Caught in civil and criminal probes, aluminum giant Alcoa and its subsidiaries agreed to pay $384 million in penalties to U.S. authorities, after an Alcoa unit admitted paying millions in bribes to secure business in the small Arabian Gulf country of Bahrain.

The admission is just one of several examples of corruption cases that continue to dog the global extractives industries. An untapped iron ore mine in Guinea has already produced a wide-ranging bribery investigation, while anti-corruption authorities in the U.K. are investigating London-based Eurasian Natural Resources about alleged bribes to win business in Africa and Kazakhstan. Last year, Anglo-Australian mining giant BHP Billiton came under scrutiny from U.S. authorities for alleged corporate gifts to Chinese government officials.

In a Transparency International ranking of industries likeliest to pay bribes to foreign officials, mining and oil and gas were among sectors at highest risk. As a result, legislators around the world have singled out the extractives industries for tougher scrutiny: In the U.S., Congress passed a law nearly four years ago to force oil, gas and mining companies to disclose payments to foreign governments, and the U.S. Securities and Exchange Commission (SEC) is now working on how to enact the regulations.

Tougher anti-corruption measures and authorities intensely pursuing investigations into foreign payoffs are just more reasons why dealing in bribes is bad business, Wharton experts note, adding there are steps multinational companies can take to avoid payoffs but still remain competitive overseas.

Chief among them are instilling a corporate culture that doesn’t tolerate corruption and responding to dubious requests with alternative, legitimate suggestions to provide support, says Wharton management professor Witold Henisz, author of the upcoming book Corporate Diplomacy: Building Reputations and Relationships with External Stakeholders. “There are other ways to contribute, by providing jobs for the local population, enabling technology transfers and offering solutions to local challenges, instead of lining pockets,” he notes.

Philip M. Nichols, a Wharton professor of legal studies and business ethics, says that the popular assumption that cultures in resource-rich developing countries support corruption is wrong, and that global corruption indexes are about perceptions of the performance of governments, not cultural norms. The Alcoa case, he notes, does not mean international companies doing business in the Arabian Gulf face a greater risk of paying bribes than anywhere else.

“Look at what Kuwait and the United Arab Emirates are doing; they recognize that corruption is damaging to their efforts to integrate more closely to the global economy,” Nichols points out. “There’s no emir sitting on a golden throne saying, ‘Gimme, gimme, gimme.'”

A Bad Practice

For two decades, the state-owned Aluminum Bahrain BSC, known as Alba, was among Alcoa’s biggest raw material customers. The transactions with Alba were conducted through Alcoa’s raw material unit, Alcoa World Alumina LLC.

According to the SEC, when the Alcoa unit first started business with Alba in 1989, it hired a consultant at the request of Alba officials in charge of the company’s contracting. That consultant, according to the securities authority, imposed a $400 million mark-up on the sale of raw materials to Alba, and in turn paid bribes worth tens of millions of dollars to Bahraini government officials. The Wall Street Journal reports that in-house Alcoa attorneys raised issue over the consultant arrangement only as late as 1997.

The arrangement came to light when Alba sued Alcoa in 2008 for overcharges tied to bribery, and the U.S. authorities began their investigations. Last year, Alcoa agreed to pay the Bahraini aluminum company $85 million and supply it with raw material for an extended period, a settlement valued at $447 million.

The $384 million Alcoa and its subsidiaries agreed to pay for violating the Foreign Corrupt Practices Act (FCPA) includes a $209 million criminal fine, a disgorgement of $161 million to the SEC and an additional forfeiture of $14 million.

In a statement, Alcoa officials said that the authorities never claimed anyone in the company had ever “knowingly engaged in the conduct at issue.” Nichols, though, says it was a clear case of mismanagement. “Their internal controls weren’t very good, and it caught up with them,” he notes. “It was a bad practice, and it yielded costly results.”

Shifting Attention

Announcing the settlement with Alcoa, Kara N. Brockmeyer, chief of the SEC enforcement division’s FCPA Unit, stated that “the extractive industries have historically been exposed to a high risk of corruption, and those risks are as real today as when the FCPA was first enacted.”

Recently that bad rap for oil, gas and mining has translated into stricter laws and tougher sanctions around the world. U.S. lawmakers established a disclosure law requiring these industries to reveal how much they pay foreign governments for rights to natural resources, although it is held up before the SEC, as industry lobbyists argue that it will make American companies less competitive. Similar disclosure laws were enacted in the European Union last year, and Canada is moving toward a mandatory disclosure framework for its extractive industries companies as well.

Companies in the industries bristle at the additional regulations, as a number state they already take their own measures to prevent and deal with corruption. In an earlier interview with Knowledge at Wharton, former Rio Tinto CEO Tom Albanese said the mining giant was among the original signatories to the Extractive Industries Transparency Initiative, an industry anti-corruption standard, and had “no allowance for facilitation funds in any country, anywhere.”

“There are other ways to contribute, by providing jobs, enabling technology transfers and offering solutions to local challenges.” –Witold Henisz

“We believe there should be full transparency of all payments between companies and governments, and they should be then subject to audit,” said Albanese, who recently was named CEO of Indian mining group Vedanta. “That’s part of our principles. Not all would believe in that, but that’s where we want to differentiate ourselves.”

Henisz, who has trained Rio Tinto executives on building good relationships with government officials and other stakeholders involved in the mining process, says that with the added regulatory pressure and scrutiny, international companies intent on avoiding corruption need to look for different ways of getting stakeholder support, and increase sustainable business contributions.

In a situation of being directly asked for payoffs, Henisz notes it is up to company officials to change the conversation and emphasize the relationship. “Shift the attention to bribes,” he suggests. “Say it is against corporate principles, and then ask, ‘What is it really that you want, what do you want the money for? What are your needs? We are your trusted partners. Can we support something more lasting?'”

It is important for companies to institute better controls and compliance practices before falling under scrutiny, Henisz says, noting that Rolls Royce, currently caught up in its own corruption scandal as U.K. investigators look into alleged bribes paid in China and Indonesia, implemented new transparency measures in March, including reinstating a whistleblower hotline.

Such examples, Nichols says, demonstrate that corruption can happen even in well-regarded, international companies. “In general, it’s the same answer as to why banks give a bad loan,” Nichols says. “Businesses make mistakes all the time.”

Staying Competitive

Nichols acknowledges that the constant lure of corruption is that it is easy. “It sometimes confers short-term benefits, and may help a business compete,” he says. “But there are always long-term costs.”

With governments in developing countries more ambivalent about whom to grant mining rights to, and competition for natural resources on a global scale increasingly coming from Chinese-backed state companies, Nichols agrees that companies in the metals industries face a tougher challenge to avoid seeking shortcuts.

“Bribery sometimes confers short-term benefits, and may help a business compete. But there are always long-term costs.” –Philip M. Nichols

But the issue of corruption has nothing to do with the culture of natural resource-rich developing countries, he adds. “There is no place in the world where corruption is part of the culture,” Nichols says, pointing to the recent protests of the Arab Spring, where popular anger was focused on perceived corruption in governments.

Globally, he notes, there has been a shift in attitudes against corruption, in government and corporations. The United Nations Global Compact recognized that corruption is one of the world’s greatest challenges, and anti-corruption is one of its 10 principles. Nichols credits an uptick in anti-corruption prosecutions around the world to the Organisation for Economic Co-operation and Development’s (OECD) Anti-Bribery Convention, which requires signatories to criminalize corruption. It now counts 40 countries as members. Separately, further pressure for scrutiny of the oil, gas and mining industries has come from Publish What You Pay, a global grassroots movement that includes 750 organizations, including Oxfam.

There are still kleptocracies in the world, Nichols says. But in the business world, he adds, there is awareness that allowing corruption means losing Western investors and regulatory penalties. Increased resistance of larger companies to corrupt demands makes it easier for smaller companies to resist. “Talk to managers in firms in those countries, they tell you, ‘We just say no,'” he says. “The big firms let smaller firms ride on their coattails…. Businesses that pay bribes are pretty weak anyway.”

Even the effects of state-sanctioned efforts by natural resource-hungry China are wearing thin, Henisz adds. “They may have taken shortcuts for a while, but we are learning it is not sustainable,” he notes. “We’ve seen a lot of pushback against their mining and gas interests in Africa. There is a feeling they have not contributed a lot beyond the fence.”

The counter to state-funded firms willing to take shortcuts, Henisz says, is for oil, gas and mining companies to demonstrate they are committed to working with foreign stakeholders, and are allies that will look beyond winning a project. “Managers have to ask themselves: Are they contributing to the betterment of the region over some time horizon?”