Putting bribery under the cosh

Bribery and corruption remain ongoing issues for businesses worldwide, especially for companies that are doing business in developing economies, where corruption is more commonplace than it is in the West.
Patricia Mansfield-Devine reports. 

Corruption legislation is tightening across the globe, including in the developing regions, with many looking to the UK Bribery Act 2010 (put into action in July 2011) to see whether it should act as a flagship for other countries trying to stamp out corruption.

Corruption as a definition includes not only illegal acts but also unethical behaviour, according to Philippa Foster Back, director of The Institute of Business Ethics. What is important to note, she says, “is that bribery is illegal everywhere, though this may not necessarily be enforced.”

In the UK, bribery legislation applies not only to British-registered companies, wherever in the world they are doing business (the UK authorities have extra-territorial reach), but also to overseas-registered companies doing business in the UK. It covers not only the bribing of officials, but also corruption between companies, and fines, says Foster Back, are now on a much larger scale than they used to be and director-level personnel can be jailed.

Robert Barrington, executive director of Transparency International UK, agrees that the legislation is becoming more serious. “There are standard definitions of corruption,” he says “but these are not very helpful, so businesses tend to stick to legal definitions.

“Bribery is the most frequent definition in the legal sense: it’s clearly defined and businesses could take the OECD Anti-Bribery Convention as a starting point.”

There are, of course, other forms of corruption beyond bribery that affect businesses, he adds, such as conflict of interest, lobbying, cronyism and nepotism but people aren’t really looking at that at the moment. “The line shifts a bit as legislation changes and even bribery has often been ignored,” he says.

Surveys on corruption and whether it’s getting worse are contradictory, adds Barrington. “A survey in July said it was worsening but public opinion is not always accurate. However, if you look at direct experience, when asked in July 2013, 27 per cent of companies had paid a bribe in the past year, which is about the same as three years ago.”
However, the UK, Brazil, Russia and China have all instituted new laws in the past two or three years and enforcement has gone up.

“From the compliance point of view, bribes are uncertain – you’re quite likely to be caught,” says Barrington.
“The best policy for a firm to adopt is that anything you do will become public in the next five years because there will be whistleblowers etc.”

There’s also a minefield about who might prosecute the crime, he adds: “It might be the US with their huge fines and jail terms, or it might be the Russians, which is very scary. It’s in companies’ self-interest not to pay bribes.”

A range of damaging effects
But other than the simple fear of getting caught, corruption has other damaging effects in that it is also inherently bad for business, says Foster Back.”It eats away at trust,” she says. “Once you’ve said yes once, it’s hard to recover from that. You have to say no from the outset.

“It’s a sort of cancer. Corruption saps the energy of an organisation. People are less happy in their jobs and less productive if they’re constantly looking over their shoulders.”

Barrington too believes corruption is fundamentally bad for a company’s soul.

“Bribe paying is unethical and it has consequences for your company culture,” he says.
“No company wants a culture in which payments can be made and hidden – it can slip from one-off into serial fraud.”
And there can also be other business consequences. Shareholders have not paid much attention to the issue yet, he says, but they are becoming more aware, not just about the fines, but about the disruption, legal costs and also about risk appetite.
“A company might become risk averse if it’s had a bribery case,” he says, “and the admin burden is huge in legal fees and auditors. Corruption has an opportunity cost.”

There are particular industries that face greater risk for corrupt practices, and they include construction, engineering, mining, utilities – and pharmaceuticals, as seen in the recent GlaxoSmithKline case, where personnel from the company were detained by the Chinese authorities for allegedly channelling bribes to Chinese health officials.
“It tends to be the big infrastructure-type businesses,” says Foster Back, “or where businesses are selling through intermediaries. Such business is an opportunity for those who sell the permits, and companies have to be more circumspect about using third parties now.”

Barrington says he feels that construction is the highest risk area. “You can make money from vast government projects,” he says, “but there are also inherent elements of the industry which are prone to corrupt practices, such as an informal labour force.”

In terms of geography, the most corrupt countries are often those in conflict or post-conflict zones, while stable Western democracies tend to come out better. And there are also conditions that help to prevent corruption.
“Peace helps,” says Barrington, “and democracy, along with open government, a free press and a strong rule of law. But what is also important to note is that corruption happens everywhere – if you’re in the wrong place at the wrong time you could encounter it in the UK or Scandinavia. For instance, lots of firms undertake lobbying inappropriately, but in Afghanistan, you’d have bribes rather than lobbying.”

Transparency Internationals’ Corruption Perception Index, which takes note of worldwide beliefs about corruption, ranks the Scandinavian states as the least corrupt nations, and post-conflict states as the most, along with North Korea, Myanmar, the ‘Stans’ and Somalia. But all is not necessarily as it seems.

“Chinese and Russian firms will pay bribes more often than other countries,” says Barrington, “but that they’re bribable is a dangerous thought to have – as recent events in China with GlaxoSmithKline show.

“Chinese companies are affected by laws outside China and they don’t want to be caught breaking them, but there is also a strong internal drive against corruption driven by concerns among the Chinese leadership about being undermined. They’ve seen the Arab Spring and angry citizens overthrowing their corrupt governments.”

China has a strong public sector with little transparency, he adds, so corruption was able to thrive in the past. This gives the country a poor score on the corruption index, but nowhere near as bad as Russia.

“With Russia you might say the fish rots from the head,” he says. “Corruption is intrinsic to Russian government and the public sector - though it’s hard to say if it’s worse than it used to be, as information from the Soviet era is hard to come by.

“Now some of the post-communist countries want to make fundamental changes and clean up corruption but Russia has slipped backwards – public officials are involved in corruption, so they’re incentivised to keep it and accountability mechanisms such as a free press have been utterly repressed. But many Russian citizens are aware of the situation and repelled.”

Since this problem affects the developing markets, firms need to know how to handle the issue if they do business in these regions.

“As with all aspects of doing business in emerging markets, knowledge and research are key,” says Sarah Boumphrey, an analyst at Euromonitor, who recently blogged about the issue.

“Businesses should develop a deep understanding of the market, operating environment, regulations and cultural nuances and develop good working relationships with suppliers.”

Internal affairs
For corruption to be avoided, a company’s culture must also prevent it within the ranks.
“The tone has to be set by the top,” says Barrington.

“From the ceo downwards it must be clear that the company won’t do it and won’t tolerate it. It needs to be an utterly clear, rigorous and regularly repeated message.”

Training can play a big part in this, he says, but so can making sure that targets set by the firm are realistic and that people don’t feel they can only achieve their targets if they pay bribes. “And companies shouldn’t remunerate people on financial targets alone,” he says. “They should also reward people for meeting ethical targets.”

How you deal with corruption when you find it is also an important issue. “Historically, companies have hidden it and hoped it wouldn’t happen again,” says Barrington. “But that is no longer satisfactory because it WILL come out. It’s sensible for a firm to admit internally when corruption is happening and undertake a thorough investigation into how widespread it is and who’s involved, etc. And then they need to go to the authorities and position themselves in the best way possible.

“It’s in their interests to self-report but companies have often not seen why they should – but now, for instance, the authorities are offering discounts on fines for self-reporting.”

And once corruption has been found, it needs to be dealt with severely, he says: “Firms need to punish the individuals involved, no matter how senior, and give evidence to the authorities for them to be prosecuted.”

“A zero tolerance policy is key in my opinion,” says Euromonitor’s Boumphrey, “and this policy, which should come from the top, should be well known internally and externally.

“I would go as far as to say that before entering a new market, companies should do a thorough assessment to ensure that it is possible to operate in that market without engaging in corrupt practices. The potential risks and costs are too high to do otherwise.”

In the end, it’s always possible that a company will just have to walk away.