This post originally appeared on the Corporate Compliance Trends blog.
When I visited Nairobi a few weeks ago, the signs of President Obama’s recent visit to attend the Global Entrepreneurship Summit were still clearly visible all around – from welcome posters to the spruced-up cityscape. I was in Kenya to work with CIPE’s partner organization, Kenya Association of Manufacturers (KAM), on a training-of-trainers workshop devoted to anti-corruption compliance and practical ways in which mid-sized companies in particular can implement robust compliance programs. The topic is quite timely.
Corruption remains a key problems in Kenya, affecting both the country’s democratic and economic development prospects. It was one of the leading issued discussed during President Obama’s visit, which resulted in an agreement signed between the Kenyan government and the U.S. to introduce new anti-graft measures. The 29-point deal stipulates, among other things, that Kenya will step up investigations into corruption cases, increased U.S. assistance and advice to Kenyan anti-corruption agencies and advice on relevant legislation, and international commitments by Kenya to join the Egmont Group of Financial Intelligence Units and the Extractive Industries Transparency Initiative (EITI).
At the same time, profound challenges persist. Within days of Obama’s visit, Kenya’s Office of the Auditor-General released a troubling report that brought to light some uncomfortable numbers. According to the report, only 26% of money spent and collected by the government has been fully approved in an audit for 2013-2014. The health department alone failed to account for 22 billion Kenyan shillings ($216 million) worth of spending. What is more, over 12,000 false names were discovered on the government payroll.
Corruption is a destructive tax on business that hampers entrepreneurship and economic development. In the last two decades significant progress has been made in making the fight against corruption a top priority for governments and businesses worldwide.
Yet many challenges remain, including spreading best practices in anti-corruption compliance beyond large companies to smaller firms in global value chains. The launch of CIPE’s new guide on anti-corruption compliance for mid-sized companies in emerging markets, held yesterday in Washington, DC, at the OpenGov Hub, focused on ways to boost third party compliance in difficult environments.
Corruption is a systemic problem that plagues many transitional countries across the world, rooted in weak rule of law and lack of private property rights. Not only does corruption erode trust in public institutions, such practices also hinder economic growth and weaken democratic governance.
The corruption challenge can be addressed by building responsive institutions that offer basic assurances of private property rights and ensure law and order. CIPE programs address the root causes of corruption through a multi-pronged approach. CIPE programs mobilize the private sector to raise anti-corruption standards and advocate for reforms; streamline regulations and reduce implementation gaps to limit opportunities for corruption; improve corporate governance to strengthen firm-level integrity; facilitate collective action to level the playing field and coordinate company efforts; and equip small and medium-sized enterprises to resist bribery and meet the requirements of global value chains.
Two recent case studies, described below, show these CIPE approaches in action.
“I see a great need of vendor supply chain training providers to run the show effectively. If we want growth, train the relevant person first” — Ayesha Muharram, Chief Internal Auditor and Country Compliance Officer, Glaxo Smith Kline.
Lately it has become a requirement among multinational companies to comply with international anti-corruption laws such as U.S. Foreign Corrupt Practices Act (FCPA), U.K. Bribery Act, Canadian Corruption of Foreign Public Officials Act, Brazilian Clean Companies Act. Under these laws, multinational companies need to take appropriate actions for ensuring clean business — including making sure that all of their suppliers, vendors, and subsidiaries around the world are following the rules.
To help local companies and multinationals working in Pakistan deal with this challenge, CIPE Pakistan initiated a discussion on issues related to supply chain compliance in multinational companies. In collaboration with the Overseas Investors Chamber of Commerce & Industry, CIPE conducted a first focus group meeting of the Value Chain-Unethical Practices project. This first meeting was used to conduct a gap analysis, focusing the capacity building needs and the given standards in Pakistan.
Last week Chinese e-commerce giant Alibaba filed paperwork with the U.S. Securities and Exchange Commission for an initial public offering (IPO). As one of the largest companies in the world’s second largest economy, Alibaba represents an enormous opportunity for investors. They are expected to raise between $15 and $20 billion, making this IPO potentially bigger than Facebook’s.
While Alibaba already handles more sales volume than eBay and Amazon combined, there is added room for growth as internet penetration in China is only around 45 percent. Online shopping is projected to increase at a rate of 27 percent per year as the still-poor country grows richer and more connected.
Regardless of the perceived opportunities, foreign investors are not entirely convinced that Alibaba will be a good buy. The attitude toward Chinese companies in general is one of skepticism and uncertainty — perpetuated most recently by concerns about the transparency in auditing practices. Alibaba’s complex network of businesses and a lack of details surrounding partnerships with domestic logistics companies also raise some questions for potential investors.
In all the buzz surrounding Alibaba’a IPO, however, there is a missing element that could be cause for additional concern. By selling shares in the U.S., Alibaba opens itself to more exposure to the Foreign Corrupt Practices Act (FCPA), a piece of legislation that makes it illegal for companies to bribe officials of foreign governments. A number of multinational companies from around the world have already been ensnared in FCPA investigations as a result of corruption in China and the idea that Alibaba has grown within a market rife with corrupt acts could be cause for increased suspicion. Compounding this risk is the fact that the company has been the subject of investigations by domestic authorities in the past.
Faced with a corrupt judicial system, what strategies do Russian businesses employ to resolve business disputes? Lately, less murder and more litigation.
Faced with multinational firms who are liable under U.S. and U.K. laws for their Russian partners’ corrupt practices, how do Russian businesses gain access to international partners? Start putting in place anti-corruption compliance programs.
Those were some of the answers that came from experts from Russia and the U.S. had some answers at a recent panel discussion co-hosted by CIPE and the Kennan Institute, “Corruption and Business in Russian: National Problem, Regional Solutions.” Jordan Gans-Morse, an assistant professor of political science at Northwestern University, presented the results of his innovative research on how non-oligarchic firms are surviving in an atmosphere of endemic corruption. Against this backdrop, CIPE Moscow Program Officer Natalya L. Titova, joined by CIPE partners from St. Petersburg, Chelyabinsk, and Kaliningrad, spoke about a CIPE program in Russia that is helping regional businesses to meet international anti-corruption standards in order to join global value chains.
To improve local governance in Afghanistan, CIPE conducts training seminars for the Provincial Councils in Afghanistan on democratic governance and market economics, including topics like advocacy, corruption, and the informal economy. Using the knowledge gained from the seminars, many of the Provincial Councils have taken on issues affecting their communities.
CIPE recently discussed the efforts of the Kunar Provincial Council with Chairperson Haji Mia Hassan. After discussing corruption issues with local government officials, the Kunar Provincial Council filed corruption cases against several officials with the prosecutor’s office, including the director of the Customs Department and the Director of Haj and Endowments.