Putting an end to corruption

A trillion dollars a year are paid globally in bribes. It's a curse and will take more than the Bribery Act here and tougher laws in the US to sort out, says Oliver Bennett.

by Oliver Bennett
Last Updated: 09 Oct 2013

While on a recent work-finding visit to a major Gulf state, Jack Darby, who works for a big London architectural firm, was given an offer he could refuse: to take on a 'sponsor' to grease the deal. 'I didn't want to go along with it at all and said so,' says Darby (not his real name). 'It's surprisingly common in international construction contracts, but a kind of bribery. These "sponsors" are often connected to the ruling elite and you're expected to pay them a retainer to make "connections".' Darby declined and didn't get the contract. But somebody else did.

Or take the extraordinary case of Japanese imaging giant Olympus, whose first non-Japanese boss, Michael Woodford, was peremptorily fired last month, he says for questioning the size of payments made to advisers as part of the £1.4bn acquisition of UK medical supplies firm Gyrus in 2008. Woodford has taken the case to the SFO, while the Olympus board is said to be mulling legal action against him.

Consider also Will Mitting, who set up a financial magazine in Malawi three years ago and found that he had to make bribes to printers and even payments to get invoices paid. 'Otherwise, your invoice would stay there for six months, for the sake of about 50p. So you do it. In fact, if you don't "tip" in Malawi you're out of the game. It's woven into the system. Everyone's involved and you despair.'

This year, global corruption hit the corporate agenda. The UK Bribery Act, in force since July, has already claimed a scalp and in May the US saw its first conviction under the Foreign Corrupt Practices Act (FCPA).

From bribery to tax avoidance or evasion, to internships, no ethical stone is being left unturned. Privileges once taken for granted, from installing nephews of friends in work experience to backhanders, are under scrutiny and the kinds of casual leg-ups that were once routine are now proscribed. Recently, the Serious Fraud Office charged 71-year-old Bill Lowther with allegedly conspiring to pay for the son of the governor of Vietnam's state-owned bank to be educated at Durham University.

The Act is certainly timely, as corruption has hardly been out of the news lately: from phone hacking at News International to last year's MPs' expenses scandal to the banking crisis and insurance misselling. As Philippa Foster Back, director of the Institute of Business Ethics (IBE), says, business ethics is the new green - and the cliche is apt. 'It started with environmental concerns and has moved to ethical questions at large,' she says. One of the two key organisations dealing with ethics in the country - Transparency International (TI) being the other - the IBE has made more presentations on the Bribery Act in France than here. 'It's the extra-territoriality,' says Foster Back. 'If you got caught bribing someone in Indonesia, you could be tried in the UK under the Bribery Act. It's a global benchmark now.' UK companies doing business abroad can no longer get away with malpractice and the Act will save them from themselves, says Foster Back. 'So most companies are developing policy documents and codes of conduct.' By such means, she says, the UK can be an ethical beacon to the world.

True, the UK is in a strong position. We don't have a kleptocracy here, the police force is mostly honest and bribing a public official is highly unusual. Compared with, say, Thailand, we're pretty clean. According to the anti-corruption watchdog, Thai prime minister Yingluck Shinawatra is second on the country's rich list, with seven Hermes handbags, eight cars and a house with a football pitch.

But the Act has left many UK businesses wondering where the boundaries lie. 'People are extremely concerned about corporate hospitality but it's fine to entertain,' says Foster Back. 'As Ken Clarke (the Secretary of State for Justice) said: "It's okay, you can still go to Wimbledon."' But if your 'ask' grows, think again. 'For example,' adds Foster Back, 'is it appropriate to get a ticket for the World Cup final in Brazil and return airfares? Probably not. So it's scale and reciprocity. You can take a client, but perhaps not the other way round.'

There's also a concern that, due to our new probity, business might be missed. In 2006, a quarter of UK companies thought they had lost a contract to a competitor that had paid a bribe in the previous five years, according to a report by security consultancy Control Risks. The riskier the country, the greater the pressure to behave unethically. 'It has historically been the case that an ethical businessperson might lose the deal,' says Liz David-Barrett of the Centre for Corporate Reputation at the Said Business School, University of Oxford. 'No one wants to be the first to make the right move, which might mean saying "no".' Plus, an ethical approach might not only give a less scrupulous competitor an advantage; it could even favour a foreign competitor. As Mitting says: 'There's a massive influx of Chinese into Malawi and, from what I hear, they're not particularly prone to such considerations.'

Typically, corruption is more prevalent within underdeveloped countries where bribes and nepotism are endemic. Mark Hillary, an expert in outsourcing, has scrutinised various globalised outposts for companies locating new offices. 'One of the hardest places I've worked in is India, where getting the right to build is difficult,' he says. 'It's very hard to find out who owns land, and often three or so officials come out of the woodwork, claiming you have to pay them £1,000 each.' The hassle is so great that these guys get paid to go away: a scenario familiar to anyone who has stepped from an aeroplane into the teeming mayhem that is India. Stand in an interminable line or pay someone to jump the queue when buying a train ticket? A lot of us have done the latter - so imagine the temptation in business.

Trouble is, this would now be seen as 'facilitation': the great euphemism for bribery. Facilitation can mean anything from a few rupees or baht for an agent to prestigious gifts. In China, for example, artworks are often used as business collateral, an age-old practice known as yahui or 'elegant bribery'. This itself feeds a huge saleroom market, illustrating bribery's large hinterland.

So installing anti-bribery measures can be like turning around an ocean liner, says David-Barrett, citing some tried-and-tested, developing-world bribe inducements. 'A common one is when the tax authorities turn up,' she says. 'They demand to look around the business, leaf through papers and tell you: "We'll do this every day for six months."'

So you pay them to leave. A routine scam in Russia and Africa is for officials to pop up after you've negotiated a contract and demand 'procurement' money.

Any UK business tempted to 'facilitate' should beware: corruption sticks. Think about the scandal enveloping Formula One, as an illegal payment trial looms in Germany.

'We learned the hard way,' says Deborah Allen, director of corporate responsibility for BAE Systems. 'We had a reputational onslaught. Now we're hypersensitive. Still, we seem to have been overtaken by News International.'

BAE's tribulations began in 1985, when the UK Ministry of Defence signed the al-Yamamah arms deal with the Saudi government. A secret slush fund later ensued, with corruption linked to contracts from Tanzania, the Czech Republic, Romania and South Africa. BAE was excoriated by the Lord Woolf report of 2008. 'Now we can't afford any compromise,' says Allen.

But isn't defence an industry that will always be compromised? 'It's a very British idea that defence is in itself corrupt,' says Allen, adding that BAE will not work with dictatorships. 'It's for countries with stable economies. There's a big difference between the world of illegal arms trafficking and child soldiers with Kalashnikovs and the defence industry, which is mostly oriented towards communications now.'

This ethical movement is gathering pace worldwide - including in corrupt countries. 'People in affected countries are sick and tired of corruption,' says Lucy Norton, associate director of the corporate investigations team of Control Risks. 'It's pervasive. They feel overwhelmed by it.' Of all people, they need to know that business can run without improper payments, and Norton says that importing a zero-tolerance attitude from the UK can be empowering to them.

Take India, where there's a grass-roots anti-corruption movement growing in line with the country's status as a world industrial power. Recently, 74-year-old activist Anna Hazare went on hunger strike to try and strengthen anti-corruption measures, and there are also initiatives such as the website Ipaidabribe.com, which names and shames functionaries, and the ingenious zero-rupee movement from NGO Fifth Pillar, which has passed over a million worthless notes to bent officials. They're hilarious - stamped with a picture of Mahatma Gandhi and the legend 'Eliminate Corruption at all Levels'.

But the structural problem persists. A recent survey of British enterprises and investors operating in India by KPMG India showed that the majority of respondents were frustrated by the time taken to get approvals and clearances, particularly from state and local government departments. India's only consolation is that much of Africa is worse. 'Without doubt, corruption is the biggest obstacle to business in places like Malawi,' says Mitting. 'The police and customs are rotten to the core.' Take importing goods. 'A customs officer might ask for about 80% of the wholesale value and get away with it. After all, who's going to name and shame the guy? They're all at it.'

Rules and regulations do exist in Malawi, he says, but they're used as a stick to beat people into corrupt practices. 'It's impossible to comply with every regulation, so any official has an excuse to pursue you. If they want to get you, they'll get you, however minor the transgression.' And the fines are enormous, making that discreet backhander all the more attractive.

Hillary, now CEO of Sao Paulo-based tech analysis firm IT Decisions, cites problems in his adopted home, Brazil, another growing BRIC nation. 'I spoke to someone setting up a hotel on a site with outstanding utility bills. They were thrashing it out in court and the judge said: "We can sort this out." He was demanding a bribe - otherwise he would have held up the build.' Still, Hillary sees corruption in the developing world as akin to drinking and driving in the UK. 'In the 1970s it was acceptable and people were almost proud of it,' he says. 'Now they're not. It's a process that takes time.'

The yardstick for international corruption is provided by Transparency International's Corruption Perceptions Index. 'Companies take it very seriously,' says Robert Barrington, head of external affairs at TI. 'Credit ratings are based on the index for the simple reason that corruption stands in the way of economic development and companies increasingly decide the countries they want to do business with according to their corruption levels.'

The 2010 chart - the latest - shows Denmark at the top with Somalia last at 178. The worstperforming country in the industrialised west is Italy, at 67. The UK is at 20: not a bad showing, although beneath Barbados and Qatar. But a recent TI survey on UK perceptions of domestic corruption reveals a somewhat jaundiced situation: 53.4% of respondents believed corruption has increased in the UK in the past three years and 48.1% did not think the government effective in tackling corruption. Moreover, British people don't seem to know what to do: 92.7% of respondents would like to report corruption, but only 30.1% would know how to.

Why? Barrington explains that TI operates a 'principle-based' rather than a 'rule-based' system. 'In the UK, there is relatively little bribery,' he says. 'But, here, corruption takes a different form. Some of what the MPs were doing was corrupt, for example. It wasn't bribery, it wasn't against the law, but it was corruption.'

The point is, says Barrington, that it destroyed trust, the basis for all transactions, and increasingly a quantifiable business virtue. Widespread bribery can reduce a country's GDP by up to 1%, according to the World Bank. A trillion dollars is paid in bribes every year worldwide and, a decade ago, a quarter of Africa's GDP was paid in bribes. And Malawi is no worse than many African countries. 'The Nigerian system of "dash" (a routine tip) is a real pain,' said a businessman working in international publishing. 'It has totally screwed the system there.'

Barrington points to certain industries as being particularly compromised. 'Construction is bad, as is extraction, defence and pharma.' Indeed, corruption is quite sectoral, says Control Risks' Norton. 'Some industries are more opaque than others, particularly "frontiers markets" such as oil and gas.' But it can also affect softer, public-facing businesses such as retail. Since 2009, Swedish furniture giant Ikea has been embroiled in a bribery scandal in Russia, with Ikea Group CEO Mikael Ohlsson stating that 'corruption is totally unacceptable for Ikea'.

Last year, Macmillan Publishers was ordered to pay £11.3m for 'unlawful conduct' related to an attempt to bribe its way into the World Bank's education programme in south Sudan. It has now been banned for six years. And, earlier this year, Leeds-based medical device company, Depuy International (a subsidiary of US giant Johnson & Johnson) was fined $6.9m for unlawful conduct relating to the sale of orthopaedic products in Greece between 1998 and 2006, when it paid out millions in kickbacks to Greek health officials, doctors and surgeons - incentives listed on DPI's books as 'Professional Education'.

So while it's easy for the UK, US and EU to condescend to those in the developing world, we've still got our own yard to clear and, just perhaps, the anti-corruption drive will win over a new generation to business. 'Companies aren't going to rid the world of corruption and inefficiencies,' says Norton. But they can make a good start.

THE MOST CORRUPT COUNTRIES

Rank
Country
Trust Index score
1
2
2
4
5
5
5
8
9
10
10
12
12
12
12
16
16
16
16
16
16
16
16
16
16
Somalia
Afghanistan
Myanmar
Iraq
Sudan
Turkmenistan
Uzbekistan
Chad
Burundi
Angola
Equatorial Guinea
Democratic Rep. of the Congo
Guinea
Kyrgyzstan
Venezuela
Cambodia
Central African Republic
Comoros
Congo-Brazzaville
Guinea-Bissau
Kenya
Laos
Papua New Guinea
Russia
Tajikistan
1.1
1.4
1.4
1.5
1.6
1.6
1.6
1.7
1.8
1.9
1.9
2.0
2.0
2.0
2.0
2.1
2.1
2.1
2.1
2.1
2.1
2.1
2.1
2.1
2.1

Source: Transparency International's Corruption Perceptions Index 2010

TOP 25 LEAST CORRUPT COUNTRIES

Rank Country Trust Index score
1
1
1
4
4
6
7
8
8
10
11
11
13
14
15
15
17
17
19
20
21
22
22
24
25
Denmark
New Zealand
Singapore
Finland
Sweden
Canada
Netherlands
Australia
Switzerland
Norway
Iceland
Luxembourg
Hong Kong
Ireland
Austria
Germany
Barbados
Japan
Qatar
United Kingdom
Chile
Belgium
United States
Uruguay
France
9.3
9.3
9.3
9.2
9.2
8.9
8.8
8.7
8.7
8.6
8.5
8.5
8.4
8.0
7.9
7.9
7.8
7.8
7.7
7.6
7.2
7.1
7.1
6.9
6.8

Source: Transparency International's Corruption Perceptions Index 2010

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