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David-Lawler

The Most Frequently Asked Questions in Anti-Bribery and Corruption

 

David Lawler, Partner at Forensic Risk Alliance, London, UK

       
The Most Frequently Asked Questions in Anti-Bribery and Corruption
Of all the business textbooks in circulation at the moment, the Frequently Asked Questions series, published by Wiley, is perhaps the most interesting.  Each book in the series contains several chapters explaining the fundamentals of a topic, and then sets out answers to about 50 of the burning questions of the day.   Perhaps, though, I am slightly biased, because I was recently honoured to have been asked to write Frequently Asked Questions in Anti-Bribery and Corruption!   As might be expected from a compliance book, it contains lots of detail about the OECD, FCPA and Bribery Act, as well as practical guidance about setting up effective compliance procedures.  But unlike many books of its genre, it also deals with some of corruption’s social and psychological aspects.   I have learnt that as compliance professionals we must become more sophisticated about how we explain to economically-literate people that bribery is truly wrong, in our understanding of what tempts people to get involved with it, and in our approach to stopping it.  I thought that it would be useful in this article to deal with some of these most common, and most fascinating questions in bribery and corruption.    
Why is bribery wrong? 
We all know that bribery is wrong, and that the world would be a better place if there was less of it.  But how do we express this convincingly to others? ‘Because the FCPA says it is wrong’ is far less persuasive to export agents in Yemen, than in Texas. It’s vital for compliance professionals to be able to sensibly –and rationally – address this question, without recourse to dogma.  After all, we live in a capitalist society, and so what role should governments have in regulating who pays what to whom?   This latter question is often asked by people trying to argue that bribery in their particular field is not actually too bad:  “Ah, but this is [Insert Name of Country], not the UK.  You’re obviously unfamiliar with the culture in [Insert Name of Country].”   Often the same people will tell you that it’s impossible to do business in the country without paying bribes, without themselves having much experience of ever trying to do it.   Corruption creates economic distortions because it causes officials to make their decisions based on what gives them the largest personal profit, rather than what is in the public interest.  This has various knock-on effects:  countries known to be susceptible to corruption experience reduced aid, because donor countries focused on ethics and good governance scale back assistance to known violators.  If public investment is diverted into those projects where bribes and kickbacks are most plentiful, not necessarily those projects where investment is most needed, this leads to lower quality of infrastructure and public services.  Most economic commentators seem to agree that these economic distortions slow economic development, it being generally observed that corruption is associated with lower GNP per capita, lower investments and lower growth rates.  Statistics such as the fact that 50% of allocated funds do not reach clinics and hospitals in Ghana are indeed very sobering. But one also needs to accept that there are many situations where petty bribery is required to get things done, and that it seems to work in practice.    
What conditions encourage bribery?
A simple formula has been widely adopted to describe the conditions in which corrupt officials thrive: [i] Corruption = Monopoly + Discretion – Accountability – Salary The formula suggests that bribery tends to be high where public officials have a monopoly on the exercise of power, with lots of discretion, limited accountability and low salaries.  Conversely, countries where business  does not have to  deal with government restrictions – either because there are few of them, or because there are private sector alternatives – are generally correlated with lower instances of corruption.   Unfortunately, these drivers are related to macro-economic and institutional traits that change only slowly.   The highest rates of corruption in a country’s development tend to occur during periods of rapid modernization.  Both the US and the UK experienced high levels of corruption during their own industrial revolutions.  Researchers have suggested that there are four reasons why this happens:
  • It changes values and norms within society, leading to some behaviour, which was traditionally tolerated, becoming unacceptable and redefined as corrupt;
  • It creates new sources of assets and resources to which officials have access, and can therefore supply to the highest bidder;
  • It creates demand among officials who aspire to better standards of living;
  • As countries modernize, their governments tend to expand, and thus there are more bureaucrats and more people in a position where they can take bribes.
Paradoxically, this is also the time when societies start to become aware of the problems that corruption can cause and begin to strengthen anti-corruption laws and enforcement.  If not managed carefully, this can backfire, as more bureaucrats are employed to monitor corruption, and therefore more people have government jobs that give them the opportunity to be corrupt.   Although lots of anecdotal data exists showing that corruption is correlated with slow economic growth, this is not the case in many large East Asian newly industrializing countries, including China, Vietnam, Indonesia, South Korea, and Thailand, where we observe relatively high corruption but also high growth.  China, for example, is currently the fastest-growing major world economy and has attracted a large inflow of private capital from overseas, despite high levels of corruption.  This East Asian paradox certainly makes understanding corruption more complicated. Why the apparent inconsistency?   What seems to be important is the scale and more importantly the predictability of the bribery.  Research suggests that while lower levels of corruption do indeed seem to lead to higher levels of investment, predictable corruption does not stifle growth nearly as much as unpredictable corruption.  Therefore, while the best situation is to have low levels of corruption, the next best by far is to have corruption that is as predictable as possible. In such an environment firms are confident that they will be able to obtain the product or service they are seeking, albeit for the price of a small, and known, bribe.  Corruption in East Asia is well-recognised, and has a relatively high degree of predictability, thus can still lead to high levels of growth.    
Can corruption ever be a good thing? 
Or put another way, can countries ever benefit from a well-established exchange of government privileges for bribes? “In terms of economic growth, the only thing worse than a society with a rigid, overcentralized, dishonest bureaucracy is one with a rigid, overcentralized, honest bureaucracy.  A society which is relatively uncorrupt—a traditional society for instance where traditional norms are still powerful—may find a certain amount of corruption a welcome lubricant easing the path to modernization.”

Samuel Huntington ‘Political Order in Changing Societies’, 1968

Some free market economists argue that badly designed or badly implemented regulations distort efficient markets, and low-level, contained corruption can help to correct this.  Bribery thus serves a similar function to taxation, however it is much more focussed, in that money paid to obtain public services is paid by the people who most value that particular service.  Bribery does increase the price of a transaction, but this would increase anyway if the government had to pay officials an adequate wage and this increase would be funded by levying taxes on the entire population, rather than just on the users of the service.   Other situations where corruption has been argued to generate positive side-effects include the following:
  • In some countries not focussed on economic growth – for example in some very traditional or revolutionary regimes where the leaders believe it could challenge their power base – corruption encouraged by groups outside the government may actually serve to encourage growth, and so counteract repression.
  • Public positions where the officials can receive bribes – such as with the police, customs, tax office and immigration – attract good quality applicants despite low pay.
  • If the regulations in a developing country are cumbersome and inefficient, corruption allows entrepreneurs to bypass bureaucracy, and the economy can thus respond to current demands rather than rigidly complying with out-dated rules.

  

Is there a cultural element to corruption?
Is it caused entirely by economic conditions, or are some cultures or societies intrinsically more corrupt than others?  Government power alone would not seem to be the over-riding cause of corruption, as there are some relatively uncorrupt countries with intrusive governments, such as in Scandinavia.   Certain social values (most notably personal honesty) appear to be much more important than the level of governmental control.   In a fascinating experiment to try to disentangle the two factors, economists Raymond Fisman and Edward Miguel looked at an observable proxy for corruption, and chose the incidence of parking tickets given to diplomats from around the world in New York.[ii]  Prior to 2002, staff of embassies and consulates and their families from 146 countries benefited from diplomatic immunity, including the ability to avoid paying parking fines. These economists examined differences in the behaviour of government employees from different countries, all living and working in New York, and all of whom could act with impunity in illegally parking their cars.  They observed a strong correlation between illegal parking and levels of corruption in the diplomats’ home country, with diplomats from high corruption countries (based on commonly used indices) having significantly more parking violations than those from low corruption countries.  This suggests that cultural or social norms related to corruption are deeply engrained, and even when living thousands of miles away from home, diplomats behave in a manner highly reminiscent of officials in the home country.   Once people arrive at the view that it is necessary to pay bribes to do business in a particular country or sector, then they will offer unsolicited bribes to officials to get things done, even when a bribe is not needed. Politicians and public officials in Italy, for example, have reported that they have received money without asking or knowing exactly why. Although some element of corruption must be in place anyway – otherwise the bribe would be quickly returned – this phenomenon can make widespread reporting of corruption into a self-fulfilling prophecy. It is easy to see how a vicious spiral can arise, with corruption being encouraged not by the local culture but by inward investors and purchasers from developed countries.   An Asian commentator, bemoaning the prevalence of corruption and frustrated by the unwillingness of citizens to stand up to it, has modified the World Bank equation to bring in other social factors.[iii] Corruption = Monopoly + Discretion – Accountability – Salary + I + LoD + LoS + LoG Where…. + I = Ignorance of the rules by the public, and an unawareness of their own right to insist on due process.   This is correlated with high levels of illiteracy. + LoD = Lack of discipline by the public.  Doing the right thing requires discipline, and some people find it easier to pay a bribe than go through the correct procedures. + LoS = Lack of scruples by the public: they would rather do what is convenient than what is right, and are happy to pay a bribe for what they are not entitled to, with no consideration given to the wider picture, and to the position of other people. + LoG = Lack of guts by the public: submissiveness when facing someone perceived as “superior” to them can set them up for exploitation as a potential victim when facing government officials.    
How can I stop bribery?
We still have a long way to go in figuring out how to fight corruption.  As Fisman and Miguel point out: [iv] “…governments tend to make lots of changes simultaneously: Salaries are doubled, enforcement increased, and governments made transparent all at the same time, making it hard to sort out which improvements are really the result of any specific policy…Perhaps the answer is that governments should become more experimental, quite literally, in how they deal with their corruption.”   Research into cheating has shown that in any group of people, there are some that are simply dishonest, and would cheat in virtually any circumstances given the opportunity.  But there is a much larger proportion who are deeply conflicted about what to do in circumstances where other people are involved in dishonest behaviour, and most either keep quiet, or ‘go with the flow’ and become involved themselves.  Readers are probably familiar with Rudy Giuliani, spearheading a ‘zero tolerance‘ response to crime when he was Mayor of New York.   His idea was based on social scientists Wilson and Kelling’s  ‘broken windows theory’, which suggested that focussing  police attention on remedying small but powerful signs of disorder and petty crime, such as graffiti, litter, and fare evasion, would be effective in reducing more serious crimes.[v]  The tactics were widely thought of as a success, and demonstrated that if people see that others have violated a social norm, then they themselves are less likely to feel hesitant about violating that norm.   Psychologist Robert Cialdini points out the importance of group dynamics in deterring petty crime. In an experiment in Petrified Forest National Park in Arizona, researchers placed signs at entrances asking people not to take home petrified wood. The sign at one entrance showed three thieves with an X over them, while at a second entrance, the sign depicted just one thief. The sign at the second entrance was far more effective in reducing theft.  This is thought to be because if you emphasize how common cheating is, it gives the subtle message that all of your neighbours and co-workers are doing it.  “And if there’s a single, most primitive lever for behaviour in our species, it’s the power of the crowd.”[vi]   The UN tells us that 15% of all companies in industrialised countries pay bribes to win or retain business. In Asia this figure is at 30%; in the former Soviet Union it is 60% [vii]. But allowing people to see that violations of laws are frequent or widespread makes these same laws less likely to be followed by others. It is therefore important in communicating an anti-bribery policy to marginalise those who bribe and subtly portray them as violating moral and social norms.  Rather than propagate the message that ‘too many of us are involved with bribery and we need to cut down’, far more effective to highlight the fact that if even one person is involved, then  it undermines the principles of transparency and fairness which should govern the way business partners treat each other. The more a myth is perpetuated, the more people will continue to bribe.  
David Lawler is a forensic accountant and bribery specialist.  He is a partner at FRA, the forensic accounting and electronic disclosure consultancy.  His book, Frequently Asked Questions in Anti-Bribery and Corruption, is published by John Wiley & Sons in April 2012, and is available on Amazon. http://www.amazon.co.uk/Frequently-Questions-Anti-Bribery-Corruption-Corporate/dp/1119971977
 
April 2012  
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For more on FRA forensic accounting and e-disclosure, contact Caroline Fagard at cfagard@forensicrisk.com


[i] Klitgaard, R. E., Maclean-Abaroa, R., & Parris, H. L. (2000).  Corrupt cities: A practical guide to cure and prevention. Oakland: ICS Press.
[ii] Cultures of Corruption: Evidence From Diplomatic Parking Tickets.  Raymond Fisman, Edward Miguel.  NBER Working Paper No. 12312 June 2006.  http://bit.ly/pIsNLI
[iv] How Economics Can Defeat Corruption.  Raymond Fisman, Edward Miguel.  Foreign Policy, September/October 2008.  http://bit.ly/nWOo7Y
[vi] http://bit.ly/o9HkJD

Tags : anti-bribery, FCPA, monopoly, accountability

 



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