Are you dealing with Corruption?

| April 12, 2015

corruption UN

Is Corruption inviting itself in your business dealings with foreign entities?

 

Do you have a plan to insure your staff is educated as to the dangers of graft and corruption?

 

 

In my 30 years of professional experience, I can say with absolute certainty that the number one challenge I faced while doing business in less developed countries has been corruption. This scourge permeates every aspect of life and business, at every level and in every country, albeit at various degrees.

From the crooked cops in Mexico, to ticket customs in Vietnam and greedy government officials in China, I have never traveled without facing some sort of corruption on a daily basis.

Historically this has been a very difficult subject to broach, particularly in Western cultures, and in many cases these issues are swept under the rug, while carefully side-stepped by management. I found that the secret to dealing with corruption is to fight it head-on.

Call a spade a spade.

 

Education of traveling executives is the key to the ability to control the effects of corruption on the bottom line. Of course, that is assuming that a company is intent on insuring a clean business environment as fighting corruption may lead to adverse financial results in the short term.

 

The perception that Western countries are immune to this problem is a myth. According to the CPI Index from Transparency International the top 14 (out of 177) countries are in Northern Europe (the US is number 18) and the bottom 20 are nearly all in Africa or the Middle East (Russia is 127)

What this index fails to capture is the cross-border effect of corruption and this is evidenced by the fact that the bulk of products manufactured for consumption in Western markets (top 20 in the index) are manufactured in countries that share a poor score on this same index.

China (80), India (94), Philippines (95), Mexico (106), Vietnam (116), Cambodia (160).

 

In an article by the South China Morning Post in Hong Kong, a recent survey suggested that 41% of respondents said corruption was unavoidable in China and that number is 56% for Africa and 46% for Russia. (2012 – 2013)

This same article refers to 80% of respondents reporting exposure to fraud and corrupt practices in China. (Source: SCMP, China among riskiest places to do business, 2-12-2014)

 

On average, it is believed that corruption ads between 10 to 30% to the cost of a product made in a highly corrupt environment. This factor rarely appears on the cost sheets or balance sheets of corporations. Given that most LCC’s (Low Cost Countries) are also at the bottom of the CPI Index, it is understandable that many companies, on these facts alone, should consider re-shoring activities.

 

Everyone has, at some point in his or her professional life, been confronted with some form of corruption. The supplier that offers a nice steak dinner, the baseball tickets, the invitation to a “conference” at a nice resort, etc…

Unfortunately there are many documented stories at all levels of society of people who have succumbed to the attraction of this most insidious and illegal short cut.

 

I am yet to see a single entity escape entirely from corruption issues and everyone deals with it the best they can. When the stakes are high, the willingness to take risks increases and as a result, western organizations are largely perpetuating the flow of demand dollars towards highly corrupt countries and thus, feeding the monster for perpetuity.

I have no interest in generalizing the facts and I am sure there are exceptions. Some countries and companies do a better job then others and the main factors are EDUCATION, their willingness to place their ethics above their interest, the welfare of their staff; but these are clearly in the minority.

What many fail to recognize is the cultural nature of corruption. Go back to ancient times, millenniums ago, you will come across references to corrupt practices at all levels of society. More often than not, these practices were/are referred to as “local customs”.

What has changed to lead us to where corruption and “local customs” has become the scourge of modern society?

 

The answer is globalization. The borders and customs are now a blurry line while national interests are no longer localized. A powerful corporation from “rich country A” wants to win the rights to an oil field in “poor country B”, the paperwork is in the hands of an administrative employee that makes $500 a month in salary.

What is the impact of a $10,000 bribe on his financial position? …Enormous

What is the $ impact on a Multi-Billion Dollar corporation? …Negligible

 

Therein lies the issue; globalization has decimated local customs, where someone making $500 a month was considered well off. The interest on both sides is so overwhelmingly impact-full that all reason is tossed out of the window.

In many cases, corruption is a way of life. It is engrained in everything and every facet of business and personal life. It is as innocuous as slipping a “good” tip to the restaurant host to jump the long line for a table and as grave as handing multimillion dollar contracts to someone who will facilitate an arms deal for a western government.

 

What to do?

Based on this theory, it is clear that the difference in interpretation of what is graft and what is “local customs” is poorly defined and relies on local laws that are either ill conceived, poorly / not enforced and the disparity between the laws affecting the companies / individuals involved.

What the world needs is a fight on corruption at the UN level and standardization of graft laws across the board. Of course, this is largely utopia given the inability of the world body to enforce the large majority of international laws.

In Africa, corruption is the NUMBER ONE reason the continent is so despondent. It generates disparity between the have and have-not on levels that are not seen anywhere else in the world. It explains why governments are willing to subject their citizens to wars, famines and disease for the sake of hanging on to power at all cost. In Africa, corruption is largely institutionalized at the governmental and administrative level. The masses are happy to survive and the middle class lives off of the crumbs being laid by corrupt governments.

I am not singling out Africa as corruption is endemic in most parts of the world although the least exposed are ALL in Europe and the most exposed are in the Middle East.

 

The moral dilemma

For a businessperson, entering a foreign country to establish a foothold and find new customers / suppliers, it is a daunting proposition and often poses serious moral questions. I have found that most are squeamish about discussing such issues and laws are written in such a way as to discourage open discussion about this serious societal cancer.

 

 

Bad apples in any organization?

Undoubtedly, there will always be the argument from authorities that there are bad apples in any organization and I am happy to accept this argument, particularly when there are clear efforts by governments to eradicate such disgraceful activities, but it is rare that these actions are anything more then empty words. For example, the ICAC in Hong Kong (Independent Commission Against Corruption) has built a good reputation for its ability to educate people and enforce the anti-graft laws at every level of society. It operates completely independently and has had a major hand in turning around the culture in Hong Kong when it comes to corruption (HK is number 15 on the CPI index). Of course, the story over the border couldn’t be any more different.

 

Corruption in China and South East Asian countries

In China (and most South East Asian countries) corruption is simply a way of life. It is present at every level of life, business and government. In fact, there are price lists for just about anything you need to obtain either from Government or Businesses.

Government employees who are paid negligible amounts in terms of salary wield powers that can literally affect the survival of a business or an individual.

Recently, the Chinese Government has launched a massive anti-graft campaign against officials of all levels, but this is nothing more than a political effort and has had little or no effect in the day-to-day life of businesses or individuals.

 

Finding balance when facing corruption

Finding the balance between trying to maintain an honest business in a corrupt environment is not for the faint of heart. It requires you to face it upfront and to discuss it openly. No one is immune to the occasional blunt confrontation to corruption.

 

What about corruption at the B2B level?

Of course, there are also the issues facing corruption at the B2B level, such as an inspector offering to give a favorable report in exchange for benefits, a customer’s representative insisting on visiting a Karaoke or the local mall, etc.

Businesses operating in Asia, Africa, South America and other highly corrupt regions are constantly facing individuals who yield enormous powers and have the ability to make or break their very existence, so the pressure to accommodate these suggestions for a donation and in some cases, outright demands, is enormous.

 

DO NOT IGNORE CORRUPTION

In short, corruption is unacceptable. It should not be ignored and/or swept under the rug. Companies must account for this as an unavoidable factor in making business decisions. This is particularly important in the US, given FCPA law, which makes it a federal crime for US companies and individuals to engage in corrupt practices on foreign soil. Navigating this landscape requires advance knowledge of the risks and local practices faced when engaging in business ventures in high-risk countries. Most companies call this “Risk Management”, I call it “Moral Management”.

 

 

AUTHOR - Richard S Ellert