Without a strong compliance program, many smaller Russian firms could be locked out of lucrative contracts with big multinationals.
By Henry Nelson
In countries with weak rule of law, anti-corruption efforts suffer from a collective action problem: because bribery and corruption are endemic and occur frequently, individual small business owners hesitate to reform because they fear that doing so will reduce their competitiveness.
If a small or medium-sized enterpise (SME) begins to eschew bribery, it might be incapable of securing contracts that require paying a bribe, for example. The threat of short-term loss of business is serious for SMEs and can deter companies from pursuing anti-corruption compliance.
Furthermore, the collective action problem effects the general business environment. Without a strong, coordinated voice on the importance of compliance, corruption continues to be seen as “business as usual” and the consensus continues to be that bribery is a necessary component of conducting business.
This collective action problem is pervasive and continues to pose issues for CIPE and its many global partners. It is difficult to implement reforms when SMEs fear that the reforms will hurt their business.
Earlier this month, CIPE’s Washington office hosted a delegation of CIPE Russia officers and regional CIPE partners for a discussion on value-chain anti-corruption efforts in Russia. The discussion yielded plenty of interesting information on CIPE Russia’s plan to work with regional Russian chambers of commerce in order to educate local SMEs about international anti-corruption laws like the U.S. Foreign Corrupt Practices Act (FCPA) and UK Bribery Act.
Corruption is a direct threat to a country’s democratic emergence and an obstacle to a country’s democratic development. In Thailand, for example, corruption was the stated justification for the military’s ousting of an elected government in 2006 and the Supreme Court’s sacking of another elected government in 2008. Competing allegations of corruption were the main drivers of nation-crippling unrest in the country.
In Thailand, as in other new and struggling democracies across the globe, if democracy is to mature and fully take root, more is required than just the ability to vote.
In countries including Russia, Thailand, Columbia and Serbia, CIPE is helping the private sector mobilize to take proactive steps to reduce corruption. These programs demonstrate the transformative impact that private sector Collective Action can have on a country’s fight against corruption.
Eighty-one percent of Lebanese business owners and managers believe the level of corruption in the country has increased over the past two years, and another 11 percent believe it has at least stayed the same. Nearly all (97 percent) recognize that this is a problem. These are among the more eye-opening results of a new nationwide survey conducted by CIPE partner the Lebanese Transparency Association (LTA) which is informing the next chapter in the work of the Lebanese Anti-Bribery Network (LABN).
The LABN was established by LTA in 2008, with CIPE support, as a multi-stakeholder network of professionals dedicated to researching issues related to bribery in Lebanon, raising public awareness, and encouraging public officials to take measures to curb corruption. The LABN has published two works to help the private sector in the fight against corruption – a “Code of Ethics and Whistleblower Procedure for Small and Medium Enterprises” and a “You’re Being Audited” guide to the public audit process. The LABN also released several research papers on bribery and corruption in specific sectors, including electricity, taxation, and construction.
On June 27, 2013, LTA and CIPE held a LABN workshop to explore the latest data on corruption in Lebanon and develop a strategy for collective action. Among the more than 40 participants at the event were company executives, civil society activists, and government officials. CIPE’s Senior Knowledge Manager, Dr. Kim Bettcher, presented a variety of private sector-led collective action models for the group’s consideration.
The survey revealed that corruption is not confined to any one sector in Lebanon, nor can it be fought by any one constituency alone. LABN is unique in Lebanon in that it brings together unlikely partners to advance an anti-corruption agenda – grassroots and high-level stakeholders; government officials and business leaders; civil society groups and the media. Through their collective action, the members of the LABN aim to fundamentally transform the way the private and public sectors and civil society relate to each other in Lebanon. Only together can these diverse constituencies develop a sustainable strategy and effective techniques to curb endemic corruption in the country.
Based on the results of the national survey and the group’s strategic priorities, the LABN will be developing a plan of action in the coming months to take the fight against corruption in Lebanon to the next level. Through a series of focused initiates, LABN will demonstrate the tremendous potential of private sector-led collective action in bringing about a more just and inclusive society.
While the results of the survey may seem discouraging at first blush, the LABN views them in a more optimistic light. In contrast to a previous survey conducted in 2010, private sector leaders are now more aware of corruption at all levels of society and are willing to speak out against it. Simply put, corruption is no longer taboo in Lebanon. LABN is poised to harness the private sector’s frustration in the form of collective action to advance constructive proposals for reform.
Stephen Rosenlund is a Program Officer for the Middle East & North Africa at CIPE.
Twenty-seven Thai CEOs at the November 2010 signing of the Collective Action Coalition pledge to fight corruption in Thailand, on the eve of the 14th International Anti-Corruption Conference. (Photo: CIPE)
When the military overthrew a democratically elected Thai government in 2006 and when the Supreme Court disbanded a democratically elected government in 2008 – corruption was the principal justification. Corruption has become a part of daily life here – allegations of corruption contribute to the competing claims of Thailand’s color-coded protest groups that successive governments have lacked legitimacy. Uncertainty in the political environment is beginning to affect business; and uncertainty within the business community affects everyone. Businesses have started to come together to fight back.
There is a growing interest in what the private sector can do to fight corruption. In part, it is driven by the increased enforcement of the Foreign Corrupt Practices Act (FCPA) and the new UK anti-bribery laws. They are leading companies to strengthen their compliance programs, important in their own right.
Yet, as the experience of IKEA in Russia shows – compliance is not enough. Ikea had a zero tolerance policy against bribery and a rather strong compliance program, but the corrupt environment proved too difficult to overcome. Operating in highly corrupt countries (i.e. many of emerging and developing markets according to TI’s corruption perceptions index) presents a unique set of risks and challenges that can’t be addressed only by saying no to corruption.
So what can be done to complement strong compliance programs? John Sullivan and I look at some solutions – collective action against corruption and the role of business associations – in this article published in the Ethisphere magazine.
The World Bank Institute and partners have launched two essay competitions on fighting corruption through collective action. One of them is intended for students and young professionals and the other for practitioners. Students and young professionals may participate by submitting an essay or business model on the topic and practitioners may participate by submitting their experiences on fighting corruption. You can learn more here: http://info.worldbank.org/etools/antic/anticorruption_competition.asp
Main prizes cover participation and travel expenses to the World Bank Institute’s Executive Development Program: “Fighting Corruption through Collective Action in Today’s Competitive Marketplaces” that will be held in Washington D.C., June 8 to 11. Winners will also be given the opportunity to present their work at this program and will have their case study published on the World Bank Institute’s portal. The deadline for submitting work is April 30, 2009.
The WBI Executive Development Program and essay competition are part of a larger multi-stakeholder initiative on private sector collective action in which CIPE participates.
A corrupt bureaucrat can seem like a cozy business partner to entrepreneurs in developing countries. When an entrepreneur develops a corrupt relationship with a bureaucrat, that business can flourish as sharing profits with the bureaucrat result in a sudden onslaught of administrative pressures that eventually force the competing businesses out of the market.
As comfortable as this may seem to the entrepreneur that benefits from the relationship, eventually (s)he will realize that the unholy transaction was actually a bite of forbidden fruit and now a snake is sitting in his/her lap, studying the business’ weaknesses, waiting for the perfect moment to turn that “business partnership” into a means of extortion. Once the bureaucrat knows a business’ weaknesses, he/she wields all the power in the relationship. Suddenly, you and the other business are bidding on bribes to maintain the corrupt partnership or vanquish the competitor, or those free lunches to that friendly tax inspector have grown into free lunches for him and 10 of his friends, and there is nothing you can do about it. Or is there?
Russian experts on corruption like Dina Krylova from the Union of Business Associations (OPORA) and former Yeltsin advisor Georgy Satarov from the Indem Foundation point out that minimizing corrupt relationships is a far better way to build a business, even in a notoriously corrupt environment, even if that business has already started a corrupt relationship. In “Business without Corruption: an Action Guide,” they describe all kinds of ways to protect against extortion such as using tape recorders, getting support from clients or other businesses, finding the right people to send letters to, and keeping inventory of documents given to inspectors.
An even more effective means of fighting corruption is collective action, as we’ve seen in many instances in Russia, where associations and chambers of commerce are strengthening and becoming effective civil society actors; an odd paradox given the way in which NGOs have all but disappeared off the political map. To revisit an old cliché, collective action against corruption is like a rising tide that raises all ships. Through collective action, businesses can collectively refuse to be cornered by dangerous relationships and they can also come up with collective solutions against a growing wave of corruption that threatens to drown out the SME sector.
For example, as government pressure to engage in “corporate social responsibility” takes on an extortionate flavor, businesses have made their community development contributions through local chambers of commerce or associations, thereby maximizing transparency and remaining in the government’s favor, all the while doing good for the community. In another example, a real estate association hired a staff legal expert to help members whenever corruption issues arise, thereby keeping the realtors’ clear of extortion and building trust from the community that realtors are real professionals. All of these examples come from the guidebook, “Business without Corruption: an Action Guide,” which was written by CIPE partners, with support from CIPE and USAID. Click here for a link to the guide.