Corruption Overview This unit covers the following topicslnweb90.worldbank.org/ECA/Transport.nsf/0/aebc8bc811c9581e85256b… · This unit covers the following topics: ... organization

Module 1-2: Corruption Participant

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Corruption

Overview

This unit covers the following topics:

�� What is corruption?

�� Forms of corruption

�� What are the reasons for corruption?

�� Effects of corruption

�� Corruption in the transport industry

�� Preventive measures against corruption

Objectives

By the end of this unit, you will be able to:

�� Identify corrupt activities

�� Differentiate a gift from a bribe in the workplace

�� Analyze the main reasons for and effects of corruption

�� Discuss corrupt activities present in the transport industry

�� Explain the preventive measures available to fight against corruption


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Introduction

Corruption is a complex issue. Its roots lie deep in bureaucratic and

political institutions, and its effect on development varies from country to

country. Corruption is widespread in many developing economies. The

motivation to earn income through corrupt practices is extremely strong,

aggravated by poverty and by low and declining civil service salaries. The

problem of corruption lies at the point where public and private sectors interact.

Corruption violates public trust and corrodes social capital. A small side

payment to obtain or speed up a government service may seem a minor

offense, but it is not the only cost. Unchecked, the creeping accumulation of

seemingly minor acts of breaking the law can slowly erode political legitimacy

You’re on thin ethical ice when you hear... �� “Well, maybe just once......”( just this time)

�� “No one will ever know.......”

�� “It does not matter how it gets done as long as it gets done.”

�� “It sounds too good to be true.”

�� “Everyone does it.”

�� “Shred that document.”

�� “We can hide it.”

�� “No one will get hurt.”

�� “What’s in it for me ?”

�� “This will destroy the competition.”

�� “We did not have this conversation.”

If you find yourself using any of these expressions, make sure that you are

not on solid ethical grounds.

Scenario: Warning Signs


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to the point where even non-corrupt officials and members of the public see

little point in playing by the rules. Once lost by the state, credibility is very

difficult to regain.

In many countries, applicants for drivers' licenses, building permits and

other routine documents have learned to expect to pay bribes to civil servants.

At higher levels, larger sums are paid for public contracts, marketing rights or to

sidestep inspections and red tape. Corruption causes reduced investment with

many long-term effects, including social polarization, lack of respect for human

rights, undemocratic practices and diversion of funds intended for development

and essential services.

The diversion of scarce resources by corrupt parties affects a

government's ability to provide basic services to its citizens and to encourage

sustainable economic, social and political development. Moreover, it can

jeopardize the health and safety of citizens through, for example, poorly

designed infrastructure projects and scarce or outdated medical supplies.

Along with the growing reluctance of international investors and donors

to allocate funds to countries lacking in adequate laws, transparency and

accountability in government administration, corruption has the greatest impact

on the most vulnerable part of a country's population the poor.

Throughout the world there is a growing tide of awareness recognizing

that combating corruption is paramount if a more effective, fair and efficient

government is to be achieved.

Life is never fair and perhaps it is a good thing for most of us that it is not.

Oscar Wild

How can you explain the corrupt activities you have encountered in your

workplace? Can you give an example?


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What is Corruption?

Corruption is a form of unethical conduct in organizations.

There are a number of definitions of corruption. A very simple

definition is “the abuse of public office for private gain”.

Corruption and bribery may exist to evade taxes, obtain

advantages for a company which is not entitled to them, gain insider

information or receive a contract from the government. It may take many forms.

Figure 16: Two Areas of Corruption

Corruption can occur in private firms or

in the public service. However, usually more

attention is given to corruption in the public

service. Corruption in private enterprise points

out that the internal controls of the organization

are inefficient.

Public office is abused for private gain when an official accepts, solicits,

or extorts a bribe. It is also abused when private agents actively offer bribes to

circumvent public policies and processes for competitive advantage and profit.

Public office can also be abused for personal benefit even if bribery does not

In the private or public sector both the

lower levels and the top management

of the hierarchy may be involved in

corrupt activities.

Corruption at All Levels

Public Sector

SOCIETY

Private Sector


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occur, through patronage and nepotism, the theft of state assets, or the

diversion of state revenues. Although it seems that corrupt activities seem to be

concentrated in the public sector, this should not be taken to mean that

corruption cannot occur or that its effects are minor in private sector activities.

Fraud and bribery can and do take place in the private sector, often with

disastrous and costly results.

Weakly regulated financial systems

permeated with fraud can undermine savings,

increase transaction costs and impose very

high economic costs when they collapse.

Company employees may solicit bribes from

suppliers, and private sector agents may

collude to defraud the public. Money laundering

is an increasing concern throughout the world.

Furthermore, when corruption is systemic in the public sector, firms that

have business with government agencies can rarely escape participating in

bribery.

While it is important to control fraud

and corruption in the private sector,

public sector corruption is arguably a

more serious problem in developing

countries, and controlling it may be a

prerequisite for addressing private

sector corruption.

Public Sector Corruption


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Case Study: Wave of Corruption

The management of your firm has decided to develop serious measures to

prevent corruption within the firm. Your department has been assigned to develop a

policy document to define actions which are to be considered corrupt and the

measures to prevent them. When stealing an item can easily be defined as corrupt,

it is hard to define the nature of some of the other actions. Before preparing such a

document examine the list given below and decide which actions should be

considered as “stealing” or “corrupt” and should be seriously dealt with. Define

each example as:

1. “Corrupt Behavior”

2. “Acceptable Behavior” or,

3. Either (1) or (2), as defined in the written rules of the company.

If an employee;

_____ receives compensation for hours he/she has not worked for

_____ uses longer lunch or coffee breaks than he/she is allowed to

_____ punches the time card for some one else

_____ comes to work late and leaves early

_____ receives compensation as though he/she is hurt or ill, when he/she is not

hurt or ill.

_____ does his/her personal work in company working hours

_____ uses the company photocopying machines for his/her private affairs; makes

private long distance calls from company phones

_____ takes company stationary, pens, pencils and other materials for private use

_____ takes cash from petty cash for private use

_____ uses company machinery or cars for private use and brings them back later

_____ intentionally damages company products and lets a third party purchase

them at a reduced price

_____ receives presents from suppliers

Can you give any examples of “corrupt behavior” in your workplace?


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Forms of Corruption

There are different forms of corruption. These involve both public servants

and private organizations or their employees. Some of the forms of corruption

are shown in figure 17.

Figure 17: Forms of Corruption

Fraud Forms of

Corruption

Nepotism

Bribery

Extortion

Trafficking

Embezzlement

Gifts

Cronyism


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The examples given below may be considered legal practice if an

organization allows them in accordance with its rules and regulations.

The most common corrupt activities are:

1. When a public official uses (or misuses) public resources for personal

benefit such as:

2. When a public official carries out his/her public duties dishonestly or

unfairly. Some examples are given below:

�� A public official uses a work computer and work time to develop projects for

private clients

�� A public official claims travel allowances for trips not taken or claims expenses

not incurred

�� A public official uses an agency’s earthmoving equipment to improve the value of

his/her own home or does landscaping for his/her friends

�� A public official claims overtime for periods when he/she is playing golf

�� A council employee asks for money in return for a guarantee of being awarded a

contract

�� A public official awards a government tender to a company in which they have a

pecuniary interest

�� A public official forges an approval on official letterhead to help out a business

friend

�� A public official takes financial advantage of a client in their care that may be

elderly, a person with a disability, or from a non-English speaking background


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3. When a current (or former) public official misuses information or material

obtained during the course of his/ her duty. The use of this information

may or may not be used in exchange of any material or other types of

gain. Some examples are:

4. When anyone does something that could result in a public official

carrying out public duties dishonestly or unfairly. Examples may be cited

as:

On the other hand, as stated earlier, bribery, extortion, fraud, cronyism,

gifts and advantages are stated as forms of corruption. The most common ones

in most sectors, including the transport industry, are bribery and fraud.

�� A public official looks up driver license information in response to a request from

a friend who is a private investigator

�� A public official (or former public official) provides confidential information to a

company bidding for government work

�� A company that wants to do business with a government agency offers public

official money or a gift to choose that company for the job

�� Representatives of a private company regulated by a government agency take a

government inspector to expensive lunches and social functions, and give the

inspectors’ children gifts with a view to guaranteeing preferential treatment

�� A business pays a salary to a public official's spouse (even though he/she is not

in their employment) in return for expedited approvals

Can you add any other examples of corrupt activities from your experience?


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Bribery

Bribery is an offer or promise of money or advantages

in return for benefits that are under the discretion of a public

official. Usually according to the law attempting, promising,

giving, soliciting or accepting a bribe are considered to be a

civil or a criminal offence.

Bribery implies a corrupt act that violates a public servant’s

responsibilities to the public. It entails violating public trust. Bribery encourages

unfair or undeserved benefit or advantage (Buchholz, “A Vexing Conundrum”,

p.2.). For bribery to work, both parties, the giver and receiver of the bribe, have

to trust each other. Therefore it is a planned and joint activity which equally

involves two sides of a transaction.

Sometimes it is difficult to differentiate between a gift and a bribe. One

criterion to set apart a gift from a bribe may be when something is given freely,

openly and with good feeling, and when both the giver and the receiver are

joyous, it is a gift. Both the giver and the receiver are happy with the exchange.

On the other hand, if something is given secretively, coercively or is

considered obligatory, it is a bribe. The giver and the receiver are motivated by

a gain to be received as a result. It is a transaction and future gains are

expected from the receiver.

Can you differentiate a gift from a bribe in your work?

What does it profit a man if he gains the whole world but loses his soul! Matthew


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A gift or a bribe may differ from culture to

culture. In most countries, public servants are

allowed only small gifts whose maximum value is

defined by written rules and regulations.

One of the most comprehensive laws,

the Foreign Corrupt Practices Act

(FCPA) in the U.S.A. prohibits U.S.

citizens from bribing any foreign high-

ranking officials. The fine for violating

this law may be 5 years imprisonment,

$10.000 or both.

A Comprehensive Law

Case Study: Foreign Payments

A million-dollar chemical shipment has been unloaded from a refrigerated

cargo ship onto a sweltering pier. A customs official watches indifferently as

condensation pours from the containers, as the temperature soars. He looks

expressionlessly at the customs documents and shrugs his shoulders: “Your

papers are in order, but I am too busy to clear this shipment now.” The local

manager of the chemical company slips a bunch of $ 100 notes between the pile of

custom documents. Suddenly the official’s face brightens: “You are quick to

understand. Your shipment is cleared”.

�� Under the new “Convention on Combating Bribery of Foreign Public

Officials in International Transactions”, what kind of payment is this?

On the next pier, another manager of a similar company, anticipating the

same problem has had his documents pre-cleared with the cabinet minister

responsible for customs. Still the customs official hesitates, and finally explains:

“The minister expected some return for approving your papers.” The manager slips

him a $100 bill. The customs officially says: “I will send this to the minister. Your

cargo is cleared.”


Officials in International Transactions”, what kind of payment is this?

A kilometer away, a businesswoman enters a local freight- expediting

company, having been advised by her embassy that the cabinet minister has a

major interest in it. She says: “Here’s $10 000 for expediting the cargo through

customs.”


Officials in International Transactions”, what kind of a payment is this?


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Fraud

Another common corrupt practice is fraud. People

resort to fraud to gain illegal and unearned income. Fraud is

an act of misrepresentation or deception. Charging for goods

or services never delivered, changing the specifications or

timing on goods and services and their expiration dates, or overpricing goods

and services to cover the cost of bribes is considered to be fraud. Fraud

results in the loss of state revenue.

Both the private and public sector are

involved in fraudulent activities. The private

sector resorts to fraud to gain illegal and extra

unnamed income by changing the contents of

documents or giving incorrect information on

documents. The public sector is involved in fraudulent activity by overlooking

altered or missing documents or by receiving bribes to “ignore” illegal activity.

Fraud may be prevented by taking a series of preventive measures. One

measure is to simplify the documents used for customs operations. A simple

document makes control easier and more efficient. Harmonizing the contents of

these documents with bordering countries will also help make control

procedures easier and less time consuming. This simplification will also reduce

pressure on customs officers at borders.

This measure may be strengthened by computerizing customs

administrations which will allow the checking of documents and passages at

borders in real time.

Why do people choose to be corrupt rather than honest?

x

Customs fraud can be the under or

over declaration of the value of goods

or misclassification and underpayment

of taxes.

Customs Fraud


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Tradition

Economic conditions

Government

Social Disorder

Reasons for Corruption

What are the Reasons for Corruption?

For some, being corrupt may be the easiest way—or indeed the only

way—to get what they want. At times, a bribe may provide the wrongdoer with

a convenient means of avoiding punishment. Many politicians, police, and

judges seem to ignore corruption or even practice it themselves.

Corruption in a country points to areas where governments fail. It shows

that there is a great deal of uncertainty in the marketplace and that rules and

regulations are vague and constantly changing. It shows that public policies are

implemented inefficiently and incompetently. These conditions make it easier

for private citizens and public officials act to benefit personally.

In most countries corruption exists because

of tradition, economic conditions, or

government or social disorder. Some of the

reasons for its existence are the low pay

received by public servants and the ambiguity

of some laws that enable public servants to

interpret these laws as they wish. Overworked public servants also may ask for

bribes to speed up processes. Such a system enables inefficient bureaucracy

to work faster.

On the other hand, to decrease corruption a

set of measures can be implemented.

Corruption exists both when there is a

scarcity of services or resources and

also when there is an abundance of

them.

Existence of Corruption

Can you describe the main reasons for corruption in customs?


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Table 7: Basic Remedies in the Fight against Corruption

Effects of Corruption

Corruption is a cancer that fights against society and its advancement. It

undermines trust in public institutions and disproportionately affects the poor,

who cannot afford to pay bribes to obtain public services. By distorting

government decision-making, it leads to wasteful investment projects and non-

competitive and the uneconomic allocation of public funds.

Corruption also highlights the fact that the public at large and public

officials are not aware of what benefits an ethical system would provide for

them. Bribes increase the income of public servants. On the other hand, when

payments are legal they go to the public treasury for the benefit of all.

�� Better pay and working conditions

�� Supporting personnel for those with heavy workloads

�� Systematic monitoring of performance inside the

organization and by independent auditors

�� Increased professionalism

�� Better training and education

�� Better technologies

When the corruption level is high the country is poorer.

Do you think that politicians, police and judges often ignore corruption or

even practice it themselves?


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Corruption is a redistribution or reallocation of income. Usually

corruption distorts public choice in favor of the wealthy and powerful. It

reduces the ability of the state to provide services like health care or education.

Corruption restricts investment, slows down economic, social and

political development, it endangers democratic values and increases distrust in

citizens and investors alike. It also increases the amount of instability in society

because corrupt administrators are always under the threat of being

overthrown. Most choices under a corrupt regime are economically inefficient.

In table 8, the results of corrupt behavior on the decision maker are

given.

Table 8: Macro Effects of Corrupt Behavior

Behavior

Impact on decision maker

Likely result of behavior

Bribery

Unearned personal gain

Alter decision choice

Increased costs

Reduced product/service quality

Coercion

Fear of harm


Increased costs

Reduced product/service quality

Deception


Reduced satisfaction

Theft

Lose resources

Increased costs or

Eliminate product/service

Unfair

Discrimination

Purchase inferior services

Sell below market

Increased costs

False demand reduction

While most studies focus on the

economic effects of corruption the poor bear a

considerable and often disproportionate share

of the corruption burden. The poor may face

outright exclusion when access to public goods

When corruption results in shoddy

public services, the poor have no

options and cannot turn to the private

sector (e.g., private schools, hospitals,

security or garbage collection).

Shoddy Public Services


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and services require a bribe. Given their lack of voice or political influence, in

some instances the poor may even be required to pay more than people with

higher incomes. Although richer households are more likely to pay bribes, the

burdens of corruption—measured as the fraction of income paid in bribes—are

much greater for poorer households.

Corruption not only hurts the poor disproportionately, but it is likely to

increase income inequality because it allows particular individuals or groups of

individuals to take advantage of state activities at the cost of the rest of the

population. Usually the changes in income distribution in developing countries

have partly been the result of corrupt actions such as non-transparent

privatizations. Corruption is also unfair because it imposes a tax that falls

particularly heavily on trade and service activities undertaken by small

enterprises.

Corruption in the Transport Industry

Customs officials are very likely to engage in corruption

because they control access to the outside world. As goods

have to be delivered at required times and to a certain quality

standard, if customs officials are poorly paid, poorly trained

and over worked and their superiors are involved in corrupt activities, a corrupt

system of bribery emerges.

To be able to stay in the system officials have to obey the special rules

of the system or they are threatened with exclusion from the system or

violence. Thus, custom officials institutionalize the system. Usually border

control agencies are at risk, often it is accepted as “normal” to buy “protection”

for the smuggling of goods and funds, also a tolerant attitude is often adopted

Can you identify the effects of corruption on the transport industry?


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towards criminals or terrorist groups operating in neighboring countries and in

addition, for the illegal, unlicensed or excessive extraction of natural resources.

Generally corruption in the transport sector is seen as:

�� Right to passage

�� Speeding up processes

�� Fraudulent papers

Trading internationally requires honesty, trustworthiness and the

responsibility of trading goods with the best quality to satisfy customer demand.

In international trade there is the company exporting the goods and

there is the customer who receives the goods. And, in between there is the

broker who provides the global logistics. The broker has to work internationally,

across borders, across different cultures and practices. The broker has to be

fluent in the languages through which he/she is to transport the goods for a

timely delivery. The broker has to be truthful and professional in his/her reports.

Free trade policies usually improve the efficiency of customs and reduce

corruption. However, the most efficient way to fight corruption is at borders and

in the international arena, a fight against domestic corruption within countries

should also accompany this.

Can you give an example of corruption in the transport industry?


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Preventive Measures against Corruption

The most important measure against corruption is the presence of laws

defining corrupt activities and conflicts of interest. The second measure is law

enforcement against the briber and the bribed. Finally, a reform of the public

service that includes a reduction in the level of benefits controlled by public

officials is required.

One other measure may be to make payments public and convert them

into legal incentive pay schemes. Especially in cases where such payments

speed up processes and improve the allocation of public services, in this case

a legal and open system may serve as a solution. At the same time, discretion

allowed for public officials may be reduced by reorganizing and simplifying

documentation.

Forming an efficient performance evaluation system in the public service

and establishing incentives for good performance will decrease corrupt

activities and it is important to institutionalize these measures so that they

cannot be changed with changes in government. Transparency and

accountability are the “musts” of such a system. Forming institutions like an

ombudsman for hearing and dealing with complaints is another necessary step

in curbing corruption. The complaint system must work efficiently and speedily.


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ANTI-CORRUPTION MEASURES

The following measures are offered to all firms, wherever situated, and whatever their line of business.

1. Disclose publicly and make widely known its endorsement of Anti-Corruption Measures

2. Establish a clearly articulated written policy prohibiting any of the firm’s employees from paying or receiving bribes and “kickbacks”

3. Implement the policies with due care and take appropriate disciplinary action against any employee discovered to have made payments in violation of the policy

4. Provide training for employees to carry out the policy, and provide continuing support, such as help lines, to assist employees in acting in compliance with the firm’s policy

5. Record all transactions fully and fairly, in accordance with clearly stated record-keeping procedures and accounting controls, and conduct internal audits to assure that all payments made are proper

6. Report annually on the firm’s bribery and corruption policy, along with a description of the firm’s experiences implementing and enforcing the policy

7. Have the annual report audited either by an independent finance auditor or an independent social auditor, or both

8. Require all agents of the firm to affirm that they have neither made nor will make any improper payments in any business venture or contract to which the firm is a party

9. Require all suppliers of the firm to affirm that they have neither made nor will make any improper payments in any business venture or contract to which the firm is a party

10. Establish a monitoring and auditing system to detect any improper payments made by the firm’s employees and agents

11. Report publicly any solicitations for payments whenever such reporting will not lead to harsh reprisals of material consequences to the company or its employees (or report| privately to a monitoring organization, such as Transparency International or a social auditor)

12. Establish a system to allow any employee or agent of the firm to report any improper payment without fear of retribution for their disclosures


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The preventive measures used against corruption amongst countries of

South East Europe cover four areas that were defined by the partners of the

Stability Pact Anti-Corruption Initiative (SPAI) in Sarajevo on February 16,

2000:

Promoting good governance, through legal, structural and

management reforms for better transparency and

accountability of public administrations, through development

of institutional capacities and through establishment of high

standards of public service ethics for public officials.

Strengthening legislation and promoting the rule of law,

by ensuring effective separation of executive, legislative and

judiciary powers and the independence of investigative and

judiciary bodies and by enhancing investigative capacities.

Promoting transparency and integrity in business

operations, through inter alia, enactment and effective

enforcement of laws on accepting and soliciting bribes,

ensuring open and transparent conditions for domestic and

foreign investment, establishing corporate responsibility and

internationally accepted accounting standards.

Promoting an active civil society by empowering civil

society and independent media to galvanize community

action, generate political commitment, creating a pattern of

honesty in business transactions and a culture of lawfulness

throughout society.


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How and Where to Start?

Everybody has a gray area in his/her lifetime, which they may regret or

like to forget about. It is most important that one distinguishes or draws a

definite line between these gray areas and corrupt activities. And, to make sure

that there will never be gray areas in their lives from that point onwards.

Exercise: When in doubt, ask yourself ...

�� Are my actions legal ?

�� Am I being fair and honest ?

�� Will my action stand the test of time ?

�� How will I feel about myself afterwords ?

�� How will it look in the newspaper ?

�� Will I sleep soundly tonight ?

�� What would I tell my child to do?

�� How would I feel if my family, friends, and neighbors knew

what I was doing?

If you are still not sure what to do, ask and keep asking until you are certain

that you are doing the right thing. If your answer is yes, then you can say.....

“I’m on solid ethical ground...”


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Summary

Corruption is a form of unethical conduct in organizations. A very simple

definition is “the abuse of public office for private gain”. Corruption and bribery may

exist to evade taxes, to obtain advantages for a company which is not entitled to gain

insider information, or receive a contract from the government.

Corruption can occur in private firms or in the public service. However,

usually more attention is given to corruption in the public service. There are different

forms of corruption. These involve both public servants and private organizations or

their employees.

Bribery is an offer or promise of money or advantages in return for benefits

that are under the discretion of a public official. Sometimes it is difficult to

differentiate between a gift and a bribe. One criterion may be when something is

given freely, openly and with good feeling, and when both the giver and the receiver

are joyous, it is a gift. Both the giver and the receiver are happy with the exchange.

Another common corrupt practice is fraud. People resort to fraud to gain

illegal and unearned income. Charging for goods or services never delivered,

changing the specifications or timing on goods and services and their expiration

dates, or overpricing goods and services to cover the cost of bribes is considered

fraud.

Corruption is a cancer that fights against society and its advancement. It

undermines trust in public institutions and disproportionately affects the poor, who

cannot afford to pay bribes to obtain public services.


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Key Terms Bribery

Corruption

Corrupt Behavior

Cronyism

Extortion

Fight Corruption

Fraud

Gift

Nepotism

Private Sector Corruption

Public Sector Corruption

Trafficking


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Progress Check

11.. Corruption is defined best as:

a. An offer or promise of money in return for benefits

b. The abuse of public office for private gain

c. A kind of bribery that occurs in the private sector

d. Using public resources for social benefit

e. All of the above

2. Which kind of corruption is most common in the transport industry?

a. Trafficking

b. Gifts

c. Bribery

d. Nepotism

e. Extortion

3. Fraud can be prevented by:

a. Increasing the number of documents necessary for customs

b. Decreasing the control procedures for documents

c. Controlling the goods physically

d. Allowing the free passage of goods through customs

e. Using computerized transit systems for controlling procedures


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4. Which of the following is not a reason for corruption?

a. Unsuitable economic conditions of a country

b. Low pay of public servants

c. Overworked public servants

d. Computer systems and new technologies

e. Slow bureaucratic systems

5. Which of the following is not a result of corruption?

a. Social pollution

b. Reduced investment

c. Economic development

d. Undermining of trust

e. Lack of respect

6. The enemies of corruption are:

a. Transparency

b. New technologies

c. Increased professionalism

d. Training and education

e. All of the above

Documents

Corruption Overview This unit covers the following topicslnweb90.worldbank.org/ECA/Transport.nsf/0/aebc8bc811c9581e85256b… · This unit covers the following topics: ... organization