Corruption in international business

CORRUPTION IN INTERNATIONAL

BUSINESS

Presented by: Ankit Yadav

MSC Business & Management

AIMS

This presentation focuses on following areas:

What is corruption?

The Growth of Corruption;

Corruption Perceptions Index (1995 – 2010);

Causes of Corruption;

Economic effects of Corruption;

Remedies to combat Corruption;

Case Studies;

Recommendations and;

Conclusions.

2

WHAT IS CORRUPTION?

Corruption has been defined in many different ways, each

lacking in some aspect:

The abuse of public power for private benefit.

(Source: World Bank, 1999)

The agreement to pay a financial inducement to a public

official for securing favour of some description in return.

(Serious Fraud Office, 2010)

Transparency international defines corruption as the abuse of

entrusted power for private gain.

(Transparency International, 2010)

CORRUPTION = PUBLIC POWER + PRIVATE GAIN + ABUSE

- ACOOUNTABILITY

3

TYPES OF CORRUPTION

Trading in influence;

Rent Seeking (Bribery);

Nepotism (Found More in Developing Countries);

Electoral Fraud;

Kickbacks;

Unholy Alliances and;

Involvement in Organised Crime.

4

THE GROWTH OF CORRUPTION In recent years, and especially in the decade of 1990s, the

phenomenon broadly referred to as corruption has attracted a

great deal of attention.

(Source: Johnston, 1997)

In countries developed and developing, large or small, market

oriented or otherwise, because of accusations of corruption,

governments have fallen and prominent politicians have lost

their positions.

(Source: IMF, 1998)

However, the degree of attention currently paid to corruption is

unprecedented and nothing short of extraordinary. For

example, in its end-of-year editorial on December 31st 1995,

The Financial Times characterised 1995 as the year of

corruption. The following two years could have earned the

same title.

(Source: Tanzi, 1998) 5

LOWEST CORRUPTION COUNTRIES (1995)

6

9.55

9.32 9.26

9.12

8.87 8.87

8.8 8.76

8.69

8.61

8

8.2

8.4

8.6

8.8

9

9.2

9.4

9.6

9.8

New Zealand

Denmark Singapore Finland Canada Sweden Australia Switzerland Netherlands Norway

(Source: Transparency International,1995)

LOWEST CORRUPTION COUNTRIES (2010)

7

9.3 9.3 9.3

9.2 9.2

8.9

8.8

8.7 8.7

8.6

8.2

8.4

8.6

8.8

9

9.2

9.4

Denmark New Zeland Singapore Finland Sweden Canada Netherlands Australia Switzerland Norway

(Source: Transparency International, 2010)

HIGHEST CORRUPTION COUNTRIES (1995)

8

3.18

2.99

2.79 2.78 2.77 2.7 2.66

2.25 2.16

1.94

0

0.5

1

1.5

2

2.5

3

3.5

Mexico Italy Thailand India Philipieness Brazil Venezuela Pakistan China Indonesia

(Source: Transparency International,1995)

HIGHEST CORRUPTION COUNTRIES (2010)

9

1.9

1.8

1.7

1.6 1.6 1.6

1.5

1.4 1.4

1.1

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2


CAUSES OF CORRUPTION

Regulations & Authorisation;

Taxation;

Spending Decisions;

Market pressure on MNC’s to make profits;

Financing of Parties.

Quality of Bureaucracy;

Level of public sector wages (Ratio of Developed and

Undeveloped Countries);

Penalty systems;

Moral Hazard;

Transparency of rules, laws and processes and;

Examples by leadership.

(Source: IMF, 1998)

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ECONOMIC EFFECTS OF CORRUPTION (1)

Corruption has a number of adverse consequences:

Exploitation of public system by entrepreneurs (increasing

prices of products);

Productivity drain provided by lucrative opportunities of rent

seeking rather productive work;

Monopolistic practices are encouraged, which hinders free

market trade, thus reduces competition and limits the choice

for consumers;

(Source: IIE, 1998)

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ECONOMIC EFFECTS OF CORRUPTION (2)

Corruption may also bring about loss of tax revenue when it

takes the form of tax evasion or the improper use of

discretionary tax exemptions;

Creates distrust and loss of integrity in the system;

The allocation of public procurement contracts through a

corrupt system may lead to inferior public infrastructure and

services and;

Undermines economic and democratic developments.

(Source: IIE, 1998)

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INDUSTRY’S OFTEN INVOLVED IN CORRUPTION

Oil and Gas;

Mining;

Defence;

Telecommunications;

Transport Sectors and;

Infrastructure and Property Development.

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REMEDIES TO COMBAT CORRUPTION

Getting to work following bodies in unisom:

Serious Fraud Investigation Office (Enforcer);

Transparency International (Adviser);

The World Bank (Adviser)

OCED (Enforcer);

UN (Enforcer) and;

These are not the only bodies, there are other enforcement

and advisory bodies that deal with corruption.

COMBATING CORRUPTION = ADVISERS + ENFORCERS +

LOCAL AUTHORITIES + COMPLIANCE BY

INTERNATIONAL COMPANIES

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OECD CONVENTION ON CORRUPTION (1)

In 1997, the member states of the OECD adopted the OECD

convention on combating bribery of foreign public officials in

international business transactions. Following are the articles of

OECD convention:

The offence of bribery of foreign officials;

Responsibility of legal persons;

Sanctions;

Jurisdiction;

Enforcement;

Statute of Limitations;

Money laundering;


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OECD CONVENTION ON CORRUPTION (2)

Responsible Authorities;

Monitoring and follow-up;

Signature and Accession;

Entry into force;

Amendment;

Withdrawal;

Accounting and;

Extradition.


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CASE STUDIES

2G Spectrum Scam in India;

Bofors AB Howitzer Pay – Off Scandal in India;

Rio Tinto;

BAE Systems;

Panalpina Logistics and;

British American Tobacco.

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RECOMMENDATIONS

Governments should assign responsibility for foreign bribery

cases to specialised staffs with adequate resources.

The OECD ministerial group should encourage China, India

and Russia to join OECD convention. To achieve a level

playing field all major exporters should play by the same rules.

To keep pace with changes in forms of corruption, increasing

attention needs to be devoted to combating indirect forms of

bribery such as the use of intermediaries, subsidiaries,

contractual and joint venture partners.

The OECD ministerial working group should also, as soon as

possible, begin to address unresolved issues and political

loop-holes in the OECD convention and national implementing

legislation, including bribe payments to political parties, lack of

corporate criminal liability, inadequate statutes of limitations,

and private to private corruption.


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CONCLUSIONS

Recommendations from advisory bodies have been enforced

by the organisations like OECD and UN;

According to CPI index the highest corruption countries have

shifted from South America, Asia and some parts of Europe to

Africa and Middle East and;

The notion of emerging markets and opportunities in (BRIC)

countries helps in breeding the corruption in international

business.

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QUESTIONS & ANSWERS SESSION

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REFERENCES (1)

BBC News. (2004). Shell Admits Fuelling Corruption In Nigeria. Available:

http://news.bbc.co.uk/1/hi/3796375.stm. Last accessed 10 March 2011.

BS Reporter. (2010). Most of 2G Licences Given in 2008 Were Illegal. Available:

http://www.business-standard.com/2gscam/news/most2g-licences-given-in-2008-were-

illegal-cag/411374/. Last accessed 10 March 2011.

Indo - Asian News Service. (2011). Timeline of Bofors Scandal. Available:

http://www.ndtv.com/article/india/timeline-of-bofors-scandal-76775. Last accessed 12

March 2011.

Johnston, Michael. (1997). Public Officials, Private Interests, and Sustainable

Democracy: When Politics and Corruption Meet. Institute for International Economics. 0

(0), p - 61 - 82.

Mauro, P. (1998). The Effects of Corruption on Growth, Investment and Government

Expenditure: A Cross Country Analysis. Institute for International Economics. 0 (0), p 86 -

87.

SFO, UK. (2010). Bribery and Corruption. Available: http://www.sfo.gov.uk/bribery--

corruption/bribery--corruption.aspx. Last accessed 15 March 2011.

Tanzi, V. (1998). Corruption Around the World: Causes, Consequences, Scope and

Cures. International Monetary Fund - Fiscal Affairs Department. 0 (0), p 3 - 22.

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REFERENCES (2)

Tanzi, V. (1998). Corruption Around The World. IMF Staff Papers. 0 (0), p - 560.

The World Bank. (1999). Introduction to Corruption. Available:

http://info.worldbank.org/etools/docs/library/35970/mod03.pdf. Last accessed 16 March

2011.

Transparency International. (2009). Progress Report 2009. OCED Anti-Bribery

Convention. 0 (0), p 6 - 56.

Transparency International. (1995). Corruption Perception Index - 1995. Available:

http://www.transparency.org/policy_research/surveys_indices/cpi/previous_cpi/cpi1995.p

df. Last accessed 12 March 2011.

Transparency International. (2010). Corruption Perception Index - 2010. Available:

http://www.transparency.org/policy_research/surveys_indices/cpi/2010. Last accessed 12

March 2011.

Wisenthal, J. (2009). Rio Tinto Accused of Massive Fraud and Spy Claims in China.

Available: http://www.businessinsider.com/rio-tinto-accused-of-massive-fraud-and-

espionage-in-china-2009-8. Last accessed 10 March 2011.

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