Business project 5

Corruption: Cash for Favors

A common practice worldwide is for government favors to be sought in exchange for surreptitious payments in cash. Corruption is not merely a problem in developing countries. In recent years, American, German and Italian companies have been implicated in corruption scandals, both domestic and international.

Source: Stockmonkeys.com

When a large corporation decides to enter a foreign market, it must usually secure a number of licenses, permits, registrations, or other government approvals. Certain types of business may be even be illegal unless the corporation is first able to obtain a change or adjustment to the nation’s laws or regulations. Since the power to authorize the foreign corporation’s activities is vested in the hands of local politicians and officials, and since corporations have access to large financial resources, it should not be surprising that some corporate executives resort to financial incentives to influence foreign officials. While certain financial incentives, such as promises to invest in local infrastructure, may be legitimate, any form of direct payment to the foreign official that is intended to influence that official’s public decisions will cross the line into illegal subornation, also commonly referred to as bribery.

Bribery is one of the archetypal examples of a corporation engaged in unethical behavior. A number of problems can be attributed to business bribery. First, it is obviously illegal—all countries have laws that prohibit the bribery of government officials—so the foreign company engaging in bribery exposes its directors, executives, and employees to grave legal risks. Second, the rules and regulations that are circumvented by bribery often have a legitimate public purpose, so the corporation may be subverting local social interests or harming local competitors. Third, the giving of bribes may foment a culture of corruption in the foreign country, which can prove difficult to eradicate. Fourth, in light of laws such as the US Foreign Corrupt Practices Act (FCPA) and the Organization of Economic Cooperation and Development (OECD) Convention on Anti-Bribery (discussed in greater detail below), bribery is illegal not only in the target country, but also in the corporation’s home country. Fifth, a corporation that is formally accused or convicted of illicit behavior may suffer a serious public relations backlash.

Despite these considerable disincentives, experts report that worldwide business corruption shows little signs of abating. Transparency International (TI), a leading anticorruption organization based in Berlin, estimates that one in four people worldwide paid a bribe in 2009. It appears that the total number of bribes continues to increase annually. The World Economic Forum calculated the cost of corruption in 2011 at more than five percent of global GDP (US$ 2.6 trillion) with over $1 trillion paid in bribes each year (ICC, 2011).

Governments and intergovernmental organizations have redoubled their efforts to combat the perceived increase in international business corruption. Globalization, which accelerated in the final decades of the twentieth century, is often cited by specialists as contributing to the spread of corruption. Corporations and businesses in every nation have become increasingly dependent on global networks of suppliers, partners, customers, and governments. The increased interaction between parties in different countries has multiplied the opportunities for parties to seek advantage from illicit incentives and payoffs. Although outright bribery is clearly unethical and illegal, there is great deal of behavior that falls into a gray zone that can be difficult to analyze according to a single global standard. When does a business gift become a bribe? What level of business entertainment is right or wrong? Over the past two decades, governments and regulators have sought to clearly define the types of behavior that are considered unethical and illegal.

Another factor that has heightened the sense of urgency among regulators is the magnitude of recent cases of corruption (several of which are described in greater detail below). The cost to shareholders as well as stakeholders and society has proven enormous. Governments and international organizations have ramped up their enforcement of anticorruption laws and sought increasingly severe penalties, sometimes imposing fines amounting to hundreds of millions of dollars. Largely as a result of these efforts, most multinational corporations have developed internal policies to ensure compliance with anticorruption legislation. However, as we will see in the case study featured in this chapter, such compliance also raises complex ethical dilemmas for corporations. It remains difficult to regulate ethical behavior when social and cultural norms vary significantly from country to country. Acts that are considered unethical in one country may represent a traditional way of doing business in another. One legal scholar explains the difference as follows: “A common misconception, held in both Western and developing countries, and even among many researchers on corruption, is to confuse what is corrupt with what is legal. Laws are defined by values, as are ethical norms, but the two are not equivalent” (Eiher, 2009).

This resource will explore the impact, reasonableness, and the effectiveness of anticorruption laws and corporate compliance rules. Finally, we will discuss a case in which the line between corruption and traditional business practices remains difficult to ascertain.

Recent cases of corruption in international business have attracted considerable media attention. Paying a traffic officer to ignore a minor traffic violation is unremarkable; paying a senior government official a secret bribe of millions of dollars to get a large contract signed is a different matter.

While virtually all multinational companies have adopted anticorruption policies, it is not clear how often these policies are fully implemented and internalized as part of the corporate culture. The emphasis on anticorruption policies is relatively recent and, even in the most responsible organizations, such policies are still works in progress. However, there is some evidence that the implementation is not always as effective as might be hoped.

For example, a study by Control Risks (2013) and the Economist magazine’s Intelligence Unit showed that while most companies acknowledge the need to combat bribery and corruption, many are complacent and unprepared to deal with scandals inside their own organizations. The review of global attitudes on corruption surveyed more than 300 senior lawyers and compliance heads in April 2013. It painted a disturbing picture. The authors concluded that “too many companies still fall short of best practices in their anticorruption compliance programs.” Despite ranking anticorruption high on most corporate agendas, the report noted a “danger of complacency” among companies, and as a result, “the risk of a company finding itself in the middle of a corruption-based investigation remains real” (Tedesco, 2013).

Transparency International’s Corruption Perceptions Index (CPI) ranks countries and territories according to their perceived levels of public sector corruption. It is an aggregate indicator that combines different sources of information about corruption, making it possible to compare countries. Perceptions are used because corruption is generally a hidden activity that is difficult to measure. The CPI confirms that corruption remains a problem worldwide and takes place even in the wealthiest countries (Transparency International, 2013). Research in 2012 by the Austrian economist Friedrich Schneider placed the annual loss to the German economy alone at €250 billion (“Corruption Will Cost Germany,” 2012).

The Dow Jones State of Anti-Corruption Survey in 2011, which surveyed more than 300 companies worldwide, found that more than 55 percent of companies have found cause to reconsider working with certain global business partners due to concerns about possible violation of anticorruption regulations. Additionally, the biannual survey indicated than more than 40 percent of companies believe they have lost business to competitors who won contracts unethically, an increase from only 10 percent in the 2009 study. “Strict liability provisions in legislation like the UK Bribery Act make businesses responsible for the activities of their agents and partners overseas, and this is having a direct impact on the occurrence of new business partnerships between firms,” said Rupert de Ruig, managing director of Risk and Compliance, Dow Jones (Dow Jones Risk and Compliance, 2011).

Global social costs from corruption include the reluctance of investors to commit to projects in developing economies, inhibited growth of businesses due to syphoning off of revenues for bribes, and diversion of funds from food, medical, and educational aid programs. In addition, it seems likely that corruption hampers the development of executive talent in developing nations, given that frustrated local executives may seek to emigrate to countries where corruption is less prevalent. Consider for example, the long term impact of the necessity of paying a bribe to get running water in a household in rural India (Campion, 2011). This type of corruption can effectively exclude the poor from access to vital public services. Economist Daniel Kaufmann (1997) of the Harvard Institute of International Development cites public sector corruption as the most severe obstacle to development in developing and post-communist countries.

The number and magnitude of recent corruption cases prosecuted by government authorities is disconcerting. Moreover, these widely-publicized cases may represent only the tip of the iceberg: regulatory bodies focus principally on the bribery of public officials so that other forms of business corruption are under-reported. As of 2013, the ten largest cases successfully tried pursuant to the FCPA are listed below (in order of magnitude of fines) (Cassin, 2013):

1. Siemens (Germany)—$800 million in 2008

2. KBR/Halliburton (USA)—$579 million in 2009

3. BAE (UK)—$400 million in 2010

4. Total SA (France)—$398 million in 2013

5. Snamprogetti Netherlands BV/ENI SpA (Holland/Italy)—$365 million in 2010

6. Technip SA (France)—$338 million in 2010

7. JGC Corporation (Japan)—$218.8 million in 2011

8. Daimler AG (Germany)—$185 million in 2010

9. Alcatel-Lucent (France)—$137 million in 2010

10. Magyar Telekom/Deutsche Telekom (Hungary/Germany)—$95 million in 2011

There are other recent examples of large-scale corruption in international business, described in greater depth in the sections below.

According to a report issued by the Mexican Employers Association in 2011, companies operating in Mexico spend more than 10 percent of their revenue on corrupt acts. One of the most well-known cases was the Walmart scandal that was brought to light in September 2005 and resulted in the company’s stock value dropping by as much as $4.5 billion. Evidence unearthed by internal and external investigations revealed a widespread use of bribes, alleged to total over $24 million. The bribes were paid to facilitate the construction of Walmart stores throughout Mexico. The country is a huge market for Walmart—one in every five Walmart stores is in Mexico. As of October 2014, the investigation continued, having implicated Walmart management at the most senior levels of complicity or awareness.

In September 2013, China’s Xinhua news agency reported that a police investigation into bribes paid by drug manufacturer GlaxoSmithKline (GSK) indicated that the bribes were organized and paid by GSK China and not by individuals operating on their own prerogative as had been reported by the company initially. Police also alleged that the corporate parent merely went through the motions of an internal audit process, indicating a knowledge and acceptance of the bribery. This very recent case suggests that the Chinese government’s widely publicized arrests and convictions for bribery have not yet served as a sufficient deterrent to corrupt practices by foreign corporations.

In January 2010 Alcatel agreed to pay Costa Rica US $10 million in reparations for social damage caused by Alcatel’s payment of US$2.5 million in bribes to get a contract to provide mobile phone services in that country. This case is notable for its application of the concept of social damage and the resulting order of compensation to the citizens of Costa Rica.

The first major international anticorruption law was the United States’ Foreign Corrupt Practices Act , adopted in 1977 (DOJ, 2015). The FCPA criminalized bribery of foreign public officials by American business enterprises. Initially, the FCPA was not well received. Few other countries followed suit, and US companies complained that the FCPA shut them out of the competition for billions of dollars’ worth of overseas business contracts. Slowly, however, the push for concerted anticorruption measures gathered momentum, and intergovernmental institutions such as the OECD, the African Union, and the United Nations eventually adopted anticorruption conventions. Further support for a global anticorruption agenda was provided by the lending institutions such as the World Bank, by NGOs such as Transparency International, and by the rapidly evolving CSR movement. Notable among these efforts was the Communist Party of China’s promulgation of a code of ethics to fight the widespread corruption within the Communist Party of China (Sommerville, 2010).

The FCPA applies only to bribes paid (or offered) to foreign government officials to obtain or retain business or to develop an unfair competitive advantage. The concepts of bribe and foreign government official can be interpreted broadly. While companies and executives charged with FCPA violations have often sought to characterize their payments as business “gifts,” this has not shielded them from liability when there was evidence that the payments were intended as a means of obtaining illicit objectives. However, where payments have been characterized as “facilitation” or “lubrication” payments, meaning that they merely created an incentive for an official to promptly execute legal actions, such as mandatory customs inspections, the payments have been allowed. In numerous countries, the state owns all or part of commercial enterprises so that a great number of business executives could be classified as foreign government officials.

In 1997, the OECD established legally binding standards for defining bribery in international business transactions. Similar to the FCPA, the OECD Anti-Bribery Convention focuses on the bribery of public officials. Like the FCPA, the OECD also potentially creates the opportunity for companies to circumvent the regulations by hiring consultants or agents. Notably excluded from the scope of the OECD Convention is a prohibition against bribing private parties. Despite such loopholes, the OECD Convention was an important step in the right direction. By 2012, forty-three countries had ratified the agreement and begun its implementation.

Prior to the expansion of international trade in the nineteenth and twentieth centuries, most commerce was local and followed traditional norms and ethical standards. With the expansion of international trade, however, businesses began to operate across cultural and linguistic boundaries. Misunderstandings and transgressions, both intended and unintended, became commonplace. To some extent, perceptions of corruption may derive from cultural differences, because behavior that is considered corrupt in one society may represent a normal business practice in another.

One example can be found in the Chinese concept of guanxi, which refers to the reciprocal obligations and benefits expected from a network of personal connections. A person with a powerful level of guanxi is considered a preferred business partner because such a person can utilize connections to obtain business or government approvals. Guanxi can derive from extended family, school friends and alumni, work colleagues, members of common clubs or organizations, and business associates. Chinese businesspeople seek to cultivate an intricate and extensive web of lifelong guanxi relationships. The key expectation in guanxi networks is reciprocity in the granting of favors; the failure to reciprocate is considered a breach of trust. The greater the favor asked or granted, the greater the favor owed. Guanxi thus generates a cycle of favors over time. Among the questionable practices facilitated by guanxi are certain types of corrupt favoritism—such as nepotism (favoring family members) and cronyism (favoring friends). In fact, relatively high levels of nepotism or cronyism are accepted and tolerated in many non-Western cultures, not only in China. As applied to business transactions, guanxi opens doors and creates opportunities for business relationships and dealings. In itself, guanxi is not corrupt. However, strong guanxi connections and obligations can serve as an incentive to corruption.

Many traditional business practices around the world are rooted in concepts analogous to guanxi, as in the practice of using business gifts or personal connections to speed up transactions both large and small. Russians use the term blat to refer to the ability to get things done through personal networks or contacts with people of influence. The Japanese have adapted the English word connections to coin a term of their own, konne. In Pakistan, the use of personal sifarish (“recommendation”) refers to the ability to make contact with the right official on the most favorable terms. The French expression for bribe is pot de vin (“jug of wine”), which implies friendly relations. In Urdu and Hindi, petty bribes are known as chai pani (“tea water”). In West Africa the term is dash. The English colloquial term grease and the German schmiergeld (“grease money”) imply a lubrication or easing of resistance to the transaction. In Mozambique, one term for corruption is cabritismo or “goatism,” which is derived from the saying “a goat eats where it is tethered.”

The universality of such terms suggests that various forms of business bribery and graft are prevalent worldwide. However, specific business activities that are considered acceptable in some societies may be considered taboo in others. Thus, the American practice of lobbying legislators and governmental agencies would be considered an illegal form of buying influence in many other countries. In some societies, gift giving to chiefs, elders, or religious leaders is considered not only acceptable and appropriate, but even a mandatory traditional expression of respect and obligation.

A survey conducted by KPMG in the United Kingdom found that while 80 percent of respondents agreed that the UK Anti-Corruption Act was an admirable attempt to address the problem of corruption, 58 percent believed that the act was impractical and ignored the reality that bribery is an accepted way of doing business in many countries. Other similar studies have revealed widespread international criticism of US anticorruption law as hypocritical in light of the American business practice of offering gifts to potential customers or clients (e.g., trips to conferences, golf outings, tickets to entertainment and sporting events, use of luxury facilities such as spas, condos, and country clubs, etc.).

Campion, M. J. (2011, June 11). Bribery in India: a website for whistleblowers. BBC News. Retrieved from http://www.bbc.co.uk/news/world-south-asia-13616123

Cassin, R. (2013, May 29). France’s total SA cracks our top 10 list. FCPA Blog. Retrieved from http://www.fcpablog.com/blog/2013/5/29/frances-total-sa-cracks-our-top-10-list.html#

Control Risks. (2013). International Business Attitudes to Corruption: Survey 2013. Retrieved from http://www.controlrisks.com/en/services/integrity-risk/international-business-attitudes-to-coruption.

Corruption ‘will cost Germany €250 billion. (2012, March 16). The Local. Retrieved from http://www.thelocal.de/20120316/41373

DOJ (US Department of Justice). 2015. A Resource Guide to the U.S. Foreign Corrupt Practices Act. Retrieved from http://www.justice.gov/criminal/fraud/fcpa/guide.pdf

Dow Jones Risk and Compliance. (2011, March 31). Dow Jones State of Anti-Corruption Compliance Survey. Retrieved from http://www.dowjones.com/pressroom/SMPRs/DJACCSurvey2011.html

Eiher, S. (2009). Corruption in international business: The challenge of cultural and legal diversity. Abingdon, UK: Routledge.

ICC (International Chamber of Commerce). (2011). Clean business is good business. Paris: ICC, Transparency International, the United Nations Global Compact, and the World Economic Forum Partnering Against Corruption Initiative (PACI).

Kaufmann, D. (1997). Corruption: the facts. Foreign Policy, 114–131. Retrieved from http://info.worldbank.org/etools/docs/library/18143/fp_summer97.pdf.

Sommerville, Q. (2010, February 24). China communists get new anti-corruption ethics code. BBC News. Retrieved from http://news.bbc.co.uk/2/hi/asia-pacific/8533410.stm.

Tedesco, T. (2013, July 15). Anti-corruption high on corporate agenda, low in practise: UK study. Financial Post. Retrieved from http://business.financialpost.com/2013/07/15/anti-corruption-high-on-corporate-agenda-low-in-practise-u-k-study/.

Transparency International. (2013). Corruption Perceptions Index 2013. Retrieved from http://www.transparency.org/cpi2013/results.