner or the underwriter.

In the meantime there is an increasing trend of inserting anti-corruption clauses into charterparties, as a result of more companies taking a zero-tolerance approach.  Concerns remain on the ability for charterers to terminate unfavourable charters by exploiting the vulnerability of shipping to demands for facilitation payments.  It may be that charterers need to take responsibility and share the burden with owners in facing such demands, and accept the consequent delays when demands are refused – and this should somehow be reflected within the commercial relationship.

More broadly, many more countries are taking an increasing interest in tackling corruption from both those who demand and those who pay.  Recently the Chinese Government conducted a crackdown, having probed into the practices of the China Shipping Group and COSCO and pulled up senior executives for deficient internal controls and inappropriate use of funds for personal gain. Elsewhere, those who had provided services to Petrobras have this year been drawn into the largest corruption scandal on record in Brazil.

In the background the OECD continues its work in applying pressure to those countries which have ratified the OECD Convention.  Even in the US, where there are limited exceptions for “facilitating payments” paid to foreign public officials, regulators are taking an ever narrowing view of their acceptability.  A case earlier this year in the US provided judicial confirmation of this narrowing view, and this should prompt companies subject to the US Foreign and Corrupt Practices Act of 1977 to review their policies and procedures for such payments.

With this in mind, those who wish to act ethically but continue to face demands for facilitation payments are in a difficult position, especially if their counterparts do not share the burden of resisting such demands.  This has led to the conclusion that for those affected, collective action is required as a tool to fight corruption.  The theory is that pressure from individuals acting together to challenge behaviour will yield more results than acting alone – especially where acceding to a demand gives a commercial advantage over someone who does not.  Anti-corruption collective action initiatives aim to get companies together to promote good corporate practice, resist collectively, and engage with others such as government bodies and international institutions.  It can be seen that getting involved enhances those businesses’ reputations, and allows them to demonstrate a public commitment to instigate change from those who demand such payments.

The Maritime Anti-Corruption Network (MACN) was founded in 2011 with this in mind.  Its membership has since grown to over 50 members comprised of shipowners, cargo owners and maritime service providers.  As well as sharing best practice, it aims to conduct projects to target high corruption areas where ships trade, and has started in places where it appears that the government of the afflicted jurisdiction is willing to cooperate.  After much work with the United Nations Development Programme (UNDP) it launched a joint pilot project in Nigeria.  MACN intends to use its study, which outlines the systemic problems with corruption, to engage with the Nigerian government and donor partners to develop (and ultimately implement) a comprehensive plan to address corruption at ports.

Collective action initiatives like MACN can only go so far in tackling the demand side of facilitation payments, especially where demands for them are symptomatic of wider and systemic corruption. Ultimately a consistent and long term effort to stamp out corruption generally must come from those countries afflicted by it, possibly with support from other governments and stakeholders who have an economic interest in ensuring high standards of conduct.  China’s recent efforts are encouraging, and in the long term it would be better for shipping and trade if these demands were eradicated – or at least dealt with swiftly, as seen in the case of Singapore.

[1] Public Prosecutor v Syed Mostofa Romel [2015] SGHC 117

[2] OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, 1997