Economic policies, trade regulatory controls and cultural changes are working together to withstand the pressures of corruption.
Western governments in particular, seeking to root out corruption, have compelled company boards to take account of financial and reputational penalties, which may far outweigh the value of a business deal.
Yet, although Western companies can no longer regard bribery as ‘a cost of doing business’, those with global interests still face decisions which bring their legal and ethical standing into question – and they still face huge disadvantages against competitors – in jurisdictions where regulations are not enforced.
Take, for example, a genuine scenario faced by executives in a global corporation operating in the developing world. A local political leader demands payment to help settle a labour dispute that he has engineered. He implies that if the corporation refuses, the outcome could be unpredictable and bad for business. Eventually, he agrees to accept a payment to a school for orphaned children that he runs. Would you pay?
Some of the world’s most admired and well-managed corporations — all with codes of conduct, written policies, and seemingly tight controls — have grappled with these sorts of dilemmas, especially in the developing world, for years. But nowadays corporate exposure to bribery and fraud is rising up the boardroom agenda driven by two factors.
The first is the greater exposure of corporations to growth opportunities in emerging markets which have a history of corruption. The second is rising government backlash against corporate wrongdoing in both developed and developing markets.
In China, for example, the government appears increasingly determined to blame and shame corrupt officials as it roots out the long-standing culture of backhanders (although political grievances can be the motivation); in India, an important new law has been enacted to curb corrupt politicians, ministers and bureaucrats.
In Turkey, protesters against corruption have taken to the streets. In Brazil, senior political figures have been jailed.
Governments in countries such as the US, Germany and the UK are strengthening and enforcing their own anti-corruption and anti-bribery laws more vigorously, notably the US Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act. These efforts make companies increasingly liable not just for the conduct of their employees but also for the actions of their intermediaries, such as consultants, agents and joint-venture partners.
The toughest corruption issues for multinationals, regardless of their country of origin, are rarely the big-ticket scandals and scams that make headlines. Rather, as in the example above, executives are faced with subtler, but more pervasive, forms of fraud and corruption, such as pressures for payments on routine transactions.
These ‘quiet killers’ of ethical business practices are what really make it difficult for international executives to win business and do business profitably, while still ‘doing the right thing’. So boards are increasingly looking to protect themselves, and their corporate reputations, by intervening at a level beyond policies and controls and building a culture of ethics and compliance.
What constitutes corruption?
Companies routinely get into trouble when managers make payments to win a business contract, gain regulatory approval of a product, reduce their taxes, or avoid customs duties. In some jurisdictions laws are in place to prohibit managers from offering anything of value to a government official, political party, or party official with the intent to influence that person or secure an improper advantage in obtaining or retaining business.
But, in practice, managers seldom make payments directly. Instead, payments usually involve agents or dealers, tapping into unaccounted pools of cash, sponsoring foreign travel, providing extravagant gifts or entertainment, and making charitable contributions to non-governmental organisations recommended by government officials and politicians.
A bigger problem for companies is the demand for small payments to facilitate routine transactions and services. ‘Speed money’ is a payment for enticing an official to do something faster.
Many companies encounter demands for speed money, especially from government officials, but also increasingly from employees in the private sector — for example, for clearing shipments, getting permits or licences, or registering land deals. For some businesses starting a venture, every step is paved with ‘red tape’ and demands for ‘grease payments’.
Rogue bureaucrats in certain developing countries sometimes seek to extract money by making credible threats against a business, or the lives of its executives. Some companies find it easier to pay up than to run the risk of being held hostage.
Increasingly, the biggest corruption threat facing companies is the risk that their own employees may be fraudulent. Causes include rising corporate pressures to deliver improved financial performance. Greed also drives an employee to succumb to kickbacks from vendors and agencies; commissions on real-estate transactions or machinery purchases; deposits in overseas bank accounts on successful acquisitions and sales of companies.
How do you avoid corruption?
Boards of directors must build their own internal regulatory controls and enable pressured executives to seek confidential support when faced with corruption pressures. But, beyond that, boards have an extended duty of care to their employees to develop, communicate and immerse themselves in a robust culture that is able to withstand pressures when they arise.
Too few companies pay adequate attention to compliance, mainly because businesses usually allocate budgets for audits and compliance reviews in proportion to revenues, and individual emerging markets often still contribute relatively little to revenues.
According to one fraud survey (Overcoming compliance fatigue: Reinforcing the commitment to ethical growth, 13th Global Survey, Ernst & Young, 2014) only 35% of companies have taken action against corrupt employees (perhaps for fear of corporate reputational damage), and one-fifth of respondents state that their companies do not have policies in place, or they are unaware of them.
In another survey (2011/2012 Global Fraud Report, Kroll) less than one-third of respondents say their foreign employees, vendors and managers are trained to be both familiar and compliant with the UK Bribery Act and the US FCPA. Cultural and geographic distance can further lead to overdependence on local management to the point of abdication.
Other questions that boards need to answer, says McKinsey & Company, are:
- Has your company instituted a formal code of conduct that every employee has to recertify annually?
- Is there mandatory training on compliance, with appropriate rules and regulations for customer-facing employees?
- What is the preapproval process for discounts, gifts, travel, entertainment expenditures and charitable contributions?
- How is the company’s code of conduct communicated to customers, dealers and partners?
- Do customers know the entertainment and travel reimbursement policies of the company?
- How does the company deal with a problem?
- Is investigation swift and punishment decisive and fair?
Companies, focused on head-count, have a tendency to underinvest in staffing compliance functions such as internal audit and legal. Managers who understand local laws and regulations, possess the skills to work with government officials, and can get things done without paying bribes, enable companies to avoid shortcuts that expose them to exploitation by the unscrupulous. Reputational damage and distraction to counteract it once in place usually costs much more than prevention.
“In hierarchical cultures, bribery and corruption depend largely on the tone from the top,” says one leading fraud expert. Global companies need to hold their country CEOs accountable for zero-tolerance compliance with their codes of conduct and culture, as well as with the laws of their ‘host’ country.
Leaders need to ‘tough it out’ in emerging markets without making compromises and accept that there are real consequences and real costs for those who uphold ethical behaviour, especially in the short term. Some business may be lost, budgets may be missed, approvals may take more time, and officials may respond angrily. When fraud is discovered, such leaders should not feign ignorance and respond with shock and dismay, making middle managers and frontline employees the scapegoats. Leaders need to publicly support anti-bribery laws, speak out against corrupt practices in their industry, and explicitly acknowledge in financial reports loss of business that results from adherence to ethical principles.
As the head of one Indian IT company says:
“We ask our people to persist and prevail, not to take shortcuts. The message is simple: we will work alongside you. We will not hold it against you if a project gets delayed or we lose money; we will do what is right, not what is convenient. Over time, people will know what is acceptable here and what is not.”
Corruption: how to bite back
What can you do when you lose a government contract because the winning party paid a bribe?
The United Nations (UN) Convention against Corruption addresses many issues, including public and private sector preventative actions, criminalisation standards and obligations for signatories relating to bribery, trading on influence, money-laundering, and various other forms of corrupt activities.
It also provides for cooperation by government investigators and prosecutors across national boundaries in the enforcement of anti-bribery and anti-corruption laws.
Article 35 also provides for private rights of action for the victims of the illegal activities against those involved:
Compensation for damage
Each State Party shall take such measures as may be necessary, in accordance with principles of its domestic law, to ensure that entities or persons who have suffered damage as a result of an act of corruption have the right to initiate legal proceedings against those responsible for that damage in order to obtain compensation.
Countries around the world have signed this accord. The US, which prosecutes corruption aggressively under its Foreign Corrupt Practices Act, has declared that existing laws provide adequate remedies for private parties to sue for recovery under this Article.
Annual reports on efforts to reduce corruption are filed with the UN. Transparency International uses these reports and other data gathered independently to rank countries in its Corruption Perceptions Index.
In fear of reprisals for payment of bribes, companies are moving operations to countries with high anti-corruption ratings. All of these pressures and the growing world market are driving a reduction in the acceptability of corruption.
Bribery is normally perpetrated by large companies and tends to keep smaller, growing local companies from securing government and other contracts that they need if they are going to become major employers and contributors to the local economies.
“Bribery also raises the costs to the local government for the products and services the community requires. Of course, governments get their money from the taxes paid by the people of the country. The higher the costs of government contracts given to corrupt foreign companies the higher taxes must be on locals to pay for these services. Governments are increasingly recognising bribery is a ‘lose-lose’ arrangement for not only the people but the government as a whole.”
Dominique Maeremans, business development/marketing manager
Tel: +44 20 7767 2621