Third Party Risk Monitoring

A Bribe For a Bribe Leaves The Whole World Corrupt

Avatar Written by Chaithra Hanasoge

Corruption, fraud, bribery, graft, nepotism, embezzlement! – Sounds familiar?

These buzz words are doing the rounds ever so frequently in the national headlines of many countries lately. Ranging from major political scandals and large-scale larceny by reputed multinational firms to government crackdown on fraudulent practices and new anti-corruption laws at national and subnational levels, corruption related news is bustling in most locations. So why the increased hue and cry about corruption and how significant is it for businesses?

“Corruption has a pernicious effect on the economy,” the IMF’s managing director, Christine Lagarde, wrote in an essay recently. To understand this better, let us take a look at Germany based corruption watchdog Transparency International’s ‘Corruption Perception Index’ (CPI) that rates 168 countries on their corruption levels. In the 2015 edition, Nordic countries like Denmark, Norway and Sweden continued to top the charts as the least corrupt nations while conflict-stricken or repressive countries such as Afghanistan, North Korea and Somalia formed the bottom rung of the CPI ladder with high corruption levels. Some of the key characteristics that corrupt nations shared were found to be poor governance, lack of government transparency, unrest caused by conflict and war, and weak public institutions.

These factors can have obvious as well as obscure ramifications on a business. For example, Brazil and Malaysia have been victims of massive corruption scandals involving the country’s top leadership, which have tarnished the business sentiment in the region besides serious political and economic impact. Countries with high corruption rate such as India also suffer with poor focus on development and infrastructure, leading to insufficient contingency measures, especially when natural calamities occur. While in Australia, large multinationals have been at the receiving end of hefty fines and long-drawn legal battles on tax evasion charges, which has led to the country witnessing a third consecutive decline in its 2015 CPI rank due to insufficient enforcement of anti-bribery regulations. Each year, IMF asserts that nearly US$2 T or 2% of the global economy, in bribe money courses through developing and developed economies, hampering economic growth and denying basic services.

On the other end of the scale is Singapore, which has persistently maintained low corruption levels. In the 2016 ‘Doing Business’ rankings by World Bank, the country ranked at the top among 189 countries globally for the second consecutive time. Policy of a small, transparent government that minimizes complexity and red tape has been at the crux of its development, results of which are there for all to see. Today, Singapore is one of the top 5 financial centers in the world, well ahead of many developed countries, and one of the largest investment destinations in the Asia Pacific. It has a zero-tolerance policy towards bribes as a result of which in 2015, the country witnessed a 30-year low in the number of corruption complaints and cases registered for investigations.

Thus, a business operating in a location that fares well on the Corruption Perception Index such as Singapore or Denmark is more likely to enjoy lower disruption to work due to geo-political tensions, easier bureaucratic procedures for doing business, strong governmental support, and minimal economic impact from bribes, legal hassles and penalties in comparison to say Somalia, where doing business will be 20 times more difficult.

Besides this, transparency and clean image also aids business efficiency. A recent study found that businesses in high corrupt locations often employ large number of resources to get the same job done. Also disillusionment due to nepotism at workplace often leads to higher employee attrition. Hence, low corruption can improve efficiency of resources, center the focus on development, build customer loyalty and boost the brand image of the company. So, it can be concluded that a firm which operates in or outsources to cleaner countries like Denmark benefits from all these factors, implying lesser indirect costs and better services.

Or can we? On the flipside, the CPI report found “clean” countries like Denmark, Finland, Norway and Sweden guilty of hefty dodgy practices overseas. Developing countries are generally perceived to have higher corruption levels; however, developed nations are second to none. A recent example was the infamous Panama Papers leak incident that revealed high-profile corruption cases such as tax havens, involving top officials in leading developed nations such as US, UK and Canada.

So how can a business safeguard itself from the evil hands of corruption?  

Although the corruption indices are a good barometer about a location’s corruption levels, it is not gospel. Once a location is chosen, firms should take adequate precautionary measures to avoid unnecessary legal hassles. They should seek legal advisory services and review specific documents to get a clear picture of the functioning of government agencies and ground realities in the country. If planning to outsource, companies can appoint a local statutory expert to conduct systematic checks on the shortlisted service providers in the country.  Bringing in outside experts to choose important partners such as external accountants or public relations firms could be beneficial. Another area of critical importance is hiring of clean resources. Companies should carry recruitment with extra precaution and mandate thorough background checks, especially while appointing people for critical positions.

These recent alarming frauds have been captured by SupplyWisdomSM, our Supplier & Location risk monitoring service. It also delivers insights that can help buyers track and mitigate such supplier and location-based risks in real time.