Global corruption: Where do we stand?

Many of us have a notion of corruption that is framed by images of envelopes filled with money that business people or their intermediaries give to public officials to gain an undue advantage in contracting, licensing and other business-related processes in all corners of the world. These practices unfortunately still exist, but corruption in the business world is now more complex, global, growing and often elusive.

Corruption is complex, because the money flows involved are not necessarily from a bribe-payer to a bribe-taker. Take the examples of cartels, insider trading, conflict of interest and lobbying.

Cartels – from software to pharmaceutical manufacturers – are setting prices to the detriment of customers. Here, the money being lost is not through secret wire transfers but as a result of the higher prices consumers pay when they purchase a product.

Insider trading takes advantage of confidential or yet-to-be-released information to make a profit on traded stocks. The profits gained by the corrupt investor are taken from all those who had lost out from purchasing or selling the stock if they had the same level of information.

Conflict of interest is unfortunately frequent in mergers and acquisitions. This can happen, for example, when the chief financial officer of a selling company or an executive of a lending bank are investors in the purchasing company.

Lastly, political lobbying by companies crosses the fine line from civic engagement to corruption when it allows for undue influence in a country’s policy making processes. In its worst and most unregulated forms, lobbying can lead to state capture: the opaque influence of powerful economic interests over a country’s legislative, judiciary or executive powers that challenges the very definition of democracy.

These four examples change our view on corruption by broadening it and reframing the actors who are involved. Corruption happens on both sides of a business transaction and shifts the nature of relationships. A government official may be on the side of a private company s/he is dealing with rather than working to protect the public interest. A sales manager may be working with a competitor to align their prices rather than allow for market competition. A corporate executive with insider information may pretend to be a non-informed investor in a stock deal.

When it comes to conflict of interests, the seller may be the buyer; the lender can be the borrower. A corporation may act in allegiance with the regulator and take advantage of regulation or the lack of it.

Corruption in these complex forms happens in both the North and South and is global. Yet globalisation is not something new and global corruption is not either. The latter can be dated to the 1970s and a post-Watergate moral awareness in the United States which led to the adoption of the Foreign Corrupt Practices Act (1977). At that time, however, corruption was still mainly perceived as western corporations bribing local officials – the ‘money-wallet’ era of corruption.

What is now new and well documented in TI’s Global Corruption Report is that complex forms of corruption in business that go beyond bribery have become global. The partial shift of economic power to the East and the existence of economic giants, which can no longer be described as emerging, like India and China, add a new level of complexity and challenges that can now be observed everywhere in the fight against corruption.

It is always difficult to measure a phenomenon such as corruption which is hidden by its very nature. The sentiment of most of the contributors to the 2009 Global Corruption Report, however, is that corruption is increasing in business, probably because of the growing disequilibrium between a global market place and local political structures. Temptations, opportunities and threats from competition are everywhere and in every form, and the watchdogs may be hard to find.

What facilitates corruption in business are the common practices of secrecy and business confidentiality which, as we all know, have always been and are still considered key elements for market success. Strong confidentiality clauses protect business contracts and are standard in employee contracts, preventing company information from being publicly disclosed. Even within the business world, for example in the banking sector, it may be common practice and the rule not to know what your colleague is actually doing. When you are the only one to know about the deals and when your supervisor only looks at your results, corruption is a broad and very attractive avenue. Successful traders and great sales people are hardly challenged by their line managers. Instead, they are usually praised and get comfortable bonuses.

This last point highlights one of the most important drivers for corporate corruption: bottom-line pressure. This pressure and the need for profit is important and one of the core elements of our successful economies. However, profit has to be counterbalanced by other rules or drivers. For example, if a corporate executive allows corporate or personal profit to be the only rule driving his or her conduct, it will be impossible to act efficiently against corruption in the business community, particularly in our times of duress and increased global competition.

The global crisis, which is not over, may be a driving factor for corporate corruption, but it also has given us the needed momentum to fight it. The same factors that facilitate corruption also were at the origin of the crisis last year: ‘short-termism’ in the corporate world, lack of transparency, poor regulation and weak enforcement. This diagnosis has been global and is widely shared, at least in their speeches, by the most powerful heads of state. The crisis provides an opportunity to increase efforts to fight corporate corruption, and also offers an opportunity to do it in a renewed manner.

More of the same will simply not do when it comes to fighting corruption in business. Step changes are required. A first generation of social responsibility tools and programmes has come to fruition, and Transparency International is proud to have substantially contributed to it. But now the need for sound anti-corruption programmes has become common knowledge within the business community, and corporations have to be monitored on whether they adopt them or not. Corporations have to have their preventive systems in place, but they also have to set the right ethical tone with their executives. Ethics have to return as the focal point of a corporation, because systemic change can only take place if each individual makes it happen. Anti-corruption programmes can simply not work without serious ethical foundations, and these groundings also have to be reflected in anti-corruption programmes, such through company-wide whistle blowing procedures and the adequate protection of the whistleblowers.

Whistle blowing is always a sensitive topic. We must however acknowledge a fact. In many corporations, when your colleagues or your managers are doing something wrong, it is still very difficult, if not impossible, to speak out and stop the wrong-doings without damaging your own position or career, especially when those wrong-doings are directed at increasing corporate profit rather than personal enrichment. Each country has to adopt an approach consistent with its own culture and history to encourage and protect whistle blowing. Yet, if countries do not strongly regulate in that area, each corporation must – it is in its own interest.

Regulation is a word which is often used and means very different things in various parts of the world. Many countries are still at the stage that they don’t have adequate legislation and regulation in place to criminalise and fight corruption in the private sector. For those countries, we have a tool which has been provided to us by the countries themselves: the United Nations Convention against Corruption (UNCAC). Worldwide, 141 countries are parties to the convention. Yet, UNCAC implementation is still difficult to observe in many countries, making it imperative that an effective monitoring mechanism is put in place.

This question of enforcement, whether of UNCAC or any regulation, is essential to make legislation effective. Several countries have now reached the enforcement stage after years of having regulations on their books. For example, the US Foreign Corrupt Practices Act, which was adopted more than thirty years ago, had fairly quiet enforcement until the beginning of this decade. Yet, the US is ahead of European enforcement when it comes to other anti-corruption laws, namely the OECD anti-bribery convention that was passed in 1999.

It is easy to refer to a supposedly stronger judiciary culture in the US, but the question of uniform anti-corruption legislation across jurisdictions is equally important. Cooperation between the states of New York and Florida is simpler and faster than between the United Kingdom and the Netherlands or between Luxemburg and Germany. As evidenced and detailed in the 2009 Global Corruption Report, better staffed and better funded judiciary and investigative authorities are needed to address the problem of corporate corruption, but so are greater cooperation and better exchange of information (between national authorities in the European Union as well as countries within the OECD).

A global economy calls for global governance, but the various instruments in place between the US, the OECD and the EU are just one of the many illustrations of the difference between having global governance and one single global government. We cannot ask for global measures like, for example, better transfer pricing, without being able to choose advocacy pressure points and to select the governments, legislative bodies or industry associations or corporations which we wish to influence.

The priority for TI is supporting measures such as those by the US and EU that advocate for smart regulation favouring enhanced corporate disclosure on poorly regulated financial markets or in corruption-exposed industries. For example, TI is leading a targeted effort in the extractive industries. Apart from supporting the Extractive Industries Transparency Initiative, TI is reviewing anti-corruption programmes and the industry’s country-by-country disclosure of payments to governments. The defence industry is another sector in which TI is leading a cutting-edge initiative. Colleagues from the TI chapter in the United Kingdom have provided tools and policies to help combat corruption risks and are working with defence ministries and armed forces, international bodies and companies to build integrity in the sector.

Banking is another important sector and target for TI. Banks confront many specific corruption risks that need to be addressed, but they are also key partners in the fight against grand corruption, namely to combat money laundering and facilitate the recovery of assets stolen by public officials. Investment banks as well as investment funds can also play a very positive role in screening anti-corruption programmes in the companies and sectors where they invest, and in recommending the stock of corporations which are serious about fighting corruption.

Broader coalitions must be formed between anti-corruption organisations and other counterparts for all this work to be sustainable and effective. Beyond governments and corporations, greater alliances are needed with environmental groups such as on forestry, climate change and water; consumer groups on issues like reporting and disclosure standards, liability, lobbying and fair marketing; human rights and corporate watchdog groups on supply chain integrity and responsible investment and labour unions on whistle-blowing, ethics and stronger corporate governance.

In the fight against corruption in business and other sectors we have reached a stage fairly similar to the one that environmental organisations were at some years ago. As a movement, we know what needs to be done – the 2009 Global Corruption Report provides the framework for this work. The challenge is increasing awareness worldwide and ensuring that prevention and punishment of corruption becomes a global standard for judging corporate and government performance.

There are many reports, studies and articles on corruption in the business world. Transparency International (TI) has recently released a Global Corruption Report on Corruption and the Private Sector. What is it that makes the report a watershed for the TI movement which began over 15 years ago? There are two simple answers to this question: this report changes our view on corruption and how to fight it.

 

 

corrpmsma
SHARE
Previous articleExplanations of licensing; supervision; and compliance/enforcement
Next articlePart 2: The freewheeling 1970s: The Cayman Islands: From obscurity to offshore giant
Francoisvalerian

François joined TI in September 2008. He started his career as a government employee and held a number of positions in the French public service, including advisor to the Minister of industry.  He then moved to mergers and acquisitions with BNP Paribas and strategy consulting with Accenture, where he was a partner. Prior to joining TI, he was the editor-in-chief of an economical review. François graduated from Ecole Polytechnique and Ecole des Mines de Paris and holds a master’s degree in history.

François Valérian
Head of Private Sector Programmes
Transparency International
Alt-Moabit 96
10559 Berlin
Germany

T. +49 30 34 38 200
E. fvalerian@transparency.org
W. www.transparency.org 

 

Transparency International

One global movement sharing one vision: a world in which government, business, civil society and the daily lives of people are free of corruption.

In 1993, a few individuals decided to take a stance against corruption and created Transparency International. Now present in more than 100 countries, the movement works relentlessly to stir the world’s collective conscience and bring about change. Much remains to be done to stop corruption, but much has also been achieved, including:

  • the creation of international anti-corruption conventions
  • the prosecution of corrupt leaders and seizures of their illicitly gained riches
  • national elections won and lost on tackling corruption
  • companies held accountable for their behaviour both at home and abroad.

Global reach, local knowledge

Through more than 100 national chapters worldwide and an international secretariat in Berlin, we work with partners in government, business and civil society to put effective measures in place to tackle corruption.

Independent and accountable

We are politically non-partisan and place great importance on our independence. We alone determine our programmes and activities – no donor has any input into Transparency International’s policies. Our sources of funding are made transparent as is our spending.

 

Alt-Moabit 96
10559 Berlin
Germany

T. +49 30 34 38 200
E. fvalerian@transparency.org
W. www.transparency.org