Global Business Ethics: Corruption: Global Business Ethics: Corruption GLOBAL CITIZENSHIP


Slide2: Bribery: the worm that never dies Corruption abuse of public power for private gain Why pay bribes? Buy parliamentary votes, presidential decrees, and court decisions state capture Avoid taxes and regulations administrative corruption * Extortion (“facilitating payments”) * Bribery


Why proliferation of corruption?: Why proliferation of corruption? monopolies and industrial subsidies in economy excessive discretionary power (lack of clear administrative rules and regulations) over distribution to the private sector lack of accountability (poorly functioning or absent watchdog agencies)


Administrative Corruption: Administrative Corruption Bribes to public officials to distort the prescribed implementation of laws, rules and regulations Includes bribes to: win procurement contracts obtain delivery of public services gain licenses smooth customs procedures 1999 World Bank Survey of 4,000 firms in 25 transition countries Distribution of bribes for “services”: Licenses (22.6%) Connection to public services (17.7%) Taxes (14.1%) Courts (13.6%) Customs (11.9%) Health/fire inspectors (8.2%) Government contracts (6.6%) Influence on legislation (2.8%) Other (2.6%) “Mayor”


State Capture: State Capture Efforts of firms to shape the legal, policy and regulatory environment through illicit, non-transparent provision of private gains to public officials Examples include: purchase of legislative votes purchase of executive decrees purchase of court decisions illicit political party financing Governments should keep their distance from businesses and their bosses. Governments remain far too keen to do businessmen's bidding even when no money is offered. American government spends more than $90 billion of the federal budget each year on hand-outs to business. Pro-market, not pro-business


Slide6: Transparency International’s ranking


Multilateral efforts to combat corruption: Multilateral efforts to combat corruption at the national level International agreements and treaties Initiatives by international development organizations Private efforts by NGOs Private efforts by firms


Slide8: National laws on corruption The U.S. Foreign Corrupt Practices Act Enacted in 1977, revised in 1988 FCPA prohibits the bribery of foreign government officials by U.S. persons and prescribes accounting and record-keeping practices. Excluded from the act: Payments to non-government officials Grease or facilitating payments (made to expedite or secure the performance of a routine government action) usually made to lower-level government officials Penalties: US companies – up to $2 million fine US individuals (including officers and directors of companies that have willfully violated the FCPA) – fines of up to $100,000 and imprisonment for up to 5 years


Slide9: American business and the law: too much regulation and punishment? Being more virtuous than thou: did it pay? Standing alone in global markets? 1996: International Chamber of Commerce, “Rules of Conduct to Combat Extortion and Bribery” 1996: UN Declaration against Corruption and Bribery in International Commercial Transactions (1) deny the tax deductibility of bribes paid to government officials of another country; (2) criminalize the bribery of foreign government officials in an effective and coordinated manner; (3) establish jurisdiction over bribery of foreign government officials in a manner consistent with the principles of international law


Slide10: 1997: OECD Convention on Combating the Bribery of Foreign Public Officials Signed by 34 countries; 26 ratified it by 2000 aim to control corruption on the supply side (MNCs headquartered in OECD countries) Agreement to pass and enforce legislation that prohibits paying of bribes to foreign legislative, administrative, and judicial officials (including officials of government-controlled corporations and international organizations) 1997: World Bank anticorruption program: The Bank would work to prevent fraud and corruption in Bank financed projects; The Bank would assist countries that requested help in fighting corruption; The Bank would mainstream its concern for Corruption directly into country analysis; The Bank would contribute to the international effort to fight corruption. 2000: Anticorruption Action Plan


Slide11: The Global War Against Bribery (1) To the extent that corruption is the abuse of public office for private gain, its perpetrators are within reach of incentives or threats—such as removal from office—that may persuade them to change their ways. (2) since corruption usually creates inefficiency, corrupt countries tend to lose out in the global competition for capital and aid; bankers and businessmen bruised by collapsing economies now demand more than a minister’s blessing before they risk their money. (3) Above all, perhaps, corruption is now an issue that brings the crowds out on to the streets. Reasons for optimism Market forces are likely to prove far more effective than legal forces in the fight against bribery Oil-for-food fraud?


Slide12: Foreign direct investment and corruption Closed borders and open palms


Key messages: Key messages Good governance is key to economic growth and development Fighting corruption requires a multi-pronged strategy to create accountable institutions: public and private political and economic


McDonald’s in China, 1998: McDonald’s in China, 1998 Control Risks, a London business risk consultant, reports that each of McDonald’s 38 outlets in Beijing was subject to 31 miscellaneous “fees” for purposes as unlikely as river dredging, flower displays on public holidays, and President Jiang Zemin’s spiritual well-being program. The Beijing city council had not passed legislation specifically authorizing the fees, but city bureaucrats appeared to be within their discretion to impose the fees. Should McDonald’s agree to pay the fees? Systemic corruption in China


Gulf Oil in Korea, 1966: Gulf Oil in Korea, 1966 In the mid-1960s, Gulf Oil Corporation undertook a $200 million direct investment program in the Republic of Korea. When the program was nearly completed, the ruling political party approached Gulf for a $1 million contribution to finance its election campaign. The request was accompanied by pressure which left little to the imagination. The contribution was made and the incumbent party won reelection. When the ruling party geared up for the next general election in 1970, a leader of the incumbent party approached Gulf for another campaign contribution. SK Kim, the party representative, suggested that $10 million would be an appropriate contribution. Should Gulf Oil make the contribution?


Charitable contributions: Charitable contributions You are a partner in a venture capital firm focused on the Polish market and would like to privatize a regional newspaper with an eventual payout on the deal at over $10 million. As a foreign investor, your firm must obtain ministerial approval for the purchase. At a meeting with the Minister, an answer is promised within a week. As you are leaving the meeting, you are introduced to the chief fundraiser for a charitable organization that supports orphaned children. The minister’s wife founded the organization and heard that you were interested in this type of charity. The fundraiser then asks for a $50,000 donation. Despite several follow-up calls, no answer regarding the approval is received for 10 days. In the meantime, your lawyers do a background check and report that the charity is legitimate. They also note that neither the minister nor his wife appear to receive any financial benefit from the charity. Do you make the donation?


Dealing with terrorists: Dealing with terrorists You are the regional vice president for Latin America in a multinational packaged goods firm. Colombian rebels kidnap your country manager and send a videotape to your office. The group offers to release the executive if your firm take three actions: makes a $250,000 contribution to their food and medicine fund; runs an advertisement in the Financial Times criticizing the Colombian government’s stand toward the rebels; and pay a $250,000 ransom to the kidnappers. Would you meet the rebels’ demands?


Slide18: The war on terror has spawned a battle against corruption in Latin America Corruption in Latin America Latin America is a region racked by almost endemic public thievery. The United States has in the past been criticized for tolerating corruption in Latin America, especially when its political allies in the region were implicated. New weapons against Latin American corruption derived from the Patriot Act passed after 9/11. (1) On its basis, the Department of Homeland Security has been pursuing the American assets of foreigners suspected of corruption in their own countries. (2) New policy to deny or revoke the visas of corrupt functionaries, or PEPs (politically exposed persons). New, post-September 11 policy to get tough on corruption. National security argument Foreign-aid policy