INTRODUCTION
Corruption in transnational commercial transactions has been one of the
main concerns of Transparency
International (TI) since its inception. This paper draws on research
conducted by Control Risks Group
(CRG) to give an overview of the current state of the debate from a business
perspective. It has three main arguments.
First, it emphasises the importance of competition. Few business people
actively condone corruption, but some continue to argue that they are
forced to pay bribes because of the pressures from their competitors.
Secondly, corruption has always involved significant risks - even for
those who ostensibly benefit from it. Now those risks are increasing because
of growing domestic and international attention to the issue. Among the
hazards which companies take most seriously is the potential damage to
their reputation.
Thirdly, corruption typically involves making a choice between short-term
gains and long-term benefits. Companies genuinely planning for the long-term
are becoming more conscious of the need to institute strict anti-corruption
policies, but they face many challenges in putting these policies into
practice.
The paper concentrates on business issues rather than social development,
but argues that the two interests ultimately converge. Oil and gas executives
commonly refer to the need for a license to operate that goes beyond mere
governmental approval to include wider popular acceptance. International
companies are unlikely to sustain their license to operate unless their
operations are seen to meet minimum standards of integrity.
1. POWER AND COMPETITION
At the heart of the commercial corruption debate is a common disparity
between global principles and local practice. Few business people actively
condone corruption, and none of the great religions approve it. For example,
the teachings of Islam condemn both the givers and receivers of bribes.
But corruption still occurs, and even some of the largest corporate names
have been involved. The fact that there is a conflict of principles explains
why corruption is almost always hidden, and why no one likes to talk about
it.
The following chart illustrates the contradictions which companies often
face:
Local power structures help explain why corruption takes place despite
this conflict. In many regions, politicians or government officials have
powers of discretion which can decide whether commercial projects succeed
or fail. If commissions are regarded as customary, or law enforcement
is inadequate, they can use this power to demand payment from commercial
clients.
In theory companies do not need to pay and an increasing number of major
corporations refuse outright. But some succumb. The most common justification
is the pressure of competition. In the 1970s during the US Congressional
investigations which ultimately led to the Foreign Corrupt Practices Act
(FCPA), Lockheed Corporation argued that its multi-million dollar payments
to foreign officials and political organisations had proved necessary
in consummating certain foreign sales. It added that:
Such payments are consistent with practices engaged in by numerous other
companies abroad, including many of Lockheed's competitors, and are keeping
with business practices in many foreign countries.
The pressures of competition are still a significant element in the corruption
debate today. In a CRG survey of US and European business directors, respondents
were asked about the impact of bribery on their sector. While there were
some optimists, nearly 60% thought that companies who did not pay bribes
'regularly' or 'occasionally' lost international contracts.
How often does refusal to pay bribes prevent companies in your sector
from winning international contracts?
Never 17.9%; Very rarely 23.2%; Occasionally 44.2%; Regularly 14.7%.
In an era of heightened commercial competition, pragmatists have argued
that paying bribes is an unavoidable part of doing business in certain
countries. If they fail to comply, they will lose out to unscrupulous
rivals.
2. THE COSTS TO BUSINESS
No company would risk paying bribes unless it believed that the potential
benefits outweighed the risks. But even the winners pay significant costs.
These costs are partly financial. At the same time, companies who are
known to engage in grand corruption risk further demands, and potentially
severe damage to their reputations.
Transaction costs
At the most basic level, the winner's Transaction costs are higher. and
their profits lower. than if they had won the contract on merit. Moreover
they will have no recourse to mediation if there is a dispute. The CRG
survey asked business people to estimate the percentage increase on costs
to an international project where corruption played a part.
Where corruption plays a part in an international project, what is the
maximum percentage increase it can have on the costs?
36% of the total sample estimated the percentage increase as 5% or less;
51% estimated the cost increase as between six and 25%;
12% estimated the increase as more than 26%;
No one has a plausible measure for the total annual cost of corruption
in international trade and investment worldwide. But no one doubts that
it runs to many billions of dollars.
As TI authors have repeatedly pointed out, high financial costs to the
company may lead to high social costs to the country as a whole. Companies
who have paid substantial bribes will be tempted - or even forced - to
recoup the costs by cutting down on the quality of the goods or services
that they provide. Or they may pay bribes to avoid being subject to rigorous
safety regulations. The result will be substandard and even dangerous
roads, buildings and other installations. South Korea's experiences illustrate
the potential consequences, In 1993 a Seoul apartment block collapsed,
killing 28. In 1994, a section of the Songsu bridge in Seoul collapsed,
killing 32. Most calamitously, a Seoul department store collapsed in 1995,
resulting in the death of more than 500 people. In each case, the constructions
had been built without official safety checks. There have been similar
stories in many other countries.
The blackmail effect
Once a company has acquired a name for paying bribes, it is likely to
receive further demands. In this respect, its position is similar to that
of a blackmail victim. As an Arab proverb points out:
If the camel once gets his nose in the tent, his body will soon follow.
Further demands may occur in the same country or - since contemporary
rumours tend to be transnational - in a completely different jurisdiction.
Reputation
The final - and perhaps most important - cost is reputational. Allegations
of corruption - even if unproven - may undermine the reputation of individual
companies long after the offense is said to have been committed.
IBM's recent experiences in Argentina provide an example. In the mid-
I 990s allegations emerged that IBM's local subsidiary had paid $37m in
bribes and kickbacks to secure a $250m computer contract for the state-owned
Banco de la Nacion. A federal investigation has been under way ever since,
and is now picking up speed. In June 1998 the Argentinean authorities
issued arrest warrants for four US-based executives who had been working
for IBM in 1994. The case remains unresolved, and has proved a public
relations nightmare for the company. The Economist made the following
comment on the case:
Mention IBM in most countries and people think of high technology. Mention
it in Argentina and these days many people think of scandal. Major international
companies commonly regard their brand names as their greatest asset: corruption
allegations - even if unproven - may severely damage the standing of these
brands.
3. INCREASING RISKS
The CRG survey showed that 75% of European respondents and 70% of Americans
thought that less than a tenth of all corruption incidents ever came to
light. But the risks of being caught arguably are increasing - and so
are the potential costs of corruption.
Global communications
The quality of individual newspapers, television programmes and websites
may vary sensationalism is all too commonplace - but ordinary citizens
are much better informed than before, both in industrialised and in developing
countries. The communications revolution has two particular consequences
for the corruption debate.
First, corruption scandals become better known more quickly and more
widely. A company that becomes involved in a corruption scandal in, say,
south-east Asia risks damage to its reputation in Europe and North America.
Secondly, both political activists and non-governmental organisations
(NGOs) are able to use the I internet to communicate internationally,
and to mobilise their supporters more effectively using a variety of tactics
ranging from letter campaigns and boycotts to litigation. The most prominent
international campaigns concern the environment, human rights and indigenous
peoples, but corruption potentially touches on all these issues. Meanwhile,
as this conference shows, TI has been able to use its own international
networks to develop its campaign against corruption.
All this is having a significant impact on commercial thinking. In the
environmental arena, companies are learning that they need to operate
according to international standards everywhere regardless of the formal
legal or customary requirements in any particular jurisdiction. It is
increasingly recognised that the same principles apply to the avoidance
of corruption.
Governmental standards
Governments as well as companies are subject to the pressures of competition
and global communication. They are beginning to respond by demanding higher
standards from companies. They need to do so because, as CRGs research
showed, countries with a reputation for corruption may find it harder
to attract investment.
In the CRG survey, companies were asked whether corruption had proved
a significant deterrent when entering a new market:
Are there any countries where you have decided not to do business because
of the existence of corruption?
European companies: 34.1% 'Yes' 65.9% 'No'
US companies: 19.6% 'Yes' 80.4% 'No'
A significant number of both European and US companies said that they
had avoided certain countries because of the risks associated with corruption.
Perhaps surprisingly, the proportion of such companies was greater in
Europe than in the US. This appears to contradict the widely held view
that American companies are prevented from competing in certain markets
because they are inhibited by the Foreign Corrupt Practices Act (FCPA).
It may reflect the fact that US companies have more experience in finding
ways to avoid corruption, for example by getting the US government to
exert political or diplomatic pressure in favour of particular deals.
The pressures of competition are one reason - though not the sole reason
- why at least some governments are tightening their rules to reduce the
risk of corruption. Singapore is an example. In January 1996 the Singapore
government banned five large foreign companies from bidding for new government
contracts for a period of five years. The five companies were Marubeni,
Tomen (Japan), BICC Cables Ltd (UK), Siemens (Germany) and Pirelli (Italy).
Earlier, the Singapore courts had prosecuted Choy Hon Tim, a former deputy
chief executive of the state-owned Public Utilities Board, on charges
of criminal conspiracy and receiving bribes worth a total of US$9.82m
since 1979. Choy was accused of passing on privileged information on PUB
tenders to a former colleague, Lee Peng Siong, who in turn served as a
consultant to foreign companies. Choy pleaded Guilty and was sentenced
to 14 years in jail; Lee had already moved to Australia. A spokesman for
Marubeni acknowledged that it had had a consultancy contract with Lee,
but it had only paid him consultancy fees: it was not involved in bribery.
The Singaporean authorities did not accept this defence, and the five-year
debarment remains in force.
Political backlashes
Meanwhile, corruption has become a more prominent issue in the domestic
political debate of a whole range of countries. and this increases the
risk to companies whose relationship with discredited political leaders
is deemed - rightly or wrongly - to be corrupt or collusive.
Opposition politicians have always used allegations of corruption as
a means of battering the party in power (and, all too often, they have
proved just as corrupt when they come into office themselves). Corruption
as a political issue is therefore scarcely new but, in a wide range of
countries, there does seem to be a greater intensity of debate. The reasons
include better communications, the collapse of ideology and in Asia as
well as Europe and North America heightened public skepticism about the
morals of political leaders. The legitimacy of political leaders found
guilty - or suspected of - corruption is much more likely to be questioned
than in the past.
Pakistan illustrates both the potential for a public backlash against
corruption, and the hazards for international business. Allegations of
governmental corruption under Prime Minister Benazir Bhutto were among
the main factors leading to her dismissal by then President Farooq Leghari
in November 1996, and contributed to her crushing defeat in the February
1997 national elections. Since then, incoming Prime Minister Nawaz Sharif
has instituted the Ehtesab Commission ('Ehtesab' means 'accountability')
to counter corruption, although the commission's credibility has been
undermined by the widely held belief that it is politically partisan.
The commission's investigations have touched on foreign business. During
the 1993-1996 Bhutto administration Pakistan attracted some $3.6b of investment
in the thermal power sector. In 1998 the deals have gone sour. Sharif
accuses the Independent Power Providers (IPPs) of paying bribes to secure
their original contracts, and he is demanding that they reduce their tariffs
by 25-30% - or risk cancellation of their contracts
The affair has been overshadowed by the wider political and economic
crisis following the nuclear tests staged by both Pakistan and India in
May 1998. However, it still has not been resolved and involves high political
risks for both sides. All the companies involved have signed declarations
saying they had not indulged in corrupt practices. Sharif may enhance
his local political support by challenging the foreign companies, but
the affair has damaged Pakistan's reputation among foreign investors at
a time when his country needs all the external assistance it can get.
4. 'SINNERS’ AND PLAYING FIELDS
This combination of old problems and new pressures has resulted in the
emergence of a new phenomenon: the commercial 'repentant sinner'. The
repentant 'sinners' are companies which in the past may have turned a
blind or negligent eye to domestic and transnational. bribery - but which
now recognise the need to change (even if they do not always know how
to change). Often they have been severely embarrassed by a corruption
scandal involving their own employees, and recognise that they cannot
afford further damage to their reputations. Such companies are to be found
in North America, Europe - and now Japan.
While recognising the need to change, such companies are often concerned
that virtue may not
prove to be its own reward if their competitors are playing b~ the old
rules. They therefore view measures such as the US's FCPA and the OECD
convention against transnational bribery with a mixture of hope. skepticism,
and apprehension. The main question is the extent to which these measures
provide or fail to provide a 'level playing field' in which all companies
operate on the same terms.
Attitudes to the FCPA
Commercial attitudes to the FCPA - which of course is already in force
- demonstrate the same uncertain combination of optimism and widespread
skepticism. Some 76% of all respondents in the CRG survey believed that
the FCPA was an 'effective tool in helping US corporations avoid corrupt
situations' People are less likely to solicit a bribe from a US company,
if they know that the company is barred from responding. For example,
in China some US companies make a point of explaining the FCPA to potential
joint venture partners, and some even translate the act and distribute
it to all concerned.
However, these benefits come at a heavy price. In the 1997 CRG survey,
70% of respondents agreed with the statement that 'the FCPA effectively
excludes US corporations from major contracts in certain countries'. They
took this view even though - as noted above - the constraints imposed
on companies by the FCPA are at least partly balanced by US political
pressure in support of American companies.
At the same time, there was a widespread view that US companies used
intermediaries to get round the FCPA. 'Do you think that US corporations
circumvent the FCPA through the use of middlemen never, occasionally,
regularly or nearly always?’
Europe: Never (0%); Occasionally (56%); Regularly (44%); Nearly always
(0%)
US: Never (4.9%); Occasionally (70.7%); Regularly (22%); Nearly always
(2.4%)
The role of middlemen is a contentious subject. The FCPA does not exempt
companies from responsibility for bribes paid by middlemen on their behalf.
For example in 1997 the US Securities and exchange commission (SEC) filed
a civil action against Triton Energy Corporation in a case involving payments
to an Indonesian agent, who in turn was alleged to have passed bribes
to Indonesian officials. Triton agreed to pay a $300,000 penalty, and
one of its employees a $50,000 penalty, without admitting or denying the
charges.
Whatever the legal position, such attitudes will influence business views
of the OECD Convention (which will be discussed in greater detail later
in this conference). No businessman expects the convention to transform
the international commercial environment overnight. However, the major
international companies are certainly concerned about the potential impact
on their own operations.
They are even more concerned to make sure that competing countries and
companies ratify and implement the convention with equal strictness. There
will be considerable skepticism about loopholes in the implementation
of anti-bribery measures, and companies will want to be assured that all
their competitors are truly playing by the same rules.
5. MOVING FORWARD
American companies have most experience of implementing anti-corruption
initiatives, and this is scarcely surprising given that the FCPA has been
in force in the US for more than 20 years. During that period there have
been some 30 convictions, but it is generally agreed that the most significant
impact of the FCPA lies in its deterrent effect. US sentencing guidelines
authorise courts to impose significantly lower penalties on companies
which have effective FCPA compliance programmes, but which have been betrayed
by rogue individuals.
Many European-based companies such as BP and Royal Dutch/Shell also set
themselves high standards. Some others are only just beginning to grasp
the nature of the corruption problem.
Developing a strategy
Effective anti-corruption programmes will include the formulation of
company codes, as well as measures to publicise and enforce them. In particular,
it is important to make sure that middle managers and locally-based country
managers understand - and are actively involved in - the programmes. As
respondents to the CRG survey pointed out, these are the people who are
most likely to be caught up in corruption:
Who is most likely to be involved with corruption?
Locally-based country managers-58.8%
Middle managers-30.9%
Senior management-4.1%
Junior staff-6.2%
There are several reasons why country managers may be more exposed to
corruption. They are on the front line of national business dealings;
they are often keenly aware of the competition; and they are typically
under pressure to deliver quick results. Working a long way from home
in difficult conditions, they can feel that strictures from head office
- whether about environmental standards or corruption - are unrealistic
when applied to local circumstances. Company strategists need to take
their concerns into account.
Taking the initiative
There is a definite momentum towards the implementation of higher standards
of both corporate and government behaviour on matters concerning corruption.
At CRG we are advising our clients of the need to anticipate and respond
to these developments. No international company with an international
reputation to defend can afford to be lax on corruption.
However, the uneven pace of change in different countries and commercial
sectors means that progress will be far from straightforward. For this
reason we argue that 'defensive' measures such as codes and enforcement
mechanisms are insufficient. It is also important to take pro-active measures
to reduce the risk of being caught up in corruption in the first place.
The common theme is the need for business diplomacy which goes beyond
narrow commercial transactions. Companies will need to act politically
in that they need to find friends and allies to help them withstand corruption.
At the same time they must avoid being - or appearing to be - partisan.
This balance requires judgment.
Proactive initiatives may include identifying honest ministers or local
officials who can help companies withstand corruption demands. But, while
seeking political allies, companies must avoid being too closely identified
with particular parties or regimes. The overall objective is for the company
and its employees to be seen as benevolent 'insiders' who merit favourable
treatment while, as far as possible, remaining politically neutral.
This is one of the points at which the demands of commercial sustainability
converge with development concerns. No company planning a long-term presence
in any particular region can afford to rely on the support of a single
individual or group of individuals who may prove to be politically transient.
Rather the company needs to build up a wider body of support which can
outlast individual managers, politicians and governments. It is most likely
to do this if its commercial objectives coincide with - or at least are
compatible with - the region's long term development objectives.
This kind of support has to be built on relationships, not bribes. Companies
will need to I partnerships with a wide range of different 'actors' -
including the various elements of civil society that are represented so
effectively by TI and its affiliates.
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