Are businesses losing the fight against corruption

Andrew Feinstein, founder of Corruption Watch UK, author and former ANC MP opened GoodCorporation’s summer Business Ethic’s Debate with an assessment of the global corruption landscape, looking at the areas where significant improvements have been made and highlighting the problems that must still be overcome.

On the plus side, tougher new legislation such as the Bribery Act has compelled many companies to strengthen their anti-corruption policies and procedures.

Law enforcement authorities are taking a more serious cross-border approach to pursuing corruption, making it much more difficult, but not impossible, to avoid prosecution.

The UK has seen an increase in self-reporting and the US remains aggressive both in its pursuit of corporate corruption but also in the drive to encourage other jurisdictions to tighten up their laws.

On the negative side, despite the Bribery Act, the UK has been on a downward trend on Transparency International’s Corruption Index since 2010. Sectors such as extractives, defence, retail, finance, energy and infrastructure continue to see corruption scandals emerge.

“Defence accounts for 40 per cent of all corruption,” said Andrew Feinstein, “making corruption an integral part of the sector’s structural DNA rather than the result of a few bad apples.”

In 1999 the South African government spent almost £6.5m on defence equipment the country did not need. An estimated £250m was paid in bribes to the country’s senior politicians, some of it by countries whose products weren’t even shortlisted, for equipment that some 25 years later has seldom been used. Meanwhile the population was told that there were no fiscal resources to pay for anti-retroviral medication, resulting in some 365,000 Aids related deaths over the next five years.

Corruption is not a victimless crime but has a real impact on society. It undermines the rule of law, the functioning of the market and our democracies. It also diverts public resources away from essential development needs. So what should businesses be doing and are they losing the fight?

The problems businesses face

o   Businesses can combat bribery within their own organisations but find it hard to win the fight when corrupt payments continue to be demanded at state level and competitors appear to be paying.

o   Many governments appear to impose tough anti-bribery laws on corporates while continuing to operate corrupt procurement contracts for large infrastructure projects or demanding illicit payments for licences and permits.

o   Corrupt politicians in some countries take the view that big businesses can afford to pay bribes so should simply shut up and pay up.

o   Some impose new laws but preside over corrupt judicial systems that fail in their duty of enforcement.

o   In certain parts of the world, governments and politicians need to match the zero-tolerance approach to corruption adopted by many corporates and become part of the drive for change: anti-corruption policies alone cannot change corrupt countries.

o   The disconnect between business and state can be such that the legal framework of some countries does not support the initiatives companies take to tackle corrupt practices. An example was given of an employee being sacked for fraud but re-instated by the courts following an industrial tribunal.

o   In numerous countries, endemic corruption can make it impossible to compete on a level playing field. Walking away from these countries rarely changes the climate, as a corrupt organisation is almost invariably waiting in the wings prepared to pay the bribes and win the business. As such, while some businesses win the fight by confining themselves to parts of the world where it is less risky to operate, there are many developing countries where the fight against corruption seems to be lost and it is simply accepted that graft is part of business culture. While this remains the case, clean businesses can never really win.

o   Smaller businesses in particular find it hard to stand up to corrupt states, as they may not be able to afford to walk away and operate elsewhere.

How the fight can be won

o   As a first step, businesses need to ensure that their own internal processes are watertight with a strong commitment to ethical practice emanating from the top of the organisation.

o   Whistleblowing systems should be actively promoted as part of an open and transparent speak-up culture and promoted to third parties.

o   Businesses need to remove perverse incentives that can inadvertently promote corrupt practices such as commission only sales incentives for agents.

o   Even in some of the most corrupt states, big businesses have power. In certain sectors such as extractives, countries need the services of the largest international players so can be forced to enter into transparent contracts that follow best anti-corruption practices. Big businesses need to identify where they have influence and flex their muscles. By taking the lead they can assist smaller companies in the supply chain.

o   Collective action can be a powerful tool, with companies working together to insist on non-corrupt agreements and refuse the routine demands for facilitation payments. Companies that work in high-risk sectors could do more to work together and create industry initiatives that promote change. This has started to work in some sectors, but as yet on a small scale.

o   Anti-corruption legislation in emerging markets such as India, China and Brazil is starting to have an impact, but it is very nascent. There are also fears that the laws are being used to prosecute foreign companies in order to promote the country’s anti-corruption stance while the corrupt activities of domestic companies are ignored.

o   In many emerging markets, local populations are protesting vociferously about endemic and systematic state corruption. Many local staff will be keen to work for a non-corrupt organisation and will respond well to an ethical corporate culture that forbids corrupt practices.

o   There are many NGOs operating in difficult markets that are pro-change and seeking to make a difference. Companies are encouraged to identify these organisations and harness their support in tackling systemic state corruption.

o   Regulators could do more. Businesses would like to feel able to approach the SFO and ask for help in tackling corruption. Unless the SFO changes its approach to DPAs it was felt that these would not work in the UK, as businesses are unlikely to be advised by their lawyers to come forward under the current system.

o   Sanctions need to be tougher. Fines alone cannot change behaviour as they can be factored into the overall cost of doing business. There need to be severe sanctions, such as debarment or denying access to banking facilities, that would have a serious impact on a company’s ability to do business following a corruption scandal. The recent changes to Canadian law were cited.

Tackling corruption is an immensely difficult challenge; it has an impact on the ethics and culture of our businesses, but also on the wider society in which they operate. Winning the fight would be of significant benefit, to both companies and countries – particularly developing ones. Corporates are doing much to change the ethical culture of their organisations but they cannot succeed without the support of governments NGOs and collective action.

The GoodCorporation View

Regardless of the fact that in a number of countries, the fight against corruption is being lost not won, companies should still ensure that they are properly protected from corruption risks by having adequate procedures in place.

We know from the experiences of a number of companies that when the SFO is investigating, the organisation’s approach to tackling corruption and in particular the tone from the top is carefully considered and has a real impact.

We would also recommend more collective action. Where companies are able to work alongside customers and suppliers they can succeed in applying pressure to reduce some of the more routine corrupt practices.

GoodCorporation Business Ethics Debate – July 2015