Corruption Basics

This is a work in progress.  See http://webworks.typepad.com/corruption_in_iraq/  for original details (viewing currently disabled while I reorganize it).  This article will organize those details in a guide for managers in international corporations who must do business in developing countries with significant corruption.  The author, Vance Jochim, was a corporate internal audit manager for 18 years, plus Chief Auditor in Iraq for the Iraqi anti-corruption agency, Commission of Public Integrity (CPI) from 2004-2006. 



What is Corruption: Basically, it is when a public employee or official takes actions that result in personal gains to themselves. Situations could range from a policeman demanding a bribe to tear up a traffic ticket to an instance where a public official names a specific sole source vendor for a government purchase contract that results in a kickback or bribe to the official.  Corruption only differs from fraud in that a corrupt act involves a government official or employee receiving gain, and fraud involves anyone else gaining from a fraudulent activity. 

What should a corporate manager do to understand the level of government corruption practices in the affected country?

1) Research the country's reputation for tolerating corruption using these steps:

2) Corruption in Your Industry - Research the country's reputation for allowing corruption and bribes in your industry.  Research the TI site for information related to corruption and bribes related to your specific industry, such as construction or energy (the biggies).

3) Identify whether the country has an anti-corruption agency.  If so, visit them to get background information on the corruption climate in the country.  For instance, two countries ranked better in the TI index than the US, Hong Kong and Singapore, have very successful anti-corruption agencies.  Hong Kong's Independent Commission Against Corruption (ICAC) has been very successful, and was the basis for Iraq's Commission of Public Integrity (which unfortunately has lost momentum due to lack of political support in 2008). You might have to do google searches (both News and WEB searches) with terms like "Singapore Corruption" to locate articles, press releases or websites related to the agency.  Usually, these anti-corruption agencies are formed as a response to some international group like the UN or IMF or USAID supporting or funding them.  Both Hong Kong and Singapore's anti-corruption agencies were developed by consultants from the UK.  In my opinion, the UK and their foreign aid agency, DFID, are more direct, and assertive in helping developing countries establish anti-corruption agencies than the US.  The US tends to make indirect funding support for anti-corruption programs through foreign aid programs, or rely on TI, the UN or other agencies.  Iraq was unique because the anti-corruption agency plan was formulated by a reserve military officer who had once prosecuted the mafia on New Jersey.



4) Review news articles and the web with Google searches to identify information about corruption practices in the country.  For instance, there are many articles on countries like Indonesia, Nigeria, etc that have constant problems and articles appear in local and international press.  Create a daily search engine crawler like Google alert with a subject like "Malaysia Corruption" and get daily alerts of news or web items on that subject.

5) Conduct Staff Interviews to Understand Common Corruption or Bribery Practices in the Target Country - Interview local staff and vendors in the target country to determine the types of bribes or corruption that might be practiced, and which agencies or Ministries are most notorious (in Iraq, it is the national police and the health ministry).  It could be from vendors, or government officials hinting at "facilitation payments" to process a permit request faster.  Ask them what the policy is if they are asked to pay a bribe, or offered a bribe or kickback.  Do company purchase contracts contain specific clauses prohibiting paying and receiving bribes and kickbacks, and who the vendor should call if they are asked for a bribe.  If your parent company is big enough to have an internal audit department, do your vendor contracts have a right to audit clause, and does the audit department actually visit and review vendor systems and transactions for evidence of improper contract awards, vague payments, payments to third parties and other indicators of possible bribery or corruption.    Ask the internal auditors to prepare a risk analysis of corruption and bribery issues in the target country, and solutions. If your internal audit staff are mostly US CPA's, they may not have the background to recognize such indicators or analyze corruption risks. (Personal experience).

6)  Ethics Policy & Financial Disclosure Requirements - Determine if your business entity or partner in the target country has a strong, acceptable ethics policy signed by all employees, and a financial disclosure statement signed by managers.  Does the internal management culture accept or prohibit consideration of paying bribes?  Determine if the country culture respects or does not respect the value of signing such documents.  For instance, in Iraq, the value of signatures are considered to be highly respected, and thus many people would not put their signature on ethics or disclosure statements (which was a red flag).    Determine if local and country government staff and officials also have strong ethics and disclosure statements - if not, that is a red flag.  Example:  The German engineering company Siemens is tied up in all sorts of investigations due to senior management allowing bribepaying to get contracts.  They got caught and are being crucified in the press. The Siemens Board is now suing two prior CEO's and several execs for allowing the practices.

7)  Are Corruption Cases Prosecuted and Prison Terms Enforced - In the target country, ask a local attorney to research and determine who develops and prosecutes corruption cases.  Determine the size and frequency of prosecutions and type of sentence.  If there are not many, and none at the higher levels of government, that might be a red flag that the government is not supporting anti-corruption activities, investigations or prosecutions.  Do the country and local governments have published fraud & corruption reporting hotline centers with contact info that is well publicized.  (Does your own business or partner have similar internal procedures to report fraud and bribery issues?).

8) Research Your Home Country Laws Regarding Corruption and Bribery - In YOUR country, such as the USA, UK etc., research laws that cover international bribery or corruption.  For instance, in the US, the Foreign Corrupt Practices Act was passed in 1977 after SEC investigations found over 300 US firms had paid bribes, etc. to officials in foreign governments to gain favors, such as selling defense equipment.  Here is the Wikipedia page on FCPA:  http://en.wikipedia.org/wiki/Foreign_Corrupt_Practices_Act   Determine if your company has policies prohibiting practices outlawed by FCPA and research more current cases to understand what happens when those firms are caught.  Is there an active program to ensure home country and foreign country managers are aware of the law and what is prohibited.  Also check out the anti-corruption and Foreign Corrupt Practices Act Education events at the American Conference Institute at:  http://www.americanconference.com/anticor_fcpa.htm .

9) Review implications of the UN Convention on Corruption - this is a fairly new cooperative agreement signed by many members of the UN.  They agree to cooperate in facilitating prosecution and recovery of corruption provided funds in a country different than the one that lost the funds.  For instance, a corrupt official in Iraq gets kickbacks or $6-million, transfers it to London, then moves there.  It used to be harder for the losing country to prosecute or retrieve the stolen funds, but if both countrys are signers of the Convention on Corruption, they have pledged to make the process easier between any two signers to the convention.   If your target country has not signed the Convention, it would be harder for them to prosecute or retrieve funds from another country. 

10)  Look for Other Sources of Information on Corruption in Your Region - for instance, some regions have non-profit agencies set up to share information on anti-corruption practices. For instance, the Organization of American States (OAS - mostly spanish speaking Latin American countries) has an "Inter-American Convention on Corruption" sub-organization at http://www.oas.org/juridico/english/fightcur.html .

11)  Determine if your target country has effective internal audit or inspector general departments. Ensure that they are members of respected international government audit agencies like INTOSAI ( a UN sponsored organization called International Organization of Supreme Audit Institutions - in turn, INTOSAI has regional groups for the middle east (ARABOSAI), Asia and other regions (The US has the professional association Institute of Internal Auditors (IIA), but the State Dept., through USAID, provides some funding to INTOSAI and even Transparency International).  If they do, you might be able to review their reports or visit them to assess corruption practices in the target country.  Have your internal audit or security department contact them for background on corruption issues in the target country.

12.)  Research and evaluate the success and level of anti-corruption prosecutions in the target country.  They can have an aggressive, and independent anti-corruption agency, but if laws or courts prevent prosecutions, that indicates a hidden attempt by government officials to dilute anti-corruption programs.  For instance, the Hong Kong ICAC is very successfull, while the head of the Nigerian anti-corruption agency resigned and left the country, complaining of lack of support from the elected leaders.

13)  Research and learn about the OECD (Organization for Economic Co-operation & Development ) - Creator of the OECD Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions - Provides rules for members to combat bribery.  Calls for effective measures to deter, prevent and combat the bribery of foreign public officials in connection with international business transactions.  Will the provisions of this Convention affect the way you do business in a country.  Is your target country susceptible to bribes?  Review the Transparency International Bribe Payer's Index to see where they stand.  Some companies will decide NOT to do any business in such countries because they don't want to pay bribes, compete with firms that will pay bribes, or deal with public officials who do expect bribes.  (Actually, the same applies within the United States - there are certain cities and regions known for graft and bribery practices (Chicago, NJ and New Orleans, and some waterfront areas for instance) and one firm I worked with would not buy a subsidiary in those areas.)  - Added 7/29/2008

14. Trace International and Bribeline.org - Familiarize yourself with them.  Brief your management on the bribery cases reported on their website and the consequences of paying bribes.  Based in Annapolis, Maryland, they are a non-profit membership association that pools resources to provide practical and cost-effective anti-bribery compliance solutions for multinational companies and their commercial intermediaries (sales agents and representatives, consultants, distributors, suppliers, etc.).  TRACE provides several core services and products, including: due diligence reports on commercial intermediaries; model compliance policies; an online Resource Center with foreign local law summaries, including guidelines on gifts and hospitality; in-person and online anti-bribery training; and research on corporate best practices.  Check out their news articles on bribery cases, and consider publicizing that your employees doing international business should be familiar with Bribeline.org and when to file a report about someone who requested a bribe.

15.

- Created at 7/24/2008 - to be expanded later -  comments or submitted additions are welcome -